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China's chip makers struggle in downturn

CHINA'S fledgling semiconductor industry is withering amid a global economic downturn that has slashed consumer demand for televisions, computers and other electronics products that use chips.

"It's a tough time," said David Chang, chief executive of Semiconductor Manufacture International Corp, the biggest chip maker in China. "I believe the domestic industry will rebound before its overseas counterparts but, first, you have to survive until then."

China's integrated circuit industry is at risk of losing its footing after little more than a decade in operation.

Semiconductor Manufacturing, popularly known as SMIC, lost US$124 million in the fourth quarter of 2008, compared with a loss of US$21 million a year earlier. Plant utilization in December dropped 15 percentage points to 75 percent.

SMIC shares, listed in Hong Kong, closed at HK$0.30 (US$0.04) on Wednesday, compared with HK$0.60 a year ago.

SMIC was not alone in the industry's winter of discontent. Many smaller chip makers and designers have gone belly-up or merged.

"It's the most difficult year in the history of the industry," research firm CCID Consulting said in a recent report.

The industry's problems are mirrored in export data. In the first two months of this year, China's electronics exports fell by about a quarter to US$53.6 billion, while overall shipments abroad slid about a fifth, the Ministry of Industry and Information Technology said last week.

Computer exports fell 21.1 percent and TVs were down 17.4 percent, according to the ministry.

In 2009, technology spending globally is forecast to drop 3.8 percent to US$323 million, the lowest since 2001 when the Internet bubble burst, according to Gartner Inc, a US-based IT consulting firm. Computer sales are expected to be the hardest hit, forecast to tumble almost 10 percent.

Chips are widely used in electronics, from TVs, computers and music players to game consoles, mobile phones and even automobiles. Chips, which control systems, store data and do calculations, are often called the brains within electronic gadgets.

Global decline

In 2008, China earned revenue of 610.17 billion yuan (US$89.7 billion) from sales of integrated circuits. That is expected to grow 5 percent in 2009, the first single-digit growth in a decade, according to CCID.

The domestic market for chips is forecast to expand only 3 percent while the global market is expected to decrease 10 percent this year, said SMIC's Chang.

Advanced Semiconductor Manufacturing, a smaller Shanghai-based semiconductor manufacturer, posted a loss of 237 million yuan last year. Shanghai Belling, which is owned by the government, has sold its semiconductor arm to its parent Huahong Group to refocus on chip design.

State-owned Huahong, in turn, will merge with Grace Semiconductor Manufacturing Corp to build a 12-inch wafer plant, incorporating the most advanced technology in the Chinese mainland.

Huahong and Grace declined to comment on the merger. Fu Wenbiao, former director of the Shanghai Economy and Information Technology Development Commission, has been appointed Grace's chairman.

More than 100 Chinese chip design firms, 20 percent of the total, are expected to disappear within the next two years, according to iSuppli, a US-based IT consulting firm.

"They are struggling in the global economic crisis," said Vincent Gu, a Shanghai-based analyst at iSuppli. "China's young fabless (chip design) industry faces rigorous challenges such as reduced customer demand, poor cash flow and a flight of venture capital."

Commit, a Shanghai-based 3G chip designer, closed it doors in April last year, citing a shortage of capital and the reluctance of investors to supply more funds.

In 2008, the semiconductor industry attracted investment of US$16.9 billion, almost half as much as a year earlier, according to Gartner.

The government is not turning a deaf ear to the industry's plight.

In its 4 trillion yuan economic stimulus package, the government has earmarked funds to support technology industries, including semiconductors, flat-panel displays and next-generation mobile phones, according to Xiao Hua, an official with the Ministry of Industry and Information Technology.

The government is also encouraging consolidation in the industry to form larger companies more resilient to the economic slump.

The growing third-generation phone market and a government scheme to provide subsidies for rural households to buy home and electronic appliances will help boost the chip market, industry insiders said.

Indeed, SMIC's Chang said most of his company's recent orders are related to products that will benefit under the rural stimulus plan.

Expansion in the mobile phone market, underwritten by a government investment of 280 billion yuan, may also help underpin information technology sectors, including chip makers and designers.



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