Costs hurting China's chipmakers

Huge depreciation costs are making it difficult for chipmakers in China to turn a profit, industry insiders said, although a supply glut seems unlikelyDepreciation will put Chinese semiconductor start-ups at a disadvantage when competing with their established Taiwanese rivals such as Taiwan Semiconductor Manufacturing Co (TSMC), a Merrill Lynch analyst said yesterday."Chinese foundries certainly have to pay higher costs," Dan Heyler, head of Merrill Lynch (Asia Pacific) Ltd's semiconductors research unit, said at a press conference in Taipei. The value of new equipment, including factories, depreciates over time, particularly in the first few years. Chipmakers usually apportion deprecation costs for a plant in the first six to seven years of accounts. Depreciation charges made up nearly half of a TSMC's costs in the third quarter.Chinese chip foundries such as China's top contracted chipmaker Semiconductor Manufacturing International Corp (SMIC) have invested heavily in new equipment and are paying about 30 percent more than Taiwanese companies in depreciation costs, Heyler said."TSMC and United Microelectronics Corp (UMC) will be able to reduce the depreciation charges on fabs using 0.35-micron processing technology to zero next year," Heyler said.SMIC, which started commercial operations in 2001, is just starting to pay the charges, he said. Moreover, Heyler said, TSMC's newest 12-inch wafer fab uses advanced 0.13-micron processing technologies that are more cost-efficient and will offset the factory's depreciation costs.Wafers produced in 12-inch fabs allows chips to be produced 30-percent cheaper than those made from 8-inch wafers.SMIC and its Chinese peer Grace Semiconductor Manufacturing Co still largely depend on 0.35-micron processing technology to produce chips in 8-inch fabs."Their cost advantages are mostly in tax," Heyler said.To protect its semiconductor start-ups, the Chinese government gives rebates of nearly 80 percent on value-added taxes, which foreign chip suppliers must pay in full."Without the tax breaks, SMIC would continue to lose money," said Patrick Wang, a semiconductor analyst at Yuanta Core Pacific Capital Management.Heyler also said the impact on prices of rapid capacity expansion in China would be minor. TSMC chairman Morris Chang warned last year that rapid capacity expansion in China could result in a glut and drag the industry into a slowdown next year.In response, SMIC chief executive officer Richard Chang said Wednesday in Shanghai that the company's expansion wouldn't contribute to global overcapacity in the chip industry.Heyler yesterday also said strong demand would jack up average selling prices in the second quarter. He expected the trend to accelerate in the third quarter."That will apply to the world's first three foundries," he said. SMIC, the world's No.5 chip foundry, however, will see a prices fall, he added.Source: Taipei Times