The deal builds on Infineon's earlier efforts to establish a regional presence through arrangements with SMIC and with chip makers in Taiwan. It also gives substance to hints dropped by SMIC that the foundry might move to 300-mm wafers faster than expected.

Indeed, chief executive officer Richard Chang suggested last week that SMIC might move 300-mm manufacturing equipment into a fabrication facility under construction in Beijing by the end of the year (see story, page 28). That would mark a milestone in China's quest to catch up with the rest of the globe in semiconductor-manufacturing prowess.

An SMIC spokeswoman confirmed last week that the company would finish the fab shell in Beijing by December and start purchasing equipment around that time.

For Infineon, meanwhile, "the extension of our cooperation with SMIC [means] we can grow our DRAM business without having to invest in production facilities," said Harald Eggers, chief executive officer of the Memory Products Group. "At the same time, we are strengthening our regional presence in the promising market of China and aiming overall at a leading market position in Asia-Pacific."

Infineon expects the deal to boost its total production capacity by approximately 15,000 300-mm wafers per month by the beginning of 2005. Along with its other arrangements involving 200-mm and 300-mm production, Infineon will boost its capacity by 58,000 equivalent 200-mm wafers per month.

SMIC did not say how much it will spend to increase its production. But in general, a company ramping 300-mm wafers for DRAM production must spend about $45 million per 1,000 wafers, a source told EE Times. By that metric, SMIC will have to spend about $675 million to reach Infineon's target.

The SMIC spokeswoman declined to say what companies would provide the advanced wafer-processing equipment for the 300-mm fab. Such equipment is usually subject to strict export rules that preclude its being shipped into China.

Those rules on exports are laid out in a voluntary international pact, called the Wassenaar Arrangement, that governs the sale of so-called "dual-use" equipment-that is, equipment that can be used to make innocuous items like DSP chips for DVD players as well as such politically sensitive items as DSPs for military targeting systems.

In a statement, SMIC told EE Times, "Each piece of semiconductor equipment imported by SMIC is in full compliance with the export country's licensing rules. SMIC purchases equipment from numerous suppliers and [is] always in full compliance with the export country's licensing regulations."

A spokesman for Infineon said his company expects SMIC's Beijing facility to be equipped by "early 2004." Pilot runs will commence at midyear and volume production by the end of 2004 or early 2005. Training of SMIC personnel will start sometime this fall.

The deal follows an exclusive arrangement that Infineon reached with SMIC in December wherein Infineon swapped 0.14-micron technology in exchange for a supply of standard memory chips. That agreement included an option to trade 0.11-micron technology in the future.

Infineon has experience using 0.11-micron process technology on 300-mm wafers through pioneering work conducted in the 1990s on the larger wafers at its facility in Dresden, Germany. That technology and expertise were subsequently transferred to Taiwanese foundries ProMOS Technologies and Nanya Technology Corp.

Citing estimates from market research firm Gartner Data-quest, Infineon said the semiconductor market in China is expected to grow from about $16 billion in 2002 to around $31 billion in 2006. Many of those chips will be for export.

The possibility of such growth has attracted other chip makers to China and given SMIC leverage in the competitive foundry market, now suffering from overcapacity. The world's two largest foundries, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and United Microelectronics Corp. (UMC), are preparing their own moves into China. But SMIC has forged several partnerships that are largely attributed to its first-mover status in China.

The Chinese foundry has a technology-for-capacity and equity agreement with Chartered Semiconductor Manufacturing Ltd. involving 0.18-micron process technology, as well as a capacity agreement with Texas Instruments Inc. It also has a technology-for-capacity deal with Toshiba Corp. regarding SRAM and one with Elpida Memory Inc. for DRAM.

With the exception of the TI deal, which doesn't kick in until 2005, the foundry has been a memory specialist. That is an unusual strategy in that other, more experienced foundries have dabbled in memory without success. "Both TSMC and UMC tried it and failed miserably," said Don Floyd, a Taipei-based semiconductor analyst with Lehman Brothers.

Eggers says Infineon is looking to 'strengthen our regional presence.'

In striking the deal with SMIC, Infineon takes on very little risk. SMIC will purchase the production equipment, and Infineon will contribute process technology, the Infineon spokesman said.

The deal differs from the one Infineon negotiated with Nanya Technology. Under that earlier contract, which took effect in October 2002, Nanya and Infineon are co-developing 90-nanometer (0.09-micron) and 70-nm production technologies for 300-mm wafers. They have set up a joint venture to build a 300-mm fab that is expected to reach a first-stage capacity of 20,000 wafers per month in the second half of 2004.

Infineon's other joint venture in Taiwan is with Mosel-Vitelic Corp. The companies jointly own ProMOS Technologies, which runs a 200-mm and a 300-mm fab (the latter is the world's first 300-mm facility for DRAM). That relationship soured last year, however, and Infineon is in the process of selling off its stake in ProMOS.

Pilot runs for 0.14-micron technology on 200-mm wafers at SMIC will begin in mid-2003, starting with 256-Mbit double-data-rate DRAM chips. If the commodity memory market outlook improves, then the Chinese foundry could produce higher densities as well.

If things go smoothly, then SMIC could be running 0.11-micron technology on 300-mm wafers by the end of next year. That would make SMIC China's most advanced semiconductor manufacturer by far. It also raises the question of the effectiveness of the Wassenaar Agreement.

Generally, European countries have approved the export of advanced equipment to SMIC. That has led Semiconductor Equipment Manufacturing International to put more pressure on the U.S. government to loosen its export rules or risk compromising the global competitiveness of U.S.-based equipment makers such as Applied Materials Inc.

About a month ago, Infineon's top boss said that the most advanced semiconductor production technologies should get a green light for export to China. "China needs to be up to speed, just like every other region," said chief executive officer Ulrich Schumacher. "All this discussion about whether you should just transfer older technology and just let [China] do foundry with it just doesn't work."

Companies like SMIC "will have 0.11-micron technology soon," Schumacher added. "If you know you cannot avoid that-and it doesn't make sense to avoid that-then it is better to join and to help."

SMIC's successful procurement of 300-mm-wafer equipment would open the door for rival Grace Semiconductor Manufacturing Corp. and others to pursue 300-mm operations with similar zeal. GSMC's fab shells in Shanghai are capable of holding 300-mm-wafer tools, a spokesman said.

The Chinese government has made the expansion of a domestic semiconductor manufacturing sector a top priority, given the fact that the country imports most of its chips. Companies such as SMIC and GSMC have benefited from that policy, through tax breaks, state-owned-bank loans in the hundreds of millions of dollars or both.

In the past, Chinese officials well-steeped in the dynamics of central planning have said they would like to see China establish at least two dozen new manufacturing lines by 2005. Already, several lines running 200-mm wafers are due to come online in China in 2004-a year that is likely see another worldwide glut in trailing-edge capacity.