According to Richard Chang, CEO of Shanghai-based Semiconductor Manufacturing International Corp., a "foundry" that manufactures chips to order for the likes of Infineon, Toshiba, and Fujitsu, there is no doubt that chip recovery has arrived in Asia.

After just two years in business, SMIC's two fabrication facilities, or fabs, are running flat out: "Our problem is, we don't have enough capacity," says Chang. So SMIC is bulking up, adding equipment to its factories in Shanghai along with a new plant in Beijing. And in a deal unveiled on Oct. 20, SMIC aims to buy Motorola's biggest Chinese chip plant, a $1 billion facility in Tianjin. If the deal is O.K.'d by Beijing, Motorola is likely to come away with a stake in SMIC and a guaranteed source of chips, say sources in Hong Kong.

Second-tier chipmakers are struggling, and this is driving them to Asia's flourishing foundries. "It will be a foundry world," says C.D. Tam, a 33-year Motorola veteran who ran the company's Asian operations until he retired in 2002 to become CEO of a Hong Kong science park.

Most of China's big foundries are only a few years old, which means that they did not hget hurt in the last boom-and-bust cycle. In September, SMIC raised $630 million from investors and is planning an initial public offering soon. If China goes for broke, as many analysts expect, the other Asian foundries will face a dilemma. Rapid expansion in China will "[set] the stage for an overcapacity situation in 2005," writes Joanne Itow, an analyst with Semico Research Corp. On the other hand, if the recovery really has legs, the other Asians could wind up regretting that they surrendered business to China.

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