The rise in chip purchases reflects the popularity of digital devices and increasingly sophisticated home appliances made in China, an industry expert told Shanghai Daily.

But only a small fraction of the chips bought were of domestic origin. Chinese companies hope to change that as new plants open in the next two years.

A report released last week by CCID Consulting Corp., a subsidiary of the Ministry of Information Industry, said chips worth 54.5 billion yuan (US$6.6 billion) were bought by Chinese manufacturers, 15.8 percent more than during the same period of 2001.

In contrast, worldwide chip sales from January through May fell 18 percent year-on-year to US$52.98 billion, according to the Semiconductor Industry Association.

The Chinese market "presented bullish demand for IC cards and chips installed in home appliances and digital devices, such as digital cameras and MP3 players, while purchases of telecom and computer chips were weak," said Han Yirong, deputy general manager of the semiconductor department of CCID Consulting.

As China's two telecommunications giants, China Telecom and China Unicom, focused on a reorganization of the sector, spending on telecom infrastructure fell 36.5 percent in the first half.

The report says the chip market will remain strong in the second half, leading to full-year growth of 25 percent on China's mainland.

If the global economy recovers and China continues its exception-al development, chip purchases will grow 40 percent next year and 50 percent in 2004, the report said.

"The optimism is also based on the fact that the demand from the telecommunications sector will certainly rebound after reorganization is completed," Han said. "Besides, several domestic plants are scheduled to go into production in 2004, making purchases easier and lowering costs."

According to the report, the Chinese mainland companies produced chips worth 6.1 billion yuan in the first half. But exports formed 60 percent of their sales.

The deputy general manager sought to explain chipmakers' small share of the domestic market.

"On the one hand," he said, "most domestic companies do not have the ability to design chips with up-to-date technology. On the other hand, several domestic companies do have advanced designs, but they can't find a plant to produce them on the mainland."

Of the 19 chip fabrication lines on the mainland, only three currently use mainstream production technology.

The report called the Yangtze Delta the mainland's center of chip production, supplying almost a third of the total in unit terms. The Zhujiang Delta in southern China had a one-fifth share.

(Shanghai Daily August 5, 2002)