While growth will exceed that of the global semiconductor industry, it represents a slowdown from the recent rate of expansion for China’s foundry market

After years of explosive growth, China’s foundry industry will slow its rate of expansion starting in 2005 due to a global deceleration in the contract chip-making business and in the semiconductor industry at large.

China's foundry sales revenue is expected to rise by 7.8 per cent in 2005 to reach $2.49 billion, up from $2.31 billion in 2004, iSuppli Corp. predicts. The nation’s foundry revenues will rise to $3.8 billion in 2009, expanding at a compound annual growth rate (CAGR) of 10 per cent from 2004.

While expected growth will exceed that of the global semiconductor industry, it represents a major slowdown from the recent rate of expansion for China’s foundry market. China’s foundry revenue more than doubled in 2003 - and nearly quadrupled in 2002.

This year is bringing a slowdown in the worldwide semiconductor foundry industry, as overall sales slow-and as Integrated Device Manufacturers (IDMs) decrease the rate at which they are outsourcing chip production.

Global pure-play foundry industry revenue will decline by 6.2 per cent in 2005, falling to $15.9 billion, down from $16.95 billion in 2004, iSuppli Corp predicts. Meanwhile, the overall worldwide semiconductor industry, including both foundry and non-foundry chipmakers, is on track to achieve modest sales growth of 6.1 per cent in 2005, with revenue rising to $241.1 billion, up from $227.2 billion in 2004.

With 90 per cent of its manufacturing orders coming from overseas companies, China’s foundry industry will not be immune to these slowdowns.

However, other factors also are impacting China’s contract chip-manufacturing sector.

The image of the nation’s foundry business was damaged by allegations of patent infringement and misappropriation of trade secrets made by the world’s leading foundry, Taiwan Semiconductor Manufacturing Co Ltd. (TSMC), against China’s top foundry, Semiconductor Manufacturing International Corp (SMIC). The two companies settled their legal issues in early 2005, with SMIC agreeing to pay TSMC $175 million over a period of six years. The companies also agreed to cross-license their patent portfolios.

In another setback for China’s foundry market, the US Export-Import Bank (EXIM) effectively rejected a request from SMIC for a $769 million loan guarantee that would have been used to buy fab equipment from Applied Materials.

Despite these challenges, iSuppli still foresees a bright future for the country’s foundry market. Chinese foundry companies are making strong efforts to upgrade their processing technology. Most foundry production in China today is at the trailing-edge 0.5-micron geometry. By 2009, the majority of China's foundry production will move to the more advanced 0.13-micron node, iSuppli predicts.

SMIC retained its dominant position in China's foundry market in 2004 with a 42 percent market share, nearly four times as large as its nearest competitor, Shanghai Huahong NEC Electronics Co Ltd. The table below and attached presents iSuppli’s ranking of China’s top-six foundries in 2004.

Table: China's Top Six Foundry Companies in 2004 (Ranking by Revenue in Millions of U.S. Dollars)

Rank Company Revenue ($M) Per centage Market Share

1 Semiconductor Manufacturing International Corp (SMIC) 975 42 per cent

2 Shanghai Huahong NEC Electronics Co, Ltd. (HHNEC) 254 11 per cent

3 Hejian Technology Co., Ltd. 239 10 per cent

4 Advanced Semiconductor Manufacturing Corp. (ASMC) 141 6 per cent

5 Grace Semiconductor Manufacturing Corp. (GSMC) 148 6 per cent

6 CSMC Technologies Corp. (CSMC) 64 3 per cent

Others 489 21 per cent

Total 2310 100 per cent

For more information, visit www.isuppli.com