Executives Discuss Promise and Pitfalls of Doing Business in China

Spurred by investment from multinational companies and recent entry into the World Trade Organization, China is emerging as the next global technology powerhouse — and semiconductor manufacturing is no exception. The key driver is, of course, the country's 1.3 billion residents and the accompanying market. Combine this with an inexpensive, educated workforce and incentives such as property tax and income tax exemptions and you have the hottest location for manufacturing in the world today.

China has a solid infrastructure in chip assembly and packaging, but wafer processing is its emerging business. China has only a few 200 mm fabs today, with most of the country's fabs producing chips that are two, three or even more generations behind state-of-the-art (180 nm). But this condition is changing rapidly. Some analysts estimate that, in 10 years, there will be 20 foundries — primarily in Shanghai, Tianjin and Beijing, but also in the cities of Ziamen, Shenzhen, Suzhou and Zhuhai, where high-tech parks and technology development zones have been established. There is some controversy over how quickly Chinese fabs will achieve leading-edge capability. "The U.S. government restricts mainly lithography equipment to no better than 0.25 µm, but deep UV steppers are being shipped, giving capability at 0.18 µm," said Dan Del Rosario, CEO of Photronics (Brookfield, Conn.).

Dan Del Rosario, Photronics

Tsuyoshi Kawanishi, SMIC

Jay Chen, TEL Shanghai

Mary Puma, Axcelis Technologies

David Wang, Applied Materials

Joining Del Rosario in a panel discussion during Semiconductor International's 20th annual industry event at SEMICON West were Tsuyoshi Kawanishi, chairman of the board of directors of Semiconductor Manufacturing International Co. (SMIC, Beijing); David Wang, executive vice president, office of the president at Applied Materials (Santa Clara, Calif); Jay Chen, COO of TEL Shanghai; and Mary Puma, president of Axcelis Technologies (Beverly, Mass.).

China has 12% of the world's purchasing power, according to Wang. In 2001, China became the largest market for mobile phones and it has the third largest market for PCs, behind the United States and Japan. China currently imports ~80% of its ICs. Labor costs are ~$1/hr (compared with $5.80/hr in Taiwan and $7-8/hr in Singapore and Korea), and an engineer in China typically earns $10,000/year. Del Rosario noted, however, that despite China's relatively low salaries, some Chinese workers have a disposable income that compares with other G7 countries.

Even given the labor cost savings, access to the Chinese market is a more important driver. "Labor is not a big part of our costs," Del Rosario said. "It is the enormous market combined with an availability of good engineers through university education systems that are comparable to Japan's and the U.S.'s." He added, "The quest for knowledge in China is tremendous." Applied Materials' Wang said that about 460,000 engineers are enrolled in universities in China and some 18% of graduates in Shanghai have engineering degrees.

China's manufacturing costs are 15% lower than Japan's or Taiwan's, Kawanishi said, and the regions offer many value-added tax advantages. Water and electricity costs also are lower in China, contributing to an overall reduction in manufacturing costs, Puma added.

Many sources cite the difficulty in protecting intellectual property (IP) in China as the primary drawback to expanding a business there. According to an article in the August issue of Electronic Business , a sister publication to Semiconductor International, 92% of the software purchased in China in 2001 was pirated. This "hampers development of the software industry, and research and development in general, in China," the article said.

The process of entering the Chinese market is definitely different than many Westerners are used to. "Relationships are key, working with local governments and the central government in Beijing," said Del Rosario, who has made 30 trips to China in the past two years. "You have to have tremendous patience, do your homework and develop good relationships." In speaking of cultural differences, SMIC's Kawanishi said you need to harmonize what he refers to as China's bureaucratic attitude with a Western-style economy.

Capital equipment purchasing in China is similar to other regions in terms of the pre-order phase, but the post-order phase is different, said Axcelis' Puma. "The process of obtaining export licenses is more complicated, and factory support is more extensive in terms of making the operators proficient with the equipment," she said. Another panelist added that logistic systems in China are also not as mature as elsewhere.

According to TEL's Chen, there is some concern among Japanese manufacturing firms that China may become a threat. Like U.S., European and Taiwanese device manufacturers, the Japanese will continue to focus on leading-edge chip production, while China is currently restricted to 0.25 µm or higher geometries. "In five to 10 years, China's technological capability will be comparable to Japan's, so the priority becomes achieving IP protection and continually pursuing leading technology always," Chen said.