Electronica China 2005
By John Latta, WAVE
March 15 - 17, 2005
The Tiger Stirs
Electronica & Productonica is meant to examine trends
in laser and electro optics in China. Yet, when we got to the Shanghai
New International Expo Center (SNIEC), it was obvious that something
else was going on. Running in conjunction with Electronica and Productronica
China 2005 is the annual Semicon China 2005 event - they are even sharing
the same aisles. There were two other trade events in the SNIEC at the
same time. The place was hopping. We have not seen such excitement at
a trade show venue in years. China has awakened.
This is the 4th International Trade Fair for Components,
Assemblies and Photonic Technologies. It occupies one and a half of the
long buildings of the SNIEC. The other three and a half are taken up
by the Semicon show. This is the semiconductor equipment trade event.
Next week is the FPD event run by Semicon. The Semicon show, which opened
this morning, was alive with attendees and exhibitors.
China Builds a Semiconductor Infrastructure
The WAVE, having been to three prior CeBIT Asia events
and two at the SNIEC, knows the venue well. Under the CeBIT banner, it
tried and it was not clear that this show was well targeted. Yet, since
our last visit, two new halls have been added – making a total
of seven. They were all full this week.
Walking into the Semicon exhibition the isles were packed
both with exhibitors and Chinese. These were not the usual tire-kicking
public but what appeared to be serious individuals. Many of the exhibits
were large and very well manned. Applied Materials had a large booth,
for example. Even Intel was here selling its older fab equipment. We
noted many American companies with considerable staffs. Represented here
is the semiconductor ecosystem. Another tip off was the large containers
housed between the exhibit halls. These obviously were used to transport
the large booths by ship. This was an expensive and very well staffed
Our first response was – is this real or just a hope
by the vendors? With that we had many conversations in the booths. Here
is what we uncovered:
Most of attendees said that the Chinese are spending
money to build fabs. Some were here for the first time and were cautious.
But to those with experience in the market, there was no doubt that
a major investment is taking place by the Chinese government to build
a semiconductor fab infrastructure. Further, Shanghai will be the place
where most of this will happen.
In spite of U.S. export controls on the fabrication
geometry, this is not expected to be a major barrier to the construction
of the fabs. Such controls do not exist in Europe or Japan. Yet, even
with fabs that are one and two generations behind, this is not a major
impediment to what the Chinese need and are looking for. They just
have no immediate requirement for 65nm fabs.
TSMC had a booth and the comment was made by an American
that the Taiwanese will not tell the Chinese their secrets to being
efficient in fab operations. But in a number of conversations, this
was dismissed. An analogy was drawn with the entry of the Koreans in
semiconductors and especially DRAM in the 1980s. There was a high degree
of skepticism back then that the Koreans could master this cutting
edge fabrication technology. Now they dominate it.
In a pattern similar to the entry of Korea, the Chinese
expect that when they buy equipment, it comes with training and support.
Put in another way, they want the technology when they buy equipment.
As a result, they can eventually own the processes and master the technology.
As a further result, companies have a hard time charging for training
and support. Given the tough semiconductor market, the Chinese seem
to be driving the bargains.
Another point made in booth discussions is that the
Chinese are cheap. That is they want the best bargain and will drive
to no end to get it. Again, not dissimilar to the Koreans when they
entered semiconductor fabrication.
When asked – Is there a need for such a large
rise in semiconductor production – we did not get a clear answer.
That is, no one knows the depth of the demand in China. Yes, everyone
quotes the large population that this is largely a myth in that the
rural populations have so little money. Thus, the real potential near
term market is about the size of the U.S. – 300m. That is enough
to still attract significant investment.
The really important issue is that China is on its way
to creating massive infrastructure to support a consumer market which
could be like none other in the world. China will not only drive growth
in the consumer market but be able to satisfy the demands of the market
largely internally. In this context, the balance of payments with the
US and Europe shows how addicted these regions have become to the existing
manufacturing infrastructure in China. Based on what was seen on the
technology side this will only get worse.
