Troubled SMIC gets lifeline from China's Datang

Semiconductor Manufacturing International (SMIC), China's largest chip maker, has finally found the strategic investor it's been looking for: Datang Telecom Technology & Industry Holdings.

Datang Holdings is a subsidiary of Datang Telecom Industry & Technology Group, the company that holds much of the intellectual property related to TD-SCDMA (Time Division Synchronous Code Division Multiple Access), China's homegrown 3G (third-generation) mobile standard.

Datang Holdings will invest US$172 million for a 16.6 percent stake in SMIC, making the company SMIC's largest shareholder, the chip maker said Tuesday.

The cash infusion will allow SMIC to repay loans that come due next year, and the chip maker is betting that an expected uptick in demand for TD-SCDMA chips will bring in more business.

"This partnership will enhance China's 3G technology and enhance its deployment," said Richard Chang, SMIC's president and CEO, during a conference call with analysts to discuss the deal.

"By 2010 or so, no later than 2015 or 2016, we expect the penetration rate of TD-SCDMA in China will be around 10 percent, which will be a big market," Chang said, adding SMIC expects to see TD-SCDMA orders start to pour in during late 2009. "That's a very good opportunity for both companies."

SMIC once hoped to challenge Taiwan Semiconductor Manufacturing Co. (TSMC) as the world's top contract chip maker, but the company has struggled to make a profit.

Part of SMIC's problem was a dependance on DRAM. When the newly established SMIC embarked on an ambitious plant construction program several years ago, it signed deals with DRAM makers to ensure it would have enough customer demand to keep these factories running. But DRAM is a brutal business and, unlike the logic chips that TSMC primarily produces, commodity memory chips command razor-thin margins and can sometimes be unprofitable.

Earlier this year, SMIC stopped making DRAM and decided to switch to producing logic chips in a bid to end a streak of loss-making quarters.

Whether the tie-up with Datang Holdings and focus on TD-SCDMA will bring in the revenue that SMIC expects remains to be seen.

China has yet to issue 3G licenses and it's not clear when commercial licenses will be released. At present, TD-SCDMA networks are currently being tested in 10 Chinese cities, and it's widely expected that China Mobile, the country's biggest operator, will eventually be given a license for TD-SCDMA services.

While SMIC expects TD-SCDMA to bring in badly needed revenue starting next year, the standard is still an immature technology relative to WCDMA (Wideband CDMA) and CDMA2000 EV-DO (Evolution Data Optimized), which have been widely deployed in countries around the world and used daily by millions of cellular subscribers.

The IDG News Service is a Network World affiliate.