rapid rise of china's semiconductor industry: what are the implications for singapore?

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Rapid Rise of China’sSemiconductor Industry: What Arethe Implications for Singapore?

Friedrich Wu � Chua Boon Loy

Executive Summary

Lately, there has been a rush of foreign investment commitments in China’s semi-conductor industry, giving rise to predictions of a semiconductor revolution in theworld’s most populous country. Pull factors include China’s entry into the WorldTrade Organization (WTO), which would clarify trading and investment rules,government incentives, and, of course, burgeoning domestic demand.

For the moment, because of U.S. export restrictions, China’s chip industry will bekept behind the technology curve by around five years. However, its ample supply ofengineers and low labor costs will aid in the development of the assembly & test anddesign sectors, which are labor-intensive. But given strong government commitment,the industry is likely to continue to progress upward, gaining from the diffusion ofhigh-tech know-how through its alliances with multinational corporations and tier-one foundries. In the industry’s value chain, there is potential for Taiwan andChina to complement each other in both domestic and global markets, across bothhigh- and low-end technology segments, and across the entire chain of activities.

To meet the challenges, Singapore needs to further leverage on its competencies ininfrastructure and logistics, as well as the well-established ASEAN production net-work for greater economies of scale. For Singapore’s semiconductor industry toremain competitive, there is a need to strengthen the full value chain, from inte-grated circuit (IC) design to wafer fabrication to packaging & test, by attractingand building up companies specializing in different competencies. Singapore semi-conductor manufacturers should continuously strive to stay at the technology fore-front and provide competitive customer services. © 2004 Wiley Periodicals, Inc.

Thunderbird International Business Review, Vol. 46(2) 109–131 • March–April 2004

© 2004 Wiley Periodicals, Inc. • Published online in Wiley InterScience (www.interscience.wiley.com).

DOI: 10.1002/tie.20005

Friedrich Wu is the director of the Economics Division at Singapore’s Ministry of Trade and Industry(MTI). He is the Singapore government representative at the APEC Economic Committee. Beforehe joined MTI, he was head of economic research at the Development Bank of Singapore, thelargest financial institution in Southeast Asia, from 1985 to 2001. E-mail: [email protected] Boon Loy is an economist with the Ministry of Trade and Industry in Singapore.The views expressed in this article are those of the authors and do not necessarily reflect those ofthe Ministry of Trade and Industry, Singapore.

LINTRODUCTION*

ately, there has been a rush of foreign investment commitments inChina’s semiconductor industry, giving rise to predictions of a semi-conductor revolution in the world’s most populous country. Pull fac-tors include China’s entry into the World Trade Organization(WTO), which would clarify trading and investment rules, govern-ment incentives, and, of course, burgeoning domestic demand. Thelifting of the ban on Taiwanese investments in China has also raisedconcerns that Taiwan might lose its prized chip industry to China,mirroring what has happened to its once-vaunted computer industry.

The semiconductor industry has played a strategic role in the economicdevelopment of Singapore. The Singapore Ministry of Trade andIndustry has estimated that a robust long-term trend of 10% growth inworldwide semiconductor sales would add 1.2 percentage points toSingapore’s trend GDP growth.1 Currently, Singapore’s semiconductorindustry contributes to 17% of manufacturing value-added and 14% ofthe country’s non-oil domestic exports. As such, the rapid rise ofChina’s semiconductor industry would have implications for Singapore.

This article studies the current situation in China’s semiconductorindustry and assesses its growth potential over the next five years. Italso evaluates the implications for Singapore’s semiconductor industry.

CURRENT SITUATION

Within the short span of less than five years, China has establisheditself as the largest electronics-manufacturing base in the region,accounting for around one-third of total electronics equipment pro-duction done in Asia Pacific (ex-Japan) (Figure 1). By 2000, Chinabecame the largest exporter of telecommunications equipment inemerging Asia, ranking fifth after the United States, UnitedKingdom, Japan, and Germany.2 China has also caught up in the area


110 Thunderbird International Business Review • March–April 2004

By 2000, Chinabecame thelargest exporterof telecommuni-cations equip-ment in emerg-ing Asia . . .

* The observations and findings of this article have benefited from a research trip to the Greater Shanghairegion in October–November 2002 when the authors visited several industrial parks, chip plants, and gov-ernment agencies (see the list of site visits in Appendix 1).

1 Singapore’s engines of growth: A demand-side perspective. (2002, February). Economic Survey ofSingapore, 2001, pp. 83–98.

2 As a comparison, South Korea—whose novel Samsung handsets had achieved worldwide brand recog-nition and a third placing in terms of worldwide handset sales in 2001—came in at a distant tenth. In fact,for the first time in 2001, local production of communications electronics exceeded domestic consumptionin China. This could be attributed to the expansion of manufacturing by many foreign mobile phone mak-ers and the technological improvement by domestic companies.

of PC production in which Taiwan has traditionally exerted domi-nance. The former is expected to account for about 37% of the note-books manufactured by Taiwanese companies in 2002, up from just5% in 2001.3 Given the rising stature of China as an manufacturingpowerhouse, it is thus no surprise that China now represents thelargest semiconductor market in Asia Pacific.

