SMIC’s virtual fab strategy

SMIC’s CEO, Dr. Richard Chang announced late last month of the starting of a new IC production project in Shenzhen. Unlike its predecessors, in this project SMIC will register an independent legal entity, the Semiconductor Manufacturing International (Shenzhen) Corporation Ltd., which will set up an IC technology research and development center, an 8-inch wafer production line and a 12-inch fab.” SMIC will use the 300mm facility for 45nm bulk CMOS fabrication in relation to the recent process licensing deal it has struck with IBM.  

SMIC has been successful in gaining significant financial support and services from Chinese regional governments in establishing semiconductor manufacturing facilities in specific regions in the last 18 months. A number of such facilities have been termed as “virtual fabs” - Under this approach, a municipality owns the facility and SMIC manages it, garnering fees and a share of the profit for its troubles. (Though it may receive some government funding for the fabs announced last month, SMIC apparently will own them.)

Now while pure play foundries like TSMC, UMC and Chartered have reduced their capital spending plans keeping in mind a probable recession, SMIC plans to buck the trend and boost its capacity by 31% by year end – prompting fears of a capacity glut which may kick off a price war.

SMIC’s virtual fab strategy has drawn its share of critics who claim that it does not give a level playing field from the financial point of view. However, it’s to be noted that government investment in semicon industry is not new. The point is whether this has given SMIC the initial boost to catch up with the top players. Also with the Shenzhen deal with SMIC owned fabs, SMIC may be re evaluating its virtual fab strategy. 

With China’s semiconductor market, driven by computing & consumer electronics demand predicted by IDC to top  $28 B in 2008 & coupled with the fact that SMIC has distanced itself from it’s initial focus on DRAMs, this expansion may not be such a bad idea for SMIC.

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