The WAVE picked up on the floor that China made an announcement
last week that it would make a major investment in the TFT LCD industry.
We have been unable to confirm this. As indicated above, there is a
Semi FPD conference also at SNIEC next week and this is sure to be
discussed. The point of this, if correct, is that such an investment
will make the current overinvestment in the Crystal Cycle even worse.
Thus, the potential for an even greater glut in LCD output lies in
the future and that some of the demand from China will be met by internal
production. This is not good news for Samsung, LG and Sharp.
Checking the Consumer Market
Running at the same time was ispo – 1st International
Tradeshow for Sports, Fashion and Lifestyle Brands. This is the goods
market that North Face and other high-end brands sell to. The booths
were first class and the place was busy but not as busy as Semicon. Again
we tapped the floor for information.
Yes, China has become a very important market for even
high end brands. The target market is for individuals from 28 – 40 – and
who own cars. This family or individual is active and spends money.
One of the real challenges is pricing. For example,
Shanghai will spend more money for the same product than Shenzhen.
Thus, issues such as distribution and pricing remain significant to
address as China becomes a high-end fashion and brand conscience market.
China’s Entry in Semiconductor Fabrication
If China is able to execute in creating an ecosystem of
semiconductor fabrication it has huge implications in the production
of electronics components. We went probing some more.
The focus on semiconductor ecosystem development in
China is very high volume, one product, mass production. With this
focus, the Chinese fabs can relentlessly drive the prices down to levels
not achieved with other fabs. This comes at a disadvantage, however.
There is no customer focus and changes in requirements, even if slight,
are not acceptable. Notice how this is counter to the foundry fab model
in place at TSMC and UMC. There is a close parallel with the automobiles
in China, even the Shanghai Buick. One model suits all. Such an approach
will suit the early market but we strongly doubt this will be sustainable
in the long run, especially if the fabs are to supply outside of China.
(Note that this has become the strength of TSMC and UMC.)
The China semiconductor industry has a problem with
quality. This is a combination of inexperience and focus. The mentality
is that things will work out with time but that today quality is less
important than quantity. One of the issues is that profitability forces
a relentless attack on yield and this is directly related to quality
and its management. At present, these forces are just not present.
One supplier of discrete components told us that his Chinese buyers
shifted their buying patterns to Chinese suppliers. Then, after poor
and inconsistent quality experiences they came back.
Some, in their assessment of the quality issue, went
so far as to state this could threaten the Chinese attempts at entry
into semiconductor fabrication. That is, if these companies do not
get serious about quality, it could place at risk the entry into fabrication.
One sound bite was “Will China preserve past its problems?”
The current emphasis in production is for 6” and
8” wafers and for specific circuits. This excludes small volume
ASICs, custom designs and discrete items. The latter would exclude
most EO devices.
China has an advantage with the pricing of the RMB and
the strong push by the government to get into semiconductor fabrication.
In spite of the fact that U.S. and European companies
are considering joint projects for fab in China, there is considerable
concern of putting too many “eggs in one basket.” That
is, China has become the world’s production basket, and to also
be dependent on China for device fabrication, they would become too
venerable. Many see this as not a good sign, the passage this week
of the anti- secession act in China, authorizing force to secure Taiwan
back onto China.
Many observed that if China is successful in its semiconductor
and possibly a TFT LCD production strategy, this could have a major
impact on companies outside of China. Companies in the U.S., Korea
and Japan are counting on China to absorb their production. If the
Chinese can become the lowest cost producers and supply the local market
first, this could deny the market to outsiders. This would create a
glut of products and possible exit from the market by major suppliers.
One supplier said that the technology transfer from
Taiwan to China has already begun. The reason was rather interesting.
