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SMIC Shenzhen fab plans puzzle industry

Posted: 05 Feb 2008     Print Version  Bookmark and Share

Keywords:China  fabs  virtual fab  government investment  foundry 

The announcement of China's Semiconductor Manufacturing International Corp. that it plans to add separate 200mm and 300mm fabs in Shenzhen has observers puzzling over the foundry's motives.

Revelations that several Chinese municipal governments, including Shenzhen, have largely or fully funded a number of SMIC facilities as part of a "virtual fab" strategy has further raised eyebrows. Under the approach, a municipality owns the facility and SMIC manages it, garnering fees and a share of the profit for its troubles. But in the case of the planned fabs, SMIC apparently will own them, though it may receive some government funding,

Whether SMIC's virtual fabs give it an unfair advantage over rivals that must foot most of the bill for their facilities remains a matter of debate. Indeed, some sources say the strategy has already proved a disappointment and may be in flux. They pointed to the foundry's severing of ties with Japanese DRAM specialist Elpida Memory Inc., which reportedly was to occupy a 300mm virtual fab in Wuhan, China, that now stands empty.

Such setbacks and a spate of quarterly losses have prompted fears that SMIC, having set the stage for a capacity glut, may kick off a price war. That would be bad news for the foundry industry, which is projected to log 15 per cent growth this year, coming off a flat 2007.

Against the grain
Despite some strengthening in the market for foundry services, top pure-play foundries Chartered Semiconductor Manufacturing, Taiwan Semiconductor Manufacturing Co. Ltd and United Microelectronics Corp. have reined in their capital spending plans for the year in response to recessionary fears and the seasonal IC lull.

SMIC has another game plan: It expects to boost capacity about 31 per cent by year's end, to 267,000 wafers per month from last year's monthly capability for 185,000 wafers.

"Our strategy is to expand our capacity to meet customer demand," CEO Richard Chang declared in a conference call last week.

Since its founding in 2000, SMIC's penchant for going against the grain has fueled its meteoric rise. In the first half of 2007, the company was the world's third largest pure-play foundry in terms of sales, behind only TSMC and UMC, according to Gartner.

SMIC has built China's most-advanced fabs and is the prized pillar of the nation's effort to get its semiconductor industry off the ground. But market watchers say the foundry's eye-popping ascendancy has come at the expense of its bottom line. Analysts note that the company has never made a profit on a fiscal-year basis and that it reported losses in three quarters last year.


IP worries
Perhaps more worrisome for the industry at large is the company's allegedly spotty regard for intellectual property rights; indeed, some analysts went so far as to say that TSMC's IP had helped put SMIC on the map.

In 2003, TSMC sued, claiming SMIC had infringed its patents and misappropriated trade secrets. The complaint claimed the Chinese foundry had hired more than 100 former TSMC employees and had asked some of them to provide confidential trade information. TSMC also alleged that SMIC had stolen its 0.18?m process and related technologies.

SMIC settled in 2005, paying TSMC some Rs.690.87 crore ($175 million). But the Taiwan-based foundry again sued SMIC in 2006, alleging the latter had breached the settlement agreement. That suit is still pending, and the companies continue to trade complaints.

SMIC has consistently denied that it stole TSMC's IP. It claims to be in production with its own 90-nanometer process, and to have a 65nm process in qualification. And it has cultivated an impressive customer list, including such high-profile names as Broadcom, Qualcomm and Texas Instruments.


Late last year, SMIC licensed a 45nm process from IBM Corp. The technology provides the foundry with a migration path from the 65nm node and buffers it from further allegations of IP breaches.

In another strategic shift, the foundry provider has distanced itself from its initial focus on DRAMs. Early on, SMIC snagged the likes of Elpida and Qimonda as customers, but plummeting margins in the DRAM business over time wreaked havoc on its bottom line. SMIC thus has sought to build business in the more-profitable logic sector.

Virtual-fab strategy
Initially, SMIC "spent a lot of capex" to build fabs in Beijing and Shanghai, said Steven Pelayo, an analyst with HSBC Global Technology Research in Hong Kong. But in 2005, it turned to outside investors to fund a 200mm facility in Chengdu, China. SMIC manages the business, operating as Cension Semiconductor Manufacturing Corp., for the fab's owners.

Two years ago, SMIC constructed a 300mm virtual fab in Wuhan. The facility was the first semiconductor foundry to be built in central China again, with funding from the local government.

"It's not a level playing field from a financial point of view," HSBC's Pelayo said of the virtual-fab strategy. But he added that the approach has let SMIC "lower its capital spending" and could fuel a "return to profitability."

Jim Hines, an analyst with Gartner, said he doesn't "view this as a fairness issue," adding, "The idea of government investment is not necessarily a new idea in the semiconductor industry." Foundries in Taiwan and Singapore also receive government support, Hines noted.

The Garner analyst also dismissed the notion that SMIC's fab expansion plans could fuel a capacity glut this year. "We're not expecting a surplus of capacity in the foundry business, [regardless of] what SMIC does," he said.

In any case, SMIC appears to be reevaluating its virtual-fab strategy. "The rapid falloff in management-service-fee revenue and the announcement of two new SMIC-owned fabs in Shenzhen lead us to believe that management is adjusting course," Pelayo said.

Under the deal announced last week, SMIC will build separate 200- and 300mm fabs, as well as an R&D centre, in Shenzhen. The fab project will cost Rs.6,237.59 crore ($1.58 billion) in the initial stages. The government reportedly may fund a portion of the project but will not own the fabs.

The 200mm fab will be capable of processing wafers at line-width geometries from 0.35- to 0.13µm when it moves into production in late 2009. The 300mm fab is expected to tap the 45nm process licensed from IBM. SMIC did not divulge a timetable for the 300mm fab or the R&D centre.

- Mark LaPedus
EE Times

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