Will new ‘Bear’ emerge from the bear market?

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 farmer’s 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. Several reasons were given, including poor Internet access in rural areas, the determining factor in how useful a PC might be. Learning to use PCs will also take time. 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. Years ago, the main products were leadframes. Today, companies have expanded into advanced packages such as BGAs and CSPs. 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. Others in the area include Jiangyin Changdian Advance Package Co., Ltd. (JCAP), Millennium STATSChipPAC; ASE; ChipMOS; and United Test and Assembly Center. Carsem has a plant in Suzhou, as do China Wafer Level CSP, Ltd. and EEMS. 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.

Besides the chip investment, China’s economy has bright spots. Boosted by government initiatives and green spending, its 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

Government stimuli provide promise for mobile handsets, white goods, telecom infrastructure and semiconductors.
As China tries to create domestic demand, its economy could turn from export-oriented to consumer-based. While this will take many years, today’s actions may have positive long-term ramifications. As 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.

References

1. ZDNet Asia, “China IT Spending in the Country is Expected to Grow by 11% Y/Y to $51.2 billion in 2009,” Feb. 6, 2009.

E. Jan Vardaman is president of TechSearch International (techsearchinc.com); jan@techsearch
inc.com. Her column appears bimonthly.