"China's chip industry, once the wunderkind of the semiconductor industry, is broken, a combination of the recession and too little money being spent by the government," said Robert Castellano, president of The Information Network, in a prepared statement. "Only $7 billion was spent on fabs in the past five years, enough to build only two 300-mm fabs."

China produced 42.5 billion semiconductors in 2008, accounting for 24.3 percent of chip consumption in the country, Castellano said. Internal IC production in the country dropped 0.4 percent last year, he said.

Chips produced in mainland China accounted for only 20.9 percent of the country's consumption five years ago, Castellano said.

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Other analysts have speculated that China, which stormed into the foundry market several years ago, had grown weary of the chip business. Last year Bill McClean, president of chip market research firm IC Insights Inc. said China's move into the IC marketplace has been a failure. EE Times reported in December that investment in China's chip industry has been slowing for over a year.

Castellano said the recession and dearth of government investment is resulting in consolidation, as the mainly foundry-based Chinese chip industry competes with entrenched rivals in Taiwan and elsewhere. He predicted that Hua Hong NEC Electronics would soon acquire Grace Semiconductor.

But Castellano said that as much as $25 billion is earmarked over the next five years to prop up the industry, including $5 billion for a joint venture between Japan's Elpida and Suzhou Venture Group and $5 billion for Sino-chip.

"Areas propelling the Chinese IC industry are part of the government stimulus program such as projects to supply subsidized electronic goods to rural areas of China," Castellano said. "The construction of 3G networks, the expansion of mobile TV operations are big areas of opportunity."

The Information Network (New Tripoli, Pa.) is a high-tech research and consulting firm that recently published an analysis of China's semiconductor and equipment markets.