smic_logo.jpgSMIC has just reported its results
and, once again, they failed to impress. China's largest chipmaker did
make a profit but that was largely due to one-off gain from the sale of
used chip-making equipment — one of the consequences of being in a
rapidly evolving industry.

BusinessWeek's Bruce Einhorn writes here
about the problems that China's SMIC — and, by extension, other
emerging market chipmakers — have competing in a capital-intensive
industry where even the established giants struggle to consistently
make money.

It was AMD's founder Jerry Sanders who once said “only real men have fabs” — thanks to Mike Magee's The Register for the attribution
— and the phrase neatly sums up the enduring fascination that
semiconductor companies still have for owning “fabs” — the
capital-intensive fabrication plants where silicon wafers get turned
into chips — despite the ample evidence that owning a fab is akin to
pouring money into a bottomless pit.

The huge cost of new fabs — more than a billion dollars — means
their owners are involved a race against time to get yields up and
recoup the investment before the technology becomes obsolete. It is a
high-risk game best left to a handful of experienced giants — Taiwan's
TSMC and Intel of the US, for example.

It is particularly hard to see the economic rationale for a
developing nation like China to be pouring money into building fabs.
SMIC has earmarked $720m this year on capital expenditure to expand
production capacity.

Nevertheless, SMIC seems intent on being a foundry player and the
industrial logic is that it can help China's local chip companies at an
early stage of their development — the subtext being that they would
get treated worse by foreign foundries. And as Bruce Einhorn notes, “in
China, at least, there's no shortage of governments willing to throw
around money to get into the chip business.”

But I can't help thinking the money would be better spent if it was
used to boost China's nascent fabless semiconductor design sector.
After all, the most consistently successful chip companies in the west
are fabless, meaning they outsource manufacturing to a “foundries” like
TSMC, thus leaves them free to concentrate on design.

These companies have realised that the real value of a chip business
is not sunk into plant and equipment but rather lies in its
intellectual property.

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