China vs. India IC Production Trends

Overall, the growth rate of China-based IC production is likely to be very strong through 2011. However, considering that China-based IC production was only ~$3.12B in 2006, this growth will come off a small base.

If China-based IC production rises to $9.5B in 2011, as we forecasted, the 2003-2011 CAGR for China-based IC production will be 32%. But even after such meteoric growth, China-based IC production would still represent only ~3% of the total forecasted worldwide IC production in 2011! Even after adding a significant “markup” to many of the Chinese producers' IC sales figures (since many of the Chinese IC producers are foundries that sell their ICs to companies that resell these products to the electronic system producers), Chinese IC production would still represent much less than 10% of the worldwide IC market in 2011.

We believe that the future size of the IC production base in China is highly dependent on whether foreign companies continue to locate — or relocate — IC fabrication facilities in China. In 2006, Hynix Semiconductor (Kyoungki-do, Korea) and STMicroelectronics (Geneva, Switzerland) began IC production at their joint venture fabrication facility in Wuxi City, China, to produce DRAM and NAND flash memories for the two companies. If the Hynix/STMicro joint venture is a success, it will most likely spur other such ventures, especially for high-volume memory production.

An unexpected sharp increase in joint venture and/or foreign-owned fabrication facilities in China would have the potential to boost Chinese IC production above our current 2011 forecast. However, even after such an increase, China's share of worldwide IC production would likely still be <10% in 2011.

Although China-based IC production is forecasted to represent only ~3% of the world's IC production in 2011, there has been a great deal of interest regarding India as potential “hotbed” for IC manufacturing. In our opinion, over the next five years, the opportunity for India to become a large production base for ICs has been highly exaggerated.

China and India will most likely compete for future “low-cost” IC fabrication facilities. Moreover, we believe that China has the clear advantage in almost every area of competitive importance (Table ). One key area is the country's spending on infrastructure, an area where China spends 7× what India spends. According to our beliefs, the IC market, and eventually IC production, will follow electronic system production. In this case, China produces 17× the amount of electronic systems than India!

While there may be a couple of major IC fabrication facilities located in India over the next five years, we believe China holds the clear advantage over India with regard to attracting new IC production. Even with this advantage, we expect IC production in China (expressed as a percent of worldwide IC production) to increase at a slow pace, making the pace of India's share of worldwide IC production pale in comparison.

Overall, the potential for a startup to establish an IC fabrication facility in China, India or wherever is not really dependent on what country it chooses to locate itself in — it is a matter of which market segment it will attempt to target. We fully believe that it's what you make, not where you make it. In the case of the IC manufacturing startup, there is essentially no product opening left to target. Thus, whether it is China, India or any other “new” location, a buildup of IC manufacturing must come from existing IC producers' expansion plans.