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China chipmaking to explode through '08

That's good news for makers of chip-fabrication gear, but it could also mean a glut of processors and a drop in prices.

Twenty new chip-fabrication facilities will be built in China between now and the end of 2008, according to a report, a situation that will be good for semiconductor equipment manufacturers but may create problems for chipmakers.

At this rate, China will likely increase its output of chips faster in relative terms than other nations, according to the report from the Semiconductor Equipment and Materials Institute, a trade group representing equipment manufacturers.

Right now China plays home to more than 35 domestic, multinational and joint-venture semiconductor manufacturers with wafer fabrication plants, and if history is any guide, many of the new "fabs" will be owned or partly controlled by Taiwanese or Western companies.

China's fabs will also become more modern. Until recently, China's fabrication facilities made chips on slightly older manufacturing processes than their counterparts in the U.S., Europe and Taiwan, partly because of restrictions on importing manufacturing equipment. Though China has become a dominant exporter of electronics and PCs, the country actually imports more semiconductors than it produces.

Now China-based organizations are lobbying the government to invest in equipment to build 90-nanometer chips on 300-millimeter wafers, according to the report.

Overall, this is good news for equipment makers such as Applied Materials, Nikon and Novellus. The chip-making machines sold by these companies sell for millions of dollars, and many established companies, such as Intel, have expanded programs to recycle equipment from one chip generation to the next to cut costs.

In 2004, sales of new semiconductor equipment in mainland China reached $2.73 billion, while sales of refurbished equipment came to an estimated $180 million. Packaging materials came to $781 million. (Many Western companies make chips in their home nation and send them to China for the more low-tech, high-employee task of testing and packaging.)

Semiconductor equipment installed in China by the end of 2004 was capable of processing 106 million square inches of silicon a year.

The rapid expansion of China's fabs, however, will likely revive fears of market gluts. Morris Chang, founder of Taiwan Semiconductor Manufacturing Corp., has noted in several speeches during the past few years that industrywide slumps occurred after Japan, Taiwan, Singapore and Korea, respectively, ramped up fab construction. More fabs simply mean greater supply. In 2003, Chang predicted China's fab plans would create a glut in 2005, but so far the fears haven't become completely realized.

Entrepreneurs in India and Mexico are also trying to expand their country's local chip industry.