However, China remains a relatively small player in the field of micro-electronics in Asia in terms of production and exports. AlthoughChina’s integrated circuits (IC) domestic production had growntremendously, at a rate of 71% per year to 6.4 billion units by 2001(from 0.4 billion units in 1996), this was equivalent to only 2% of South

Rapid Rise of China’s Semiconductor Industry: What Are the Implications for Singapore?

111Thunderbird International Business Review • March–April 2004

Structure of Semiconductor Industry Value Chain

The spectrum starts with the design of integrated circuits (ICs), performed withsophisticated computer-aided design tools. This results in the production of circuitdiagrams in multiple layers, each of which is etched onto the silicon substrate ofthe chip.

The value chain then moves through the production of specialized intermediatessuch as the silicon wafer and the masks. These are used to etch the pattern of thecircuits on the silicon through a series of highly complex steps known as pho-tolithography. This results in a finished wafer on which the ICs are found, built upthrough various layers of metal and semiconductor materials in silicon.

The value chain then proceeds through the testing of the circuits, the cutting ofthe wafer to secure the individual chips, and their packaging onto plastic or resinsubstrates to form the familiar chips with their multiple leads for insertion intocircuit boards.

3 Made in China: The latest in consumer electronics. (2002, May 28). Australian Financial Review.



Figure 1. Electronics Equipment Production and SemiconductorMarket in (ex-Japan) Asia Pacific (2001)

Figure 2. China’s Exports and Imports of Semiconductors

Source: Gartner Dataquest.

Source: UN Comtrade Database.

Korea’s IC production in 2001 (332 billion units). As a result, there isa huge gap between domestic production and industrial demand, andthe difference has been made up by imports. Indeed, despite its rapidlygrowing shipments abroad, China remains a net importer of chips.According to China’s General Administration of Customs, the countryimported US$13.8 billion worth of semiconductors in 2000, amount-ing to 95% of its domestic consumption.4 In 2001, imports of semi-conductor devices outweighed exports by a ratio of 4:1 (Figure 2).

Wafer FabricationMost of the chips produced in China are low-end by internationalstandards—around five years behind the worldwide mainstream capac-ity. In 2001, less than a quarter of China’s production capacity wasstandard 200-mm wafers, and two-thirds were 0.5 microns or thicker(Figure 3 and Appendix 3). Most of the Chinese fabs are state-owned,and are typically lacking in efficiency and state-of-the-art technology.Key products of Chinese fabs comprise less-advanced semiconductordevices such as transistors, regulators, and power amplifiers, as well ascommodity products such as consumer applications ICs and audioICs. As a result, as does nearly every MNC making complex electron-ics products in China, technologically-savvy Chinese companies, such



Figure 3. China’s Chip Production Capacity Breakdown (2001)

Note: Production capacity is measured in MSI (or millions of square inches), which is a measurementexpressed in terms of the silicon wafer surface area, to normalize wafer diameter differences. China’s chipproduction capacity reached 15 MSI in 2001.

Source: Gartner Dataquest, June 2002.

4 China: Start the engines, power the fabs. (2002, January). Gartner Dataquest.

as PC maker Legend or telecom-equipment maker Huawei, buy mostof their chips overseas.5

Although China could raise the US$1.0 billion or more that is need-ed to build a chip fabrication plant, several factors could impede theexpansion of its semiconductor sector in the near term. The firstobstacle is limited access to advanced chipmaking equipment. U.S.-based semiconductor equipment companies are restricted under theWassenaar Arrangement from shipping advanced 0.18 microns pho-tomasks and lithography equipment to China, and as a result, a major-ity of the Chinese fabs are operating on already known processes andused equipment. Nonetheless, China might be able to get aroundsuch import restrictions by turning to non-U.S. suppliers, such asJapanese and European companies, which together make up half ofthe wafer fab equipment market.6

The second hurdle is limited access to leading-edge technology andoperational expertise, as the strategy of MNCs has typically been toshift older-technology capacity to China. Even with the recent partiallifting of a ban on China investments, Taiwanese chip companies areonly allowed production shift of 200-mm silicon wafers chips with cir-cuitry of 0.25 microns or bigger. To break through such technologicalbarriers, start-up foundries such as Semiconductor ManufacturingInternational Co. (SMIC) and Grace Semiconductor ManufacturingCo. (GSMC) have entered into alliances with established foreign play-ers. For example, SMIC has linked up with Chartered SemiconductorManufacturing (a tier-one Singaporean foundry), whereby the latterwill transfer its 0.18 microns process technology in exchange for accessto capacity and market.