Some of the engineering and operations talent in Taiwan find that they
have no where to go. That is, middle management positions are occupied
with young engineers at TSMC, UMC and others in Taiwan. Thus, upward
mobility is at a standstill. This talent is coming to China and readily
finds jobs where there talent is needed.
There is a Silicon China map, similar to other such
Silicon maps. The difference is that this map is of Shanghai.
One supplier commented that the next 3 – 5 years
will be the time when China becomes the center of semiconductor fab
activity. It is clear that there are many dynamic forces shaping this
market and China has, in this technology, the opportunity not only
to supply its own market but to fundamentally change the supply chain.
Early Signs of FPD
Truly Semiconductors of Hong Kong and Guang Dong, China,
were showing LCD and OLED panels. The most interesting were the OLED.
Currently, they have in production a 1.17” panel, samples on a
1.5” panel and the next is 1.8”. The 1.17” panel is
used in phone subdisplays and MP3 players. Pricing is $10 - $13 FOB.
They get their materials from Kodak.
Truly did do LCD panels but has discontinued these. The
panels were being assembled by them from components obtained from LG.
Jiya Electronics, Shenzhen, is doing flat panel production.
They make only STN panels and no TFT LCD.
Pale Opto-electronics Presence
There was only the smallest presence of opto-electronics
at these two events. In context it was quite simple: discrete components
are not a high priority in China and all efforts in these areas are coming
from Taiwan as it migrates production to China. The whole area of opto-electronics
was so low at these events that even Agilent did not have any such products
in its booth.
Taiwan remains a leader in part due to the technology requirements
for CD and DVD players. As we have also seen, Pixart is coming on strong
in optical mouse ICs and Unity Opto has secured a production contract
from Agilent for mouse sensors. At least for the near term we should
look to Taiwan for optoelectronics developments not China.
iSuppli Stiffs WAVE Report
Part of the conference program at electronica and Productionica
China was an all day seminar on Flat Information Displays Conference
2005 – China. The WAVE Report sought entry but was denied by iSuppli.
Yet, it was clear other media had been accepted and to the best of our
ability to determine, these were from the Chinese media. It was not clear
what iSuppli had to hide but they did not want the event reported by
the WAVE Report.
Every trip to China is a learning experience. But this
was more than we expected.
We have heard the words – China is a huge market – but
we have not seen the clear indications of the impact of this other than
the malls and shopping districts in the large cities. One of the first
signs is usually the development of infrastructure and there is no more
fundamental infrastructure in electronics than production and especially
semiconductor production. What we saw at Semicon is that this infrastructure
is being built. This could fundamentally change the supply chain in the
same way that has happened in Japan, Korea and Singapore. China could
well become its own self contained supply and demand market in much the
same way that the U.S. was some 30 – 40 years ago.
Building a fab is expensive, complex and experience intensive.
Operating a fab is even more experience intensive. The one component
missing from China is experience. Quality remains a critical issue as
China seeks to rush into fab. Further, the mentality of making semiconductors
in China has a cultural component – they are creating only a few
products for the mass market and in the process driving costs down to
levels others cannot achieve. This is consistent with the production
philosophy for other goods including automobiles. As a result, customer
support is lacking because this is about responding to requirements.
Volume is more important than flexibility to meet buyer needs.
We have no doubt that China will be an important market
for fab equipment and that it will develop into a major supplier to the
Chinese market. However, joint venture partners are showing increasing
concern about the risk of relying exclusively on China for all parts
of the food chain from component parts to finished goods.
Yet, cultural and political issues loom large and these,
in the end, could do much to determine the role that China plays in the
global electronics market. Much was made this week about the anti-secession
act just passed which authorizes China to use force to secure Taiwan.
There is this magic glow of reaching an ever growing market
of 1.3B. Yet, the realities in China are not so simple. A key issue is
that outside suppliers of chips and flat display panels all expect to
gain market share in China. Yet, if China is capable of executing its
fab strategy, and apparently one also in TFT LCD, this could severely
truncate external demand. Many a business plan could be left hurting.