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Will a new ‘Bear’ emerge from the bear market?

In the past decade, China has become known as a manufacturing giant, with exports making up much of an economic growth rate typically measured in double digits. China has been impacted by the global recession, just as other regions have, and recently lowered its GDP estimates from 7.5% to 6.5%. However, it is the response to the global recession and what happens as China emerges that may forever change the face of the country and its role in the world economy, not to mention in the electronics industry.

Like other governments around the world, China has adopted stimulus programs. Last November, it announced a $585.2 billion package, which included plans to invest $290 billion on railway network expansion by 2011. China also instituted a program called “home electronics down to the countryside”. This is a remarkable notion, given the nation’s size, population and rural makeup. (Rural China has an estimated 320,000 villages and population of 720 million.) China’s farmer subsidy program offers a 13% rebate to rural households on 10 types of Chinese-produced electronics, including selected brands of TVs, refrigerators, mobile phone handsets and PCs. In many cases, the goods are from domestic companies. According to Goldman Sachs, sales in each subsidized product category have increased 40% year-over-year and 30% above the national average. The subsidized brands represent 80% to 90% of total sales in the category, indicating cannibalization of nonsubsidized brands. PCs were added in February.

Some analysts do not see the farmers’ subsidy program as having an immediate, large impact on semiconductors, but over time, it may be more important. While semiconductor companies are reporting increased foundry sales, Goldman estimates Chinese farmers consumed only 2% of foundry sales in 2008, and orders are probably the result of discrepancies in inventory stocking in thousands of sales outlets across China. Much of the sales are for home appliances, not PCs or handsets. In April, Goldman analysts reported that China’s rural electronics sales might not add much to its PC and handset sales in 2009. The analysts noted the handset price for the subsidized products is not much lower than the “village” models.

Over the next 10 years, however, stimulating domestic demand may change China’s status as a net exporter and spur growth in the domestic electronics industry. According to CCID Consulting, exports account for more than 70% of the sales volume in the domestic IC industry, and exports directly determine industry performance. China’s IC industry saw significant changes in 2008: The export and development rate braked, and the quarter-by-quarter basis slowed to 5% versus 24.3% in 2007. Enter the stimulus. In the past five years, the Chinese government influenced the investment of about $7 billion in new fabs, SEMI reports. In the next five years, another $20 billion to $25 billion will be invested throughout the country. Going forward, the central government will invest up to $30 billion in the industry by 2020.

Many companies have established IC packaging and assembly facilities in China. Solder bumping capacity now makes up about 5% of the world market. With the display industry growth, gold bumping and assembly have expanded the former to 4.8% in 2008. Companies with gold bumping facilities in China include JCAP (based on bumping technology from APS) and Chipmore.
Much of the IC industry is concentrated near Shanghai. Amkor’s China assembly sites are located in the Waigaoqiao Free Trade Zone in Pudong, Shanghai. There are three sites, including an Amkor-IBM joint venture. Others in the area include Jiangyin Changdian Advance Package Co., Ltd. (JCAP), which is focused on gold and copper pillar bumping; Millennium Microtech, whose JV with FlipChip International build flip chips using an electroless NiAu process; STATSChipPAC; ASE (substrate manufacturing and assembly); ChipMOS (assembly services for LCD driver ICs and memory devices); and United Test and Assembly Center (mixed signal and advanced memory chip assembly). Carsem has established a manufacturing plant in Suzhou, west of Shanghai. Also in Suzhou, China Wafer Level CSP, Ltd. offers WLP packaging services, and EEMS has a manufacturing facility with assembly and test services that include memory. ASAT has a manufacturing facility in Dongguan.

Flip chip assembly and bumping is also expanding in China. Unisem has an assembly and test facility in Chengdu. UTAC also has a JV with SMIC in Chengdu.

China’s economy has bright spots. The IT market will be minimally affected by the global economic slowdown, according to a report from Springboard Research. IT spending in the country will reach $51.2 billion in 2009, up 11% year-on-year.1

As China tries to create domestic demand, its economy could turn from export-oriented to consumer-based. Many organizations in regions around the world find it difficult to increase R&D spending, China’s emphasis on science and technology may prove an important development to its domestic electronics industry. PCD&F

E. Jan Vardaman is president of TechSearch International, (techsearchinc.com); This email address is being protected from spambots. You need JavaScript enabled to view it..