The third obstacle is a lack of a critical mass and supporting infras-tructure, which has made distribution, equipment maintenance, andraw material sourcing a logistic headache. To attract actual chipmak-ing investments from giant players such as Intel, rather than just stakesin existing/proposed plants or technology licensing, China wouldneed to build up a broad infrastructure base and a comprehensive net-work of supporting functions. It has been estimated that cheap laborprobably helps to save companies about 3% in overall production cost,



. . . a majority ofthe Chinese fabsare operating onalready knownprocesses andused equipment.

5 Dolven, B., & Kruger, D. (2002, February 14). Silicon rush. Far Eastern Economic Review, pp. 30–34.6 Semiconductor Manufacturing International Co. (SMIC) and Grace Semiconductor Manufacturing Co.

(GSMC) have recently ordered equipment from Europe and Japan capable of etching circuitry just 0.13microns wide. Source: Smith, C. S. (2002, May 6). China catching up to US in chip technology.International Herald Tribune. Retrieved November 10, 2003, from http://www.iht.com/arti-cles/56778.html.

but this could be more than offset by the lack of infrastructure.7

However, efforts in clustering its semiconductor industry are apparentin the Greater Shanghai and Greater Beijing areas, where the Chinesegovernment is planning to build, by 2005, 25 large-scale chip pro-duction lines and 20 IC assembly & test companies.

The Chinese government is also doing everything possible to attractsemiconductor companies to their science parks in Shanghai, Beijing,and Shenzhen: cheap credit, guarantees of abundant land, utilities,engineering talent, and other essential resources, along with substan-tial tax incentives. Needless to say, China’s growing demand andundersupplied market are compelling factors. It has been estimatedthat access to the domestic market and tax savings comprise 80% of thereason to build in China.8

Motorola’s investment to build a US$1.9 billion semiconductor man-ufacturing complex in Tianjin—the first wholly foreign-owned siliconwafer fabrication plant in China—and the emergence of SMIC andGSMC have caused the mainland’s IC sector to make internationalheadlines. In particular, the two start-up fabs, infused with Taiwanese



Semiconductor Terminology

The most important imperative in chip design is the drive toward miniaturization.The newest chips have circuits whose lines are a scant 0.13 microns wide, about one-thousandth of the breadth of a human hair and down from 0.18 microns in the pre-vious generation. Finer lines mean more transistors in the same space, and the moretransistors on a chip, the faster it can do its work. Intel’s original Pentium chip, intro-duced in 1993, had three million transistors. Today’s Pentium 4, which is similar insize, crams in 52 million transistors. So far, the industry has shifted less than a tenthof its capacity to 0.13 microns, yet the next step is already in the offing. Both Inteland Taiwan’s TSMC will start rolling out 0.09 micron (or 90 nanometer) chips.

Although chips are getting smaller, wafers—the disks or platters from which chipsare cut—are getting bigger. Chipmakers are starting to use wafers that are 300 mmin diameter. The current standard is 200 mm. A shift from the 200 mm to 300mm manufacturing technology can yield 2.4 times more chips, boosting a fab’soutput while cutting its cost per chip by 30% in the long run. However, building anew plant to make chips using 300 mm wafers would cost more than US$2.0 bil-lion, compared with around US$1.5 billion for a 200 mm plant.

Adapted from Brown, S. F. (2002, August). Building for the next chip boom. FortuneMagazine; Chip industry’s shift to big wafers: Pain, then gain. (1999, June). Investor’sBusiness Daily.

7 China chips still down. (2002, April 25). South China Morning Post.8 Moiseiwitsch, J. (2001, May). Superfab. Financial Technology Asia, pp. 72–78.

capital, technology, and expertise, allow China to compete for the firsttime with other foundries in Taiwan, South Korea, and Singapore.9 Aselectronics makers in China shift their product concentration fromconsumer electronics to data processing and communications prod-ucts, the demand for higher-end chips will rise, suggesting that morechipmakers would be tempted to build more high-tech fabs in China.

Assembly & TestAlthough for the moment China appears to be lacking competitiveadvantage in wafer fabrication, it has been relatively successful in theback-end semiconductor assembly & test industry, which is labor-inten-sive and requires minimal capital risk. Despite its low volume of domes-tic chip production, the number of packaging & assembly firms sited inChina is even higher than in South Korea and Singapore (Figure 4).

This reflects the fact that a vast majority of foreign semiconductorcompanies that have invested in China have put their money intoassembly & test operations to take advantage of China’s plentiful andinexpensive skilled labor.10 Consequently, China’s semiconductor



Figure 4. Worldwide Packaging & Assembly Sites

Source: Gartner Dataquest, July 2002.

9 Previous joint-venture fabs (for example, Shanghai Huahong-NEC) were carefully controlled by their for-eign overseers, and China had little to gain from the deals in terms of shared technology.

