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Oct 2002
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| MAGNIFYING GLASS |
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Chipmaking's New Capital: Asia
By Richard Tortoriello
Demand is now strongest in the region, and S&P thinks China has the
greatest potential for semiconductor producers.
Another shift in economic power from West to East is quietly taking place. But
this time, it doesn't involve oil or automobiles but tiny squares of silicon and
metal known as semiconductors. According to the Semiconductor Industry Assn.,
the boom year of 2000 marked the end of U.S. dominance in this market, with the
Americas accounting for 31.3% of worldwide chip sales vs. 25.1% in the
Asia/Pacific region, 22.9% in Japan, and 20.7% in Europe.
Only a year later, Asia/Pacific had jumped into the lead, with a 28.7% share,
compared to 25.7% for the Americas. And Asia/Pacific is the only region expected
to grow in 2002.
A couple of factors have been driving this shift. One is the emergence of
semiconductor contract manufacturing. With plants costing up to $2.5 billion,
many chipmakers have opted to outsource all or a portion of their production. At
the center of this contract-manufacturing industry is Taiwan, followed by other
Asian countries such as Singapore, South Korea, Malaysia, and China.
AGGRESSIVE PLAN. Another factor in Asia's increasing chip dominance is the
region's domestic demand, as expanding economies require more electronics goods
and infrastructure, and consumers experience increased prosperity. Among the
fastest growing of these economies and clearly the one with the most potential
is China (see BW Online, 9/23/02,"China's Fabless Appeal").
Sales of cell phones, PCs, chips, and software in China have all been climbing
at double-digit rates in recent years. At the same time, the Chinese government
has sponsored an aggressive plan to build new chipmaking and packaging plants
and semiconductor-design houses. Despite the success of this plan -- China
already has 10 major chip manufacturers and about 100 design houses -- the
country's semiconductor production now accounts for only about 20% of domestic
demand. The rest is still imported.
In addition to its fast-growing market, China offers foreign chipmakers cost
advantages, including substantial tax and land-price breaks, as well as a
plentiful pool of skilled workers and cheap wages, water, and utilities.
Construction costs are estimated to be 35% less in China than in Taiwan, bulk
gas is 30% cheaper, and the water supply is 60% less expensive. These factors
have spurred a flood of foreign investment in chipmaking in the country.
EARLY ENTRANTS. Motorola (MOT) has become the largest U.S.-based investor in
China. It has spent over $3.4 billion there to date and plans to invest over $6
billion more by 2006 to establish a manufacturing and research-and-development
base. Motorola is targeting high-growth markets, including semiconductors,
broadband communications, and digital trunking systems (used in wireless
communications), and it aims to reach $10 billion in annual production by 2006.
Texas Instruments (TXN) is another early entrant in the Chinese market. It led
competitors with sales of broadband and wireless-systems chips in China.
Recently, TI announced an agreement with China's Semiconductor Manufacturing
International Corp. that gives the Chinese outfit TI's first chipmaking base in
China. To get around U.S. export restrictions, TI will manufacture the
"critical" layers of the chips in the U.S. and then ship the wafers to China for
manufacture of "noncritical" (or metal interconnect) layers.
Applied Materials (AMAT), the world's largest maker of semiconductor equipment,
recognized early the country's potential and opened its first office there in
1984. Applied projects that sales to China will rise from 2000's $100 million,
or 1% of revenues, to over 5% of sales by 2005, or a projected $1 billion.
LONG-TERM POTENTIAL. Chinese semiconductor manufacturing isn't likely to take
over the world anytime soon -- it accounted for just 2% of semiconductor unit
volume sold worldwide in 2001. However, with its urban population of over 400
million people, rapid economic growth, increasing investment in chipmaking, and
burgeoning electronics markets, investors should take note of China's long-term
growth potential.
Businesses that are building strong positions in China now -- such as Motorola,
TI, and Applied Materials -- are likely to be the ones to reap large benefits
from this growing market in the future. For the near term, however, Standard &
Poor's has a 3-STARS (hold) ranking on shares of Motorola and TI and a 2-STARS
(avoid) ranking on Applied Materials.
Source:Business Week
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