China gets its head into gear
Mark LaPedus , Mike Clendenin
EE Times
(06/20/2005 9:00 AM EDT)
SHANGHAI, China — China is putting down roots for a domestic semiconductor and materials industry that could eventually go global, posing a potential threat to competitors and intellectual-property protections.
No one thinks this will take place overnight, but many consider it inevitable. As part of China's wider strategy of self-reliance, building a semiconductor equipment and materials industry would allow Chinese companies to glean more benefit from the country's fast-growing semiconductor and electronics market.
China already has several local wafer suppliers, which mostly serve the country's 4-, 5- and 6-inch fabs. Because modern semiconductor fabs are still relative newcomers to China, the country's nascent equipment industry has not done much in the areas of advanced semiconductor tools and materials.
But that is beginning to change as a handful of domestic startups quietly develop tools. Though most of the efforts thus far have been in chemical vapor deposition (CVD) and etch, a couple of companies and government labs are exploring more-advanced lithography. Little is known about the startups, which generally eschew the spotlight, but industry observers believe a few of them have potential staying power.
The nation's fledgling semiconductor equipment industry "could serve markets not addressed by Applied Materials, Lam Research and others, but what I'm worried about is patent protection," said analyst Avinash Kant, who follows the IC-equipment market for investment banking firm Adams Harkness Inc. (Boston).
"Most of the technology [in the semiconductor-equipment industry] is already patent-protected," Kant said. "It's hard to get around these patents. But in China, patents are not protected."
China's domestic equipment market is one of the fastest-growing in Asia, weighing in at $2.6 billion in 2004, up 132 percent from 2003. Growth is moderating this year as the country's biggest foundry, Semiconductor Manufacturing International Corp. (SMIC), curbs spending.
However, over the long term, observers expect China to be a magnet for companies building fabs, thanks to tax incentives and subsidies and to the growing electronics supply chain here. Twenty new fabrication facilities will be constructed in China between 2005 and 2008, the Semiconductor Equipment and Materials International (SEMI) association reported this month.
"In the next couple of years, the demand for low-priced equipment will grow based upon the current announced 200-mm fab projects. Local vendors may be able to come in with low prices and compete with secondhand-equipment vendors," said Mark Ding, president of SEMI China. "More 300-mm fabs are in planning in China, which gives the local vendors the opportunity to grow into higher-margin areas if they do well in supplying 200-mm equipment and keep up with the R&D."
In Shanghai, a group of former Applied Materials executives appears to be a front-runner. The executives form the core of Advanced Micro-Fabrication Equipment Inc. (AMEC), which is developing CVD and etch tools and should have prototypes by the end of this year, with market-ready systems available in 2007.
The company's game plan, which calls for 30 percent market share in Asia by 2012 to 2015, is admittedly aggressive. But the plan proved intriguing enough to attract $38 million in venture capital and the attention of Lip-bu Tan, an early investor in Chinese foundries SMIC and Central Semiconductor Manufacturing Co.
Tan, of Walden International, led the investment in AMEC by a group of Silicon Valley firms: Redpoint Ventures, InterWest Partners, Lightspeed Semiconductor and Bay Partners. The investment arm of the Shanghai government chipped in $6 million.
AMEC is still in stealth mode and thus isn't divulging its product plans yet, said venture capitalist Koji Osawa, a "board observer" of AMEC. Osawa is a principal and co-founder of venture capital firm Global Catalyst Partners (Redwood Shores, Calif.), which invests in AMEC and other companies.
China's semiconductor companies are looking for low-cost equipment alternatives to their foreign rivals, and the fledgling Chinese tool vendors could one day become a viable source of supply in select product markets, Osawa said. "It's not a well-developed market right now, but I think China's equipment vendors have a chance to get into this space," he said.
But soaring development costs, coupled with stiff competition from foreign rivals, could limit China to just a few fab-tool vendors. "I don't see that many equipment companies in China," Osawa said.
China currently is home to about 40 domestic manufacturers of equipment for the semiconductor and related microelectronics industries, according to SEMI. But few of those pose an immediate threat to overseas rivals; most are either in back-end equipment or are serving legacy 4-, 5- and 6-inch fabs, which consume more than half of the silicon in China.