10 The most recent investments have come from Fairchild Semiconductor, Philips Semiconductors, andUnited Microelectronics Corp. (UMC), which have made commitments totalling more than US$2.0 billionto construct assembly & test plants in the Suzhou Industrial Park. Japanese manufacturers such as Toshiba,Mitsubishi Electric, and Hitachi are also planning to sharply increase their plant capacities in China in a bidto slash production costs for lower-priced ICs used in a wide range of consumer electronics goods. In addi-tion to integrated device manufacturers (IDMs), companies specializing in chip assembly and testing servicessuch as Amkor, ASAT Holdings, and ChipPac have set up plants in China to ride on the country’s growingdemand for chips.

packaging capacity is expected to more than double by 2002 (Table1). With their more advanced technologies and equipment, foreignenterprises dominate the high-end product markets represented byICs (as opposed to transistors). Enterprises with foreign participationaccount for about 80% of packaging activities for ICs, while most ofthe domestic enterprises, which produce on a small scale and utilizelagging technology, cater to the lower end of the market. However,with the production of more sophisticated electronics products inChina, the level of technology can be expected to rise rapidly as thechips are packaged and tested in Chinese facilities.11 GartnerDataquest has predicted that China may well be “the future premiumlocation for IC assembly.”12

IC DesignMajor chipmakers and fabless semiconductor companies are alsoinvesting to enhance their global design teams in China, and the num-ber of IC design outfits has been growing rapidly in recent years(Figure 5). China’s comparative advantage comes from its large poolof engineers from which talent can be recruited, as well as strongdomestic demand for semiconductors. Besides semiconductor-makingcompanies, electronics equipment manufacturers (e.g., HuaweiTechnologies, Changhong Group) have built up in-house chip designteams to develop designs for end-use in China. Several pure design



Table 1. China’s Semiconductor Packaging Capacity

(billion units) Integrated Circuits Transistors2000 2002 F 2000 2002 F

Wholly Foreign-Owned Enterprises 2.78 8.11 0.50 3.40

(41.3) (50.5) (2.9) (11.0)Joint Ventures 2.67 4.78 8.11 12.11

(39.7) (29.8) (46.7) (39.1)Domestic Enterprises 1.28 3.17 8.80 15.45

(19.0) (19.7) (50.5) (49.9)Total 6.73 16.05 17.41 30.96

(100.0) (100.0) (100.0) (100.0)

Note: (1) F—Forecast; (2) Figures in parentheses refer to percentage of total capacity.Source: China Electronics News, March 2001.

11 For example, Sony Corp. is considering building a semiconductor assembly plant in China to keep upwith increasing production shifts to the country by its electric equipment maker clients. Among other prod-ucts, the plant will assemble semi-finished chips for use in digital cameras and Sony ComputerEntertainment’s PlayStation 2 game consoles.

12 Semiconductor assembly and test services update. (2002, March). Gartner Dataquest.

(fabless) companies (e.g., Huada IC Design Centre, Wuxi SemicoMicroelectronics) have also sprung up in recent years to developproducts for sale and manufacture in China. Five major universities(Fudan University, Jiaotong University, Qinghua University, BeijingUniversity, and Shenyang University) have also established large chip-design programs.

Presently, Chinese IC design companies as a whole lag behind inter-national standards. The highest design capability is 0.25 microns, andmainstream capability is 0.8–1.5 microns. Aside from the largestfirms, most Chinese design houses are in an embryonic stage, lackingcapital, equipment, and technical and managerial expertise (at least 8of the 20 major Chinese IC design companies were only establishedin 2000). Development of the IC design industry in China has alsobeen limited due to a lack of intellectual property support in takingtheir products to market.

However, China has an ample supply of engineers and low wage coststo aid the industry’s growth (Table 2). A recent report by McKinsey &Co. estimates that China-based design houses and design branches ofdomestic and international integrated device manufacturers (IDMs)will design chips for which Chinese electronics goods manufacturerswill pay more than US$10 billion.13 Already, venture capitalists are



Figure 5. Distribution of Fabless Semiconductor Companies in AsiaPacific (Ex-Japan) (2001)

Source: Gartner Dataquest, October 2001.

13 Chinese chips. (2002). The McKinsey Quarterly, No. 2.

reported to be scouting early-stage fabless chip companies in China,particularly in Shanghai where the city government has set up an incu-bation center to support the chip-design industry.14 In addition, withChina’s entry to the WTO, the Chinese government has agreed to jointhe Agreement on Trade-Related Aspects of Intellectual PropertyRights (TRIPs). This would assist and nurture new IC design compa-nies as well as to give confidence to foreign companies willing to bringdesign work to China.

