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Chinese chipmaking woes and Indian chipmaking dreams


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May 03, 2007

Chinese chipmaking woes and Indian chipmaking dreams

Bruce Einhorn

Does it make sense for countries like China and India to try to compete in the ultra-expensive semiconductor industry? Indian officials seem to think so. They’re putting together new policies designed to make investors willing to plunk down huge sums – the price tag for a low-end fab is in the hundreds of millions and well over $1 billion for more cutting-edge ones. In March, the government unveiled its “Special Incentive Package Scheme,” a package of incentives for chipmakers. And Indian officials will be revealing more details of this plan soon.

China caught the chip bug well before India did, with the Chinese government helping new companies like SMIC and Grace get started in the early ’00s. And if the Chinese experience is any indication, the Indians might be better off thinking twice before pushing ahead with their chipmaking ambitions. Grace, which was launched with support from the son of former Chinese President Jiang Zemin, is perhaps known best in the U.S. for its role in the unpleasant divorce of Neil Bush, the brother of George W. Bush and member of the Grace board. Grace was supposed to have had an IPO by now but breaking into the chip business isn’t easy and that IPO still hasn’t happened.

SMIC did make it to market, with a spectacular IPO in 2004 in New York and Hong Kong that raised $1.8 billion. SMIC has grown quickly, with fabs in Shanghai, Beijing and Tianjin and projects underway with local governments to operate new fabs in Wuhan and Chengdu, but the company is having trouble translating sales into profits. Last Friday, SMIC revealed its Q1 earnings of $8.8 million. But that was largely the result of a one-off sale of equipment that brought in $27 million. Strip that out and SMIC is in the red – again. “The only reason the company has been able to report profits at the operating level is simply because of non-recurring asset disposal,” Warren Lau, an analyst with Macquarie in Hong Kong told me. But what about the idea, popular among many boosters of Chinese chipmakers, that Chinese chipmakers have a special advantage in catering to the country’s huge demand for semiconductors? Lau doesn’t buy it. “Location is not the single most important consideration. It really doesn’t matter if you are based in the U.S., Taiwan, Singapore or China.” (Maybe he should add India to that list, too.)

In China, at least, there's no shortage of governments willing to throw around money to get into the chip business. “The entry barriers to build a fab are not that high," Lau adds. "As long as you have money you can build a fab. The important question is whether you can load the fab.” In other words, turn it into something that can make money. To do that, new chipmakers need customers, tech, and talent. “These are the high entry barriers that a lot of people don’t see," he says, "rather than ability to build a white elephant."

06:55 AM

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IC industry is not a field where u can compete just because u can do some low end IT outsourcing jobs. If Chinese can not do it, Indians of average IQ at 81 should not waste time trying it.

Posted by: nicknguyen at May 3, 2007 09:04 PM

If Taiwan, South Korea, Japan, Singapore could do it, then China and India could also do it.

Yes, it is expensive and risky but if a country has the market, the money, the personnels and the will to do it, then it is possible.

Bruce seems to be running out of theme lately other than piting China vs India.

Posted by: jcage at May 4, 2007 03:24 AM

Well, it is really a strategic event for China to develop the chipmaking industry in my opinion. It can be understood that it may take some money & some time at the very beginning but there will be certainly some good result.

Posted by: Detle at May 4, 2007 05:34 AM

The other Asian semi guys are successful because they were established with the technical support and enthusiastic end markets of the established semiconductor industry in the USA and Europe.

India and chain are going it pretty much alone and as such are reinventing a lot of wheels. No doubt they will have eventual success because of their huge capital resources and nationalistic hunger for upgrading their economies ... but it will take time. I think 5 to 10 years would be a conservative estimate to them becoming established as major players.

Posted by: Stan Schiller at May 4, 2007 10:02 AM

Producing More Chips in China & India? Yes, why not. Take a closer look to chip plants in some Asian countries (excluding China & India). Where do the manpower come from? If there are statistics that can show the nationalities distribution of manpower in these chip plants, I can imagine a large % could actually come from China or India. What China & India do really lack of to become global players in semiconductor industry is its ability to protect I.P. I believe they will soon catch up and for now, 2 big companies, Intel & AMD have somehow injected some life to the Chinese semiconductor industry.

Posted by: in_depth at May 4, 2007 05:57 PM

Both India and China's billion plus population have insatiable demand for everything including electronics. The needs of Indians and Chinese is much different from developed countries which can only be met when companies based here design for these people in mind. The break even time for capital intensive chip industry may be long but Asia is where growth is.

PS: The same Indians with average IQ earn much more than fellow intelligent Americans and are comparatively more successful.

Posted by: srai at May 5, 2007 07:54 PM

People have started worrying that India might swallow them in ICindustry also; the same thing happened with software. This is a good sign to go ahead...

Posted by: CK at May 8, 2007 12:00 AM

India is better off spending their money on their astrocious infrastructure like roads, FTZs, ports, airports,etc rather than investing on something like wafer fabs.

China's efforts are questionable but then they were much further down the road in terms of electronic manufacturing when they decided to invest into wafer fab.

India's hardware manufacturing is still at its infancy (despite all the hype being generated by the media and research companies).

The fab industry is extremely competitive with only a handful actually making money (even then I have my suspicious over the Taiwanese accounting practices).

Another problem India will face is the technology issue as no one will be willing to transfer other than low-end stuff.

Furthermore, Indian infratstructure is inadequate for supporting a wafer fab. Then there is a question of technical people and supporting industry.

Posted by: Tanglimara at May 9, 2007 08:49 PM

Invest in Indian Semiconductor companies. Spel Semiconductors is a profit making listed company available at decent valuations!

Posted by: Indian at May 11, 2007 01:43 AM


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