The recent opening of a 300mm wafer-making plant in Beijing by Shanghai-based Semiconductor Manufacturing International Corp (SMIC) makes no secret of the company's ambitions. It is China's first foray into the industry's largest-scale category, and it reflects the country's broader aim to be the world's number one electronics manufacturer in an era of accelerating contract manufacturing.
SMIC's foundry, which is a chip plant devoted to turning out integrated circuits of other companies' design, already has orders in hand from Germany's Infineon, the successor spin-off of Siemens Semiconductor. In fact, Infineon, an old SMIC customer, was instrumental in helping the company move up to 300mm technology and has been waiting for the plant to open since it was on the drawing board.
Texas Instruments, which dominates the world market in chips for mobile phones, will also make processors at the new plant. Beijing is one of four locations SMIC now operates out of, if the count includes its new joint venture with the Chengdu municipal government for a new test and measurement facility.
SMIC has wafer production lines in Tianjin and at its Shanghai headquarters. Not ones to leave new facilities idle, even one that won't see a groundbreaking ceremony till December, SMIC announced it was in talks about leasing Chengdu capacity to US-based Micron Technologies, the world's second-largest memory-chip maker.
One irony of the piece, given that SMIC's whole business model depends on companies outsourcing production to them, is that the company went into the Chengdu JV so that it could do its own test and measurement rather than outsource that work as it does now. On the other hand, the plan does move SMIC closer to being a full-service one-stop shop, which was always in the plan.
Indeed, the requirement to be a full-service operation applies to China's wider electronics endeavor, and in that respect the Mainland's first 300mm plant makes a huge addition to the national portfolio.
It comes when China is already going gangbusters. California-based industry research house iSupply says that with production capacity continuing to migrate to China, contract manufacturing, or electronic manufacturing services (EMS) as it is also known, will keep growing at more than 20% compound a year through 2008 – as will the original design manufacturing segment in which customers also farm out parts or all of the design job.
China's EMS revenue, US$17.7 billion last year, is projected to top US$45.5 billion in 2008. ODM revenue, which was US$39.6 billion in 2003, should hit US$108 billion by 2008, according to iSupply data quoted by US trade journal Electronic Business.
The trend to outsourcing will only continue to grow as companies keep narrowing focus to their core specialties and make more flexible use of assets. Industry can thank innovators like Michael Dell for introducing the notion of variable costs and flexible use of assets. It was Dell, among others, who first showed the advantage of not being weighed down with production line costs and associated overheads all year long in a business that was so cyclical. With that concept now widely understood, China shines like a very bright beacon with its huge home market (not least in semiconductors), low-cost base and thickening clusters of support industries.
That is the international story. China has an interesting domestic story to tell, too. As local Chinese vendors hold sway in the market, these makers of phones, PCs and other products will also increasingly outsource more production to contractors.
So there is an almighty convergence happening, creating a multiplier effect. As more product manufacturing migrates to the mainland from all over the world, but very much from Taiwan, too, domestic EMS companies will be pushed to keep improving capabilities and capacity, becoming ever more attractive as a manufacturing base to ever more electronics vendors.
That process starts with moving up the value chain, as SMIC has been doing so aggressively. The company will have invested US$1.9 billion this year, and anticipates spending US$1.4 billion next, most of 2005's allocation focused on its 300mm wafers project. "One of the most attractive aspects of the Beijing fab is the cost, which is about 50% below that of a 300mm fab built in Taiwan, according to SMIC," investment bankers Friedman, Billings, Ramsey said in a post-visit comment in September.
The bankers, citing SMIC sources, said local "fabless" chip companies now accounted for nearly 10% of the company's current capacity. "Increased manufacturing of semiconductors in China is expected to help with the supply chain, as most ODMs have facilities in China. This is expected to help improve lead times as well as unit costs." It sounds like things are going according to China's plan.