China–Taiwan Chip ComplementaritiesWith the easing of the restriction on semiconductor investments by theTaiwanese government in April 2002, a complementary semiconductorindustry structure between China and Taiwan could potentially evolve.Unlike the PC industry, which saw the hollowing out of the Taiwanesesector, the move by Taiwanese fabs to the mainland will occur but onlyas part of the island’s progression up the technology value chain (Table3). Besides having an opportunity to exploit the market across thestraits, the Taiwanese industry will itself benefit in having commitmentsfrom Taiwanese manufacturing players to invest in higher technology.



Table 2. Average Annual Salary of Design-house Workers (US$thousands)

China U.S.Senior Design Engineer (5 years’ experience) 14–30 80–150Junior Design Engineer (<5 years’ experience) 9–20 50–100Other Design-House Employees 9–20 50–100

Source: Chinese chips. (2002) The McKinsey Quarterly, No. 2.

Table 3. Government Guidelines on Taiwanese Chip Investments inChina

Taiwanese semiconductor manufacturers can build a total of three fabs before2005.

Taiwanese manufacturers that plan to invest in China must upgrade their technolo-gy in Taiwan first and reach stable volume production in their 300-mm wafer fabsfor six consecutive months.

These three new fabs can only use current-generation wafer equipment (e.g. 200-mm fab equipment).

These fabs can only install used equipment. This restriction will be lifted by 2004;by that time, these fabs can install newer equipment.

14 Fight for “fabless” markets heats up in Asia. (2001, June 20). Asian Wall Street Journal.

Taiwan Semiconductor Manufacturing Corp. (TSMC), for example, hasannounced its commitment to invest US$20 billion in new 300-mmwafer fabs in this decade, and planned to introduce 0.09 microns (or 90nanometers) manufacturing technology by the end of the year.

While Taiwan will capitalize on its first-mover advantage and empha-size leading-edge manufacturing and design, China will at presentfocus on lagging-edge production and back-end functions. There isno real immediate demand for any process technologies higher than0.25 microns in China, as the majority of the electronics applicationsmade locally are still relatively low-tech. By utilizing second- or third-generation production lines, Chinese fabs can also reduce equipmentand research costs. However, this is not to say that China will not haveits own state-of-the-art world-competitive fabs. The learning curvewill now be shorter because the transferred foundries will have all theequipment and processes available. With more capital expenditure andsupply of high-tech personnel, the Chinese IC industry is likely togrow much faster in the next five years.

IMPLICATIONS FOR SINGAPORE

The semiconductor industry has played an important role in theindustrial development of Singapore. The share of the semiconductorindustry as a percentage of manufacturing value-added has grown dra-matically from 3.6% in 1985 (when SGS Semiconductor announcedthe first wafer fabrication operation in Singapore) to 10% in 1995 andto 17% by 2001, making it the largest industrial sector by output.Since 1999, ICs have also overtaken disk drives as Singapore’s topnon-oil domestic exports, representing a robust 11% rise per annum in1993–2001 (Figure 6). To date, Singapore is host to 15 wafer fabs, ofwhich three would produce 300-mm wafers with circuitry of 0.18microns or thinner when completed (see Appendix 4). There are also18 IC assembly and test operations, 30 IC design houses, and morethan 160 companies providing ancillary services.

Markets Singapore and China are currently competing in different chip mar-kets. As shown earlier, there exists a wide gap in the chipmaking tech-nology between the two countries, and export controls have limitedChinese fabs to producing lagging-edge low-margin chips. In con-trast, chips from Singapore fabs are higher-end custom-made chipswith advanced functions (Figure 7). While most of the new invest-ments in China are 200 mm production facilities, Singapore fabs are



The semicon-ductor industryhas played animportant role inthe industrialdevelopment ofSingapore.



Figure 6. Singapore’s Exports and Imports of Integrated Circuits

Source: International Enterprise Singapore.

Figure 7. Singapore’s Chip Production Capacity Breakdown (2001)

Note: Production capacity is measured in MSI (or millions of square inches), which is a measurementexpressed in terms of the silicon wafer surface area, to normalize wafer diameter differences. Singapore’s chipproduction capacity reached 152 MSI in 2001.

Source: Gartner Dataquest, June 2002.

migrating their capacity toward 300 mm and with smaller circuitry.Until China is able to garner sufficient capital and technology to buildworld-competitive state-of-the-art fabs, both countries will continue toserve different demand segments in the global semiconductor market.

With MNCs increasingly relocating their electronics production toChina, the industrial demand for chips is expected to grow exponen-tially. By 2010, China will be the world’s second biggest semiconduc-tor market, behind only the United States.15 Given its voraciousappetite for chips and the severe under-supply situation for higher-endones, China has become one of the fastest growing markets forSingapore. Singapore’s domestic exports of electronic devices (or theSITC-776 category, under which a majority are ICs) to China grewfrom S$141 million (US$101 million) in 1996 to S$459 million(US$255 million) in 2001, or 27% annually. As a result, the Chinesemarket has overtaken the more traditional markets such as thePhilippines and the United Kingdom. With the reduction of theimport tax on most ICs from 6% to 0% in 2002 in accordance with itsWTO accession agreements, Singapore’s exports of semiconductorproducts to China are likely to increase further.

