Applied Applies Guan Xi

Travelling the Silicon RoadSHANGHAI — Applied Materials Inc.’s business in China illustrates just how beneficial the right relationships can be here, the so-called “guan xi.”

It’s a concept not always easy for the West to grasp; at the same time it has become a rather mythical aspect about doing business in China.

A U.S. company that is the biggest process tool vendor in the world, Applied has had operations on the ground here since 1984. Today, the company employs about 400 people at five sites around the country, with about 300 at its Chinese headquarters here in Shanghai, specifically the Zhangjian Hi-Tech Park. Applied is literally right down the street from its largest customer here, Semiconductor Manufacturing International Co. (SMIC).

The company is also in the process of establishing a Chinese holding company, having filed for that status with the Chinese government last June. Holding company status would let Applied act like a local Chinese company; pending approval the company plans to establish what it calls a Global Development Capability (GDC) center in Xi’an — one of the many newly developing high-tech centers in China — that will provide engineering and software support.

Its facility in Shanghai, which consists of two former factory buildings converted to office space, also houses a training center. It also contains a bonded parts warehouse, which certainly gives the company an edge dealing with China’s complex tax structure for foreign companies – a tax structure so complex that even some Chinese officials admit to not understanding all of it.

“It’s always a problem,” acknowledged Kevin Sun, a marketing manager for Applied Materials China, discussing the headache of getting parts through customs in a timely manner. Because of tax issues, storing spare parts at customer sites isn’t an option, but with the company’s warehouse having a bonded status, the company can store parts there in Shanghai, and only pay tax on parts that actually leave the warehouse bound for a customer site when they are needed.

“That’s one advantage our competitors are learning,” Sun said of the bonded warehouse. The warehouse is not a common thing to find among foreign process tool vendors doing business in China. For instance, typically it is only chip companies that get any sort of tax exempt status inside China.

To get special status, it helps to know the right people — to have established guan xi.

“They see our commitment [to China], so they give us some special deals,” Jeff Lin, manager of corporate affairs and communications for Applied Materials China, said of Applied’s relationship with the Chinese government. “For example, they gave us the bonded warehouse.”

As Lin said, doing business in practical-minded China right now is all about timing, being in the right place, and knowing the right people. That commitment he referred to has involved both R&D and scholarship funds; the company sets aside $1 million a year for each. It also has set up a similar program specifically in Xi’an, where it plans to base its domestic holding company, calling it the Innovation Fund.

While it isn’t uncommon for large companies to do similar things in the United States and Europe, here in China, it amounts to considerably more than just good public relations. It comes back around to the importance of establishing and maintaining relationships in China, Lin concedes.

And it is paying off now. “When [Applied] came here, the business was small,” he said. But now, that business is growing. While he said that company doesn’t break out numbers specifically for China, he suggested that Applied’s revenue derived from China is becoming a significant chunk of overall revenue.

But a look at Applied’s order numbers provides some idea of China’s importance to Applied. In its July quarterly earnings reports, the company said that Southeast Asia and China accounted for 12 percent of orders totaling $1.47 billion. Japan lead the way for the company’s orders with 23 percent, followed by South Korea 19 percent, North America 19 percent, Taiwan 15 percent and Europe 12 percent.

U.S. Export Laws Hit Tool Vendors the Worst

This is not to say that it is all smooth sailing for Applied in China. It still has its fair share of headaches to deal with. One of the biggest is not a Chinese government issue but an American one: export rules on process tools for advanced technologies.

While the application of the Wassenaar Arrangement regulations limiting the export of semiconductor process technology from the U.S. to China have eased recently, it is still problematic for U.S. process tool vendors.

The United States is one of the 33 member countries that signed off on the Wassenaar Arrangement, an international body formed in 1996 to address the export and control of conventional military arms and dual-use goods and technologies, such as semiconductor technology. The Wassenaar group decides on export controls and then each member country is responsible for enacting them.

Chinese Export

With China trying to bring its domestic chip industry up to the level found in the rest of the developed world – a process that will take at least a decade or more, officials acknowledge – it represents a large potential market for semiconductor process tool and materials and vendors. There isn’t a huge domestic industry for producing homegrown process tools in China, and the companies that do exist are typically making tools for 0.5-micron processes — 0.35-microns at best.

The aforementioned SMIC, China’s largest chipmaker and the No. 4 foundry in the world, has the first 300mm fab here in China, in Beijing, producing certain designs with 90nm design rules. In fact, it developed its 90nm process with the help of a U.S. customer, Texas Instruments.

U.S. export rules dictate what kind of 90nm-capable process equipment Applied can sell in China, which is in turn dictated by the potential end customers of the chips fabricated on said equipment — there can be no potential military applications for said chips. No 65nm-capable process tools can be exported out the United States into China currently.

TI incidentally, likes to keep its leading-edge technology in house; for the wafers that SMIC fabricates for them, the foundry is creating the final four layers of the chips.

But much military technology is bought off the shelf these days; other high performance military applications, particularly those involved in aerospace apps, involve chip technology other than that based on silicon, such as gallium arsenide or indium phosphide.

And for chipmakers that sell chips that can be used in military applications, for those big chipmakers doing business in China already, it’s typically a small part of their overall revenue that’s affected. TI, for example, which has operations here in Shanghai, while bound by U.S. export rules, wouldn’t see much difference in its sales here if such export laws were lifted, explained Jeff Smith, deputy director for Asia semiconductor communications.

Those types of high-end applications aren’t really what is selling in the Chinese market anyway.

And for fabless and fab-light companies that depend on foundry work, manufacturing in China isn’t so cheap that it has become a necessity to use Chinese foundries — it’s much more important to find a foundry with good technology, and there is plenty of that across the Straits of Taiwan.

Electronic News Travels to ChinaSo the export rules hit process tool vendors the worst. There’s little impetus for chipmakers to fight the current export laws, although industry groups from all walks of the supply chain have lobbied against them, not just those representing equipment.

And as Sun pointed out, Europe and Japan have no such export laws regarding process equipment.

Editor’s Note: As explained at length elsewhere on this site, this is a news story written by me that originally appeared on the now-defunct Electronic News’ website, which is long gone. It’s former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge). You can still see a copy of this story at EDN.

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