* Merger deal awaiting regulatory approval - sources
* Deal to complete as early as year-end - sources
* Merged firm will still face challenges in tech - analysts
(Adds details, quotes)
By Lee Chyen Yee and David Lin
HONG KONG/SHANGHAI, Dec 1 China's second- and
third-largest contract chipmakers Shanghai Hua Hong NEC and
Grace Semiconductor have agreed to merge in a sector in need of
a consolidation and technology upgrades, sources said on
Chinese chipmakers, including domestic leader Semiconductor
Manufacturing International Corp , Grace and Hua
Hong, have lagged leaders Taiwan Semiconductor Manufacturing Co
Ltd , United Microelectronics Corp
and Global Foundries in technology and sales.
"China needs better technology and savvy people to become
competitive in the foundry sector. They need to strengthen
integrated circuit design and lift their market share," said KGI
Securities analyst Ricky Liu in Taipei.
"Hua Hong NEC and Grace will have greater capacity when they
merge, but they need more than that to compete, especially since
the semiconductor industry is seeing slowing growth in shipments
and falling average selling prices," he said.
Hua Hong NEC Electronics Co Ltd, set up in 1997 and whose
shareholders include state-backed Hua Hong Group and Japan's NEC
Corp, owns two eight-inch fabs with a capacity of
60,000 wafers per month.
Grace Semiconductor Manufacturing Corp, which began
operations in 2003, was started by Winston Wong, son of late
Taiwan plastics tycoon Wang Yung-ching, and Jiang Mianheng, son
of former Chinese president Jiang Zemin.
Grace, whose investors include Hong Kong tycoon Li
Ka-shing's Hutchison Whampoa Ltd and Cheung Kong
(Holdings) Ltd, has an eight-inch fab with a capacity
of 40,000 wafers per month.
PRECURSOR TO MERGER
Both chip companies have jointly invested in a
higher-technology 12-inch semiconductor project with a capacity
of about 10,000 wafers per month, a move that analysts say paves
the way for the merger.
Industry sources said the key assets of both companies were
worth about $1 billion.
"The deal is about to close and will probably happen by
year-end," said a source close to the matter, declining to be
identified as he was not authorised to speak to the media.
Grace and Hua Hong NEC declined to comment.
"The merger will be good for both companies as their
products and production lines don't really overlap and they
complement each other," said Vincent Gu, a senior analyst at
research firm iSuppli in Shanghai.
China's companies have succeeded in certain areas of the
technology sector. PC maker Lenovo Group Ltd has
climbed to the world's No.2 spot, and Huawei Technologies Co Ltd
has emerged as the second-largest telecommunications
equipment provider globally.
But the country's chipmakers are performing poorly compared
with global competitors.
Analasys said Taiwan's TSMC was already utilising
28-nanometre technology at its fabs, but Chinese chipmakers were
nowhere near, with SMIC's technology migration slowing as its
65nm revenue contribution declined.
More advanced 28nm technology packs more power within the
same chip area than older 40nm, boosting processing speed and
reducing power consumption, while larger wafers allows more
chips to be manufactured from a single wafer, reducing
China's largest contract chipmaker SMIC has been beset by
problems, such as poorer technology and management uncertainties
at a time when global semiconductor sales are faltering amid
global economic woes.
Global revenue for the semiconductor market is expected to
decline 0.1 percent in 2011 to $299 billion, research firm
Gartner said in September, as consumers moderate purchases of
(Editing by Chris Lewis)