Will Singapore Be Squeezed in the Middle?The key implication for Singapore would thus not be from China perse, but from the development of a complementary industry structurebetween China and Taiwan, which would span across both high- andlow-end technology segments, across the entire chain of activities, aswell as in both domestic and global markets. As a result, Singapore’ssemiconductor industry might find itself being squeezed in the mid-dle—lagging somewhat behind the leading Taiwanese foundries, andat the same time too high-cost to participate in the production ofcommodity chips.

Nevertheless, as evidenced by recent investment commitments,Singapore continues to be an attractive location to site technology-intensive semiconductor businesses. In addition to U.S., European,and Japanese investors, Taiwanese entrepreneurs—who have seentheir home industry beset by earthquakes, power outages, a steadyerosion of industry tax breaks, limited water supplies, scarce land atthe key industrial parks such as Hsinchu, and the potential politicalfallout from China—have also set their eyes on Singapore.16 Besides a



With MNCsincreasinglyrelocating theirelectronics production toChina, the industrialdemand forchips is expected togrow exponentially.

15 Forecast by Cahmers In-Stat. China is already the world’s biggest telecommunications market with 350million users, even ahead of the US (290 million). The International Data Corporation (IDC) also expectsChina to surpass Japan as the second largest personal computer market by 2003.

16 See note 8.

highly skilled workforce, Singapore has a well-established infrastruc-ture and an efficient logistics sector. The strong involvement ofMNCs and the presence of numerous local firms providing ancillaryservices have created a sustainable and sizeable semiconductor clus-ter, allowing companies to take advantage of economies of scale andengineering knowledge (Figure 8).

In addition, Singapore has the advantage of strong industry andintrafirm linkages with semiconductor companies in the neighbouringASEAN economies, giving rise to greater economies of scale. As seenin Figure 4, Malaysia and the Philippines have many companies in ICassembly & test, with the number of firms exceeding even the UnitedStates and Europe. As an example, ST Microelectronics ships its wafersfrom the Singapore plant to Malaysia for assembly & test, and thenback to Singapore for warehousing before shipping overseas. In fact,Motorola is relocating its premium flip-chip packaging technologyfrom Japan and Hong Kong to Malaysia, creating one of the world’smost competitive advanced semiconductor assembly & test facilities.

For Singapore, the key challenge is not to produce in the mainstream,but to manufacture on the cutting edge. For example, Singapore’sChartered would need to quickly close the technology gap with theother tier-one rivals and focus on new-generation products. Comparedwith 1999 when Chartered lagged TSMC and UMC by 10 quarters for



Figure 8. Quality of Infrastructure and Cluster Development in Asia

Note: 1 is the worst score while 7 is the best.Source: World Economic Forum, Global Competitiveness Report, 2002.

0.25 microns technology, the time lag has now narrowed to 3–4 quar-ters for 0.18 microns technology, but it still trails behind by about 2–3quarters for the more advanced 0.13 microns chips.17 In the first quar-ter of 2002, wafers with 0.18 microns and below technology accountedfor 10% of Chartered’s business, but made up 53% of TSMC’s revenue(with 30% derived from 0.15 microns) (Figure 9). UMC has successful-ly applied 0.13 microns technology in its mass production and is sched-uled to produce with 0.1 microns technology in mid-2002.Nonetheless, recent technology alliances between major chipmakers willhelp transfer essential know-how to Singapore. This includes the jointventure between Advanced Micro Devices (AMD) and UMC to builda 300-mm wafer fab plant in 2005 to churn out chips based on 0.065microns technology, more advanced than the 0.13 microns technologybeing used today. With the industry shifting towards 300 mm fabs toproduce chips for more sophisticated products, such alliances will helpsecure a prominent place for Singapore at the technology front.

CONCLUSION

Success in the semiconductor industry is driven by technology, butit also depends on a breadth of serviceable markets, a supporting



Figure 9. Revenue Breakdowns by Technology (2001)

Source: Estimated from company reports (various issues).

17 Chipmaker Chartered Semi narrows gap on Taiwan. (2002, June 25). Reuters.

semiconductor infrastructure, healthy downstream industries, anda sizeable and steady supply of capital to cover escalating develop-ment costs. By itself, China will need time to grow and mature. Atthe moment, while there is plenty of downstream chip infrastruc-ture, there is limited technology- and knowledge-intensive fabrica-tion and design capabilities. But China is rapidly gaining from thediffusion of high-tech know-how through its alliances with MNCsand tier-one foundries. Strong government support, a sizeableengineering workforce and the increasing permeation of foreignbusiness practices will help raise the technological level and pro-duction capacity of its chips industry in the medium term.

