New China chip plant impact unclear

A $1.6bn chip foundry planned for China could have less impact on chip prices than initially expected, according to industry sources.

Rick Hsu, an analyst with Nomura Securities, said that it remains unclear when the new plant will start operations, but that he did not expect it to make built-to-order chips for other companies.

Industry sources have suggested that NEC's joint venture partner in Shanghai, Hua Hong, will buy an empty fab shell from troubled local chip maker, Grace Semiconductor. The two companies may even merge.

The fab will be fitted out with cutting edge chip manufacturing equipment able to use large 300mm silicon wafers to build latest-generation chips. An unnamed source that spoke to Reuters put the likely cost of the project at $1.6bn.

"But they haven't any concrete plan when they will install equipment," said Hsu. "It's easier said than done."

Globally, cutting-edge chip production is dominated by companies like Taiwan Semiconductor Manufacturing, and United Semiconductor Manufacturing, both based in Taiwan, and Semiconductor Manufacturing International Corp based in Shanghai.

These so-called 'pure-play foundries' concentrate on building chips for other companies, rather than designing their own. Customers include a wide variety of companies without their own manufacturing facilities, such as graphics chip makers Nvidia and ATI.

If Hua Hong puts the new plant into the foundry business the introduction of this production capacity into the market would tend to push down manufacturing costs of a wide range of chips - particularly as the new China-based foundries, like SMIC and Grace, have been offering extremely low prices to win business from established Taiwanese suppliers recently.

According to Hsu, however, the new factory will probably be devoted to making a more limited range of chips for Hua Hong and NEC, rather than other companies.

A TSMC spokesman, commenting on reports that Hua Hong planned to cooperate or merge with Grace Semiconductor, noted that details were still unclear, but said Grace Semiconductor already had plans to develop the empty fab, so the introduction of Hua Hong into the equation is irrelevant.

"They're both already there, so from my point of view, it doesn't really make any difference," he said.

Companies are eager to build chip making plants in China because of great demand from local and foreign manufacturers. Reuters reported that China's semiconductor market was believed to be worth about $40bn in 2004, and is predicted to see 20 to 30 per cent annual growth rates.

Currently, the majority of these chips are made outside China, largely in Taiwan.