"The industry in China is still quite young, and companies won't be coming out with anything for some time," said an executive at an equipment startup in China who requested anonymity. "But China would like to establish a semiconductor industry, and equipment is the foundation of that industry."
Local companies have been lobbying the government for some time to spend more money on R&D for advanced equipment, and the government seems keenly interested in speeding development of the local chip and LCD equipment industries. It wants to encourage fabs to buy domestic machinery, but any policy would have to be carefully crafted so as not to run afoul of World Trade Organization rules, as an older tax-rebate policy did. One possibility is routing R&D funds to both foundries and local equipment makers, which could come together under a group similar to Sematech.
Nascent Chinese equipment industry could help finesse export issue
Such activity, if duly supported by China's chip makers, could foster a stable local supply of advanced equipment, avoiding the sticky issue of foreign-export licenses for tools that can make chips for basebands as well as missile-targeting systems. And it would introduce more competition into the market, driving down prices.
Opinions are mixed about whether China will become a force to reckon with in the semiconductor equipment and materials market. Market leaders like Applied Materials and ASM Lithography don't see an immediate threat, but they're concerned about the outlook five years down the road.
"I think China will build equipment," said Jim Easton, vice president of sales and marketing for Silecs Inc. (San Jose, Calif.), a low-k dielectric materials startup. "That will require the United States to become more competitive than we are today."
The fab-tool industry in China "will pick up very fast," predicted Werner Rust, senior director of sales and marketing for ASM NuTool Inc. (Fremont, Calif.), part of Netherlands-based ASM International BV. "It will take three to five years."
Rust said he doubts Chinese companies will be able to develop a complex technology like optical lithography all that quickly, but he believes some could move into niche markets. "They will start out and build their own furnaces. I am sure they can build vacuums," he said. "I don't think they will go out and develop atomic-layer deposition, but I could see them doing CMP [chemical mechanical polishing]."
More important than the physical plants, China is building up the know-how. A growing number of Chinese nationals who once worked for U.S.-based equipment makers are now nurturing the nascent domestic industry, according to Rust.
Others are not as optimistic about China's fortunes in the sector. "They are slow and behind in materials," said Philip Dembowski, global market manager for semiconductor fabrication materials at Dow Corning (Midland, Mich.). "I don't see any photoresist companies in China. I don't see any CMP slurry vendors."
Dembowski believes China-based equipment companies could succeed in selling into the domestic market but not to the markets in other Asian countries, Europe or the States.
But that's exactly what AMEC and others, such as Shanghai Micro Electronics Equipment and Beijing Seven Star, intend to do eventually. They hope to persuade local companies to start testing their equipment, perhaps during a downturn, when process engineers might have more time. They believe that their products' lower cost of ownership — in some cases, as much as 35 percent — plus promised performance advantages will compel both foreign and domestic companies to take a chance on them.
It will take a while. South Korea has been trying to build up a strong equipment industry since the late 1980s, but it's stalled out at about a 10 percent to 15 percent global market share. Taiwan has tried, too, but with poorer results.
Still, there's room in the market for standouts. One of the fastest-growing companies in the equipment business is South Korea-based Jusung Engineering Co. Ltd., a provider of semiconductor and LCD manufacturing tools. It has gained the confidence of customers in Asia, the United States and Europe, boosting revenue from 27.1 billion won in 2003 to an estimated 223.7 billion won in 2005.
Japan has been Asia's biggest equipment success story; yet, even there, companies cloned existing equipment before moving on to their own innovations. Chinese companies can likewise be expected to do some copying. And China's lax IP laws could make it difficult for international competitors to take action.
A better way for companies to protect their market share may be to emphasize the extras, such as integration and after-sales service. Big vendors will have a clear advantage in working more closely with the fabs, especially those in China and Taiwan that may need more integration assistance or that want closer collaboration on process development.
"A lot of times, it's very difficult to make that competitive jump from copying something to actually providing a solution that works at the customer site," said Dan Hutcheson, president of VLSI Research Inc. (Santa Clara, Calif.), an equipment industry specialist.
For China, the bottom line is that it it is home to an industry in its infancy — and a customer base that's smaller than Japan's and not as vertically integrated as South Korea's. Those will be handicaps to overcome.
"It's probably a long haul for them, maybe 10 or even 20 years before it is a viable business," said Hutcheson. "But remember, the Chinese are very patient."
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