Although the competitive challenge from China in terms of loweroperating costs and abundance of land and skilled manpower isreal, these represent only a small part of operating costs, as thesemiconductor industry is capital-intensive, and could be offset byother factors such as low productivity and inadequate infrastruc-ture. In the industry’s value chain, there is potential for Taiwanand China to complement each other in both domestic and globalmarkets. Taiwan will emphasize leading-edge manufacturing, whileChina will focus on labor-dependent design and assembly & testfunctions, as well as non-leading-edge production.

To meet these challenges, Singapore needs to further leverage onthe competencies in infrastructure and logistics, as well as the well-established ASEAN production network for greater economies ofscale and scope. For Singapore’s semiconductor industry to remaincompetitive, there is a need to strengthen the full value chain fromIC design to wafer fabrication to packaging & test, by attractingand building up companies specializing in different aspects. Inview of the increasing outsourcing trend in the electronics pro-duction, the global foundry business is expected to experiencetremendous growth to account for about 50% of worldwide semi-conductor sales as early as 2005, up from just 12% in 2001.18

Singapore foundries, armed with their experienced manufacturingteams and credibility earned through years of closely protectingthe intellectual property rights of customers, must continuouslystrive to stay at the technology forefront, as well as provide inte-grated service packages to customers.



In the industry’svalue chain,

there is potentialfor Taiwan and

China to complement

each other inboth domestic

and global markets.

18 Nystedt, D. (2002, May 16). Dataquest upbeat on chip sector. Taipei Times, p. 14.

APPENDICES

Appendix 1

List of Places Visited in Greater Shanghai Region and JiangsuProvince, October–November 2002

Wuxi• Wuxi Foreign Economic Relations & Trade Bureau• Wuxi-Singapore Industrial Park• Seagate Technology International (Wuxi) Co. Ltd • Pentex Schweizer Circuits (Wuxi) Co. Ltd• Yongzhong Office Software Co.

Changzhou• Changzhou Hi-Tech Industrial Development Zone• Tenant companies

Nanjing• Nanjing Foreign Economic Relations & Trade Bureau• Nanjing Foreign Investment Services Centre• Nanjing Hi-Tech & New Technology Industrial Development Zone• Jiangning Economic Technology Development Zone• Jiangsu IT Bureau• Jiangsu Software Park• Phoenix Software• Ericsson (Nanjing) Co.• Dongnan University• Nanda Soft Co.

Suzhou• China-Singapore Suzhou Industrial Park• International Science Park• National Computer System (Suzhou)• SISTEC Software



Appendix 2

Glossary of Terms

Active Component Electronic components, such as transistors and diodes, that are altered through applied electrical signals.

Amplifier A device that accepts a small signal and outputs a larger signal that generally matches the waveform characteristics of the input. Amplifiers are available to boost electrical and optical signals.

Assembly (or Packaging) The step in semiconductor manufacturing in which thedevice is encased in a plastic, ceramic, or other package. In some cases, the chip is assembled directly on a printed circuit board.

Capacitor An electronic component that holds a charge. It comes in varying sizes for use in power supplies. It is also constructed as microscopic cells in DRAM chips.

Design Performed with sophisticated computer-aided design tools, chip design results in the production of circuit diagrams in multiple layers, each of which is etched onto the silicon substrate of the chip.

Fab (Fabrication) A manufacturing plant that makes semiconductor devices.

Fabrication usually refers to the front-end process of making devices and integrated circuits in semiconductor wafers, but does not include the package/assembly (back-end) stages.

Fabless A semiconductor vendor that does not have in-house manufacturing facilities. Although it designs and tests the chips, it relies on external foundries for their actual fabrication.

Foundry A semiconductor manufacturer that makes chips for third parties. It may be a large chip maker that sells its excess manufacturing capacity or one that makes chips exclusively for other companies.

Integrated Circuit (IC) The formal name for the chip or microchip. An electronic circuit in which many active or passive elements are fabricated and connected together on a continuous substrate (usually silicon).

Integrated Device Manufacturer (IDM) A single factory that performs the entire set of

processes including design, manufacturing, testing, and assembly.

Microns One millionth of a meter, or one micrometer, which is approximately 1/25,000 of an inch.

(Appendix 2 continued)



Appendix 2(Continued)

Passive Component An electrical component without gain or current-switching capability. Commonly used when referring to resistors, capacitors, and inductors.

Process Technology Refers to the manufacturing of semiconductor chips. The driving force behind this technology is miniaturization. The smaller the elements of the chip, the faster the transistor switches, the less energy required, and the cooler the chip runs. The elements of the chip are measured in micrometers (microns) and nanometers.

Semiconductor Device An elementary component (such as a transistor), or a larger unit of electronic equipment comprised of chips.

Transistor A device used to amplify a signal or open and close a circuit.

Wafer The base material in chip making, which goes through a series of photomasking, etching, and implantation steps. It is a slice approximately 1/30" thick from a salami-like silicon crystal up to 12" in diameter (300 mm).

