China Market Growth Fueled by Government Spending during Industry Downturn


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China Market Growth Fueled by Government Spending during Industry Downturn

A massive infusion of government spending in the semiconductor sector will be driving significant growth in the industry to 2020. The China central and local governments have announced investment of up to $50 billion in China semiconductor-related projects, marking a major shift in the investment business model for the global semiconductor industry. Equipment and materials suppliers who can leverage their current China industry relationships, and expand their contacts to the next generation buyers will prosper in the next decade.

News of the ongoing global industry downturn—and the slow progress with China’s foundries, SMIC and Grace Semiconductors—has obscured the aggressive long-term commitment in the semiconductor industry by the China governments at all levels. In the past five years, the China government influenced the investment of about $7 billion in new fabs. In the next five years, another $20–$25 billion will be invested into the semiconductor industry by local governments throughout the country. Going forward, the central government will invest up to $30 billion in the industry by 2020.

The most recent activity in investment strategy marks a new phase of industry development in China. In the first phase from 2000–2005, China invested in the foundry model as part of a comprehensive push to develop a complete chip design-production-packaging-test infrastructure.

This phase—marked by fabs from SMIC, Grace, Huanhong, TSMC, and Hejian—was enabled by private sector investments supported government tax incentives. The next phase peaking in 2005–2006 supported international integrated device makers (IDM) such as Intel and Hynix supported by government incentives.

The current phase extending at least to 2010 introduces an unprecedented new business model: government owned “virtual” IDMs. A summary of these recent and planned investments are provided in Figure 1. Many of these projects are based on three pillars: investment from government or state-owned entities, fab operation expertise from established companies such as SMIC or other experienced team, and a marketing/product partner such as Elpida. This new business model underscores the growing role of China-based investment and the continued importance of China as a global center of semiconductor manufacturing.

Figure 1.

Project

Name

Total Investment

US$ B

Project

Location

Commencing

Year

Elpida-Suzhou Venture Group (SVG)

5.0

Suzhou

2009

Hynix-Numonyx

1.5

Wuxi

2009

Sino-chip

5.0

Shandong

2010

SMIC Shenzhen

1.6

Shenzhen

2008

Intel

2.5

Dalian

2008

TBD

5-10

Shanghai

2010

Total

20-25

   

Unlike recent years, increasingly China fab equipment and materials purchasing decisions are occurring at the local level and not through corporate contracts originating from Japan, Taiwan or the U.S. With local, regional and national government funding involved in the building and equipping of new fabs, the purchasing process in China has taken a unique Chinese character. In addition to technical evaluations, request for proposals (RFP) and request for quotes, multi-discipline delegations and committees are formed that include local government officials and local universities. Government plays a critical role in the decision making process.

Growing Market Diversity

As the China semiconductor industry grows with the infusion of government, international IDM and foundry, and China-investor investments, the market is also diversifying with increasing 300 mm equipment, a massive assembly and test infrastructure, and a rapidly expanding related-industries in flat panel displays (FPD) and solar. Increasingly, these industries are becoming inter-related where university, government, investor and supplier relationships extend across multiple supply chains.

China has become the world’s leading market in IC demand accounting for approximately 28% of the world’s chip consumption. Increasingly, this demand will be met with China-produced chips, including leading edge IC’s produced in 300 mm fabs.

Meanwhile, the fab materials spending in China will reach to US$1.5 billion by 2010, with the highest growth rate amongst all the key microelectronic markets in the world. In addition, with recent 300 mm fab announcements by SMIC, Hynix, Promos and others, and recent changes in the Taiwan government, greater leading edge technology spending is anticipated.

Along with wafer processing, China’s test and assembly market, including internal IDM assembly and test operations, continues to be world’s fastest growing. Over 45 assembly and test plants are currently operating in China, most centered in Suzhou, Wuxi and Shanghai. Further expansion of the Chinese assembly and test industry is occurring in western China with new plants opening in Xi’an and Chengdu. A report issued by market researcher iSuppli found there are more than 550 fabless semiconductor companies in China who help drive capacity in these plants.

FPD Growth

Beyond the semiconductor market, China is also experiencing rapid expansion of the display and solar industries. LCD TV sales in China have grown from 3.9 million units in 2006 to an estimated 12.6 million units this year. By 2012, LCD TV sales are forecasted to grow to over 33 million units (HDCN Forecast, January 2008). To meet this local demand and massive export market, Generation 6 plants have been announced by BOE-Hiefei, Irico and SVA. A Gen 7.45 plant has also been announced by InfoVision Optronics (Kunshan) Co., Ltd. (IVO). IVO has also announced an expanded cooperation agreement with AUO of Taiwan. Most recently, BOE-Beijing has announced a preliminary plan for a Generation 8 plant.

China’s Emerging Solar Energy Market

Since 2004, China has been moving toward a huge solar production ramp on all fronts of the domestic supply chain: polysilicon feedstock, wafers,cells and modules. China’s solar cell production and capacity have reached growth rates from 100–400%. In the last two years, China’s ten IPOs have raised nearly $2 billion to meet the world’s growing demand for PV related products and services. With these highly prominent initial public offerings, China’s solar energy industry is poised to make a major impact on worldwide polysilicon capacity and solar cell production.

In 2008, China has become the number one PV producer in the world. However, China’s domestic market for PV installation is quite small. About 98% of its production is shipped overseas. By the end of 2007, China’s accumulative installation was only 100MW, less than 1% of the worldwide installation.

Even though China government has enacted a number of national renewable energy policies, less emphasis has been put on solar energy. SEMI has joined forces with China’s leading PV companies and formed the SEMI China PV Committee. The Committee has recently initiated a PV industry advocacy program to collectively address issues facing China’s PV industry and to petition for more government support in the areas of legislation, policy, and financial support, with the aim of stimulating domestic demand while overseas market weakens.

SOLARCON China 2009 will be held concurrently with SEMICON China from March 17-19, 2009. SEMI China is committed to make SOLARCON China the leading PV expo in China. More than 20 government delegations have already accepted SEMI’s invitation to take part in this event.

China’s Emerging Solar Equipment Industry

In addition to polysilicon, solar grade wafers and solar cells and modules, China will also benefit from an emerging domestic equipment industry representing the entire production process including thermal process, plasma etch, wet bench, PECVD and semi-automated screen printing.

Supporting equipment and component vendors are also expected to emerge in China. The business model for many of these new solar energy firms, such as Suntech, Yingli and Jing’ao, follow a vertically integrated path. Some companies, such as LDK or CSUN, however, specialized in a limited number of steps in the supply chain.

Recently, Chinese PV product manufacturers have increased their focus on thin-film silicon PV modules, a sub-area that is attracting significant interest.



The global PV industry is certain to grow over the next several years. Regardless of the ultimate scope and nature of the future industry, China’s role in the global industry will certainly grow—and like most industrial segments in China, achieve global impact.