Sources: TechEncyclopedia.com; IC Insights Glossary of Terms.



Appendix 3

China’s Existing and Planned Production Fab Lines

Company and Fab Start Planned Wafer GeometryName Year Capacity Diameter (microns)

(wafers (mm)/month)

Advanced Semiconductor Fab 1 1997 25,000 125 1.5

Advanced Semiconductor Fab 2 1998 15,000 150 0.7

Changzhou Semiconductor 1986 1,000 50 1.5Government of China

Factory No. 878 1988 1,000 75 1.5Government of China Fab 5 1994 2,000 100 1.5Government of China MEI

No. 24 1982 1,500 75 1.5Government of China MEI

No. 771 1992 4,000 150 1.5Government of China MEI

No. 24 1992 4,000 150 1.5Grace Semiconductor

Manufacturing Fab 1 2002 50,000 200 0.25Hua Hong-NEC

Microelectronics Fab 1 1999 25,000 200 0.25Huajing Electronics Group

Fab 1-A 1984 15,000 100 0.35Huajing Electronics Group

MOS-1 1993 12,000 100 1.5Huajing Electronics Group

Fab 1-C 1998 10,000 125 1.5HuaYue Microelectronics

CHMC Fab 5 1998 10,000 125 1.5Motorola MOS 17 2003 20,000 200 0.25NEC Shougang Phase 3 1994 10,000 150 0.35ON Semiconductor 1983 18,000 200 0.35Semiconductor

Manufacturing Int’l Fab 1 2002 42,000 200 0.25Shanghai Belling Fab 1 1988 10,000 100 1.5Shanghai Industrial Complex

Fab 1 1983 1,200 100 1.5Shanghai Industrial Complex

Fab 2 1985 16,600 100 1Wuxi CSMC-Huajing

Semiconductor 1998 20,000 150 0.5Xin Whey Guafon

Microelectronics Fab 1 1990 10,000 100 1.5

Sources: Worldwide Fab Database, 2001, Gartner Dataquest, January 2002.



Appendix 4

Singapore’s Existing and Planned Production Fab Lines

Company and Fab Start Planned Wafer GeometryName Year Capacity Diameter (microns)

(wafers (mm)/month)

AU (JV between UMC-AMD) 2005 (tbc) 300 0.13

Chartered Semiconductor Manufacturing Fab 1 1989 26,000 150 0.5



Silicon Manufacturing Partners (Agere-Chartered JV) Fab 5 1999 24,000 200 0.16

Chartered Silicon Partners (Chartered-Agilent-EDBI-ST JV) Fab 6 2000 35,000 200 0.18


Hitachi-Nippon Steel Semiconductor 1998 30,000 200 0.15

STMicroelectronics AMK 6 2000 80,000 150 N/ASTMicroelectronics AMK 5 1984 70,000 125 1.5STMicroelectronics AMK 8 2001 41,000 200 0.18Systems-On-Silicon

Manufacturing (Phillips-TSMC-EDBI JV) SSMC 2000 30,000 200 0.18

TECH Semiconductor (Micron-Canon-HP-EDBI JV) TECH 1 1993 16,000 200 0.15

TECH Semiconductor TECH 2 1996 34,000 200 0.15

UMCi (UMC-Infineon- EDBI JV)—Module A 2003 20,000 300 0.13

Source: Worldwide Fab Database, 2001, Gartner Dataquest, January 2002.



Appendix 5

Further Reading

Das, D. K. (1998). The dynamic growth of the electronics industry in Asia. Journal of AsianBusiness, 14(4).Green, E. M. (1996). Economic security and high technology competition in an age of transi-tion: The case of the semiconductor industry. Westport, CT: Praeger Publishers.Malerba, F. (1985). The semiconductor business: The economics of rapid growth and decline.Madison, WI: University of Wisconsin Press. Mathews, J. A. (1999). A silicon island of the East: Creating a semiconductor industry inSingapore. California Management Review, 41(2), 55–78.Mathews, J. A., & Cho, D.-S. (2000). Tiger technology: The creation of a semiconductorindustry in East Asia. Cambridge, UK: Cambridge University Press.Simon, D. (2001, November-December). The microelectronics industry crosses a criticalthreshold. The China Business Review, pp. 8–20.Sung, G. H. (1997). The political economy of industrial policy in East Asia: The semiconduc-tor industry in Taiwan and South Korea. Cheltenham, UK: Elgar Publishers.Wu, F., & Chua, B. L. (2003). Declining global market shares of Singapore’s electronicsexports: Is it a concern? Thunderbird International Business Review, 45, 1–13Wu, F., & Kumarapathy, S. (1998) Are Singapore’s electronics exports losing competitivenessto regional rivals? Asia-Pacific Journal of Economics and Business, 2(2).



rapid rise of china's semiconductor industry: what are the implications for singapore?

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