China Is Worried About China

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.

Travelling the Silicon RoadBEIJING — There is no end of conjecture in the semiconductor industry as to what the rise of China means to the industry as a global whole. It ranges from dire predictions of tremendous overcapacity that will take years to absorb, to ridiculously bullish forecasts of domestic chip demand.

The conjecture isn’t just limited to the chip industry, but involves all sorts of industries, such as agriculture to automobiles, not to mention the economic and political concerns of those in the U.S. and other western governments.

But Chinese officials say that China is not really concerned so much with dominating the semiconductor industry, or anything else, for that matter, as it is with addressing its own internal issues. And one of the ways it sees to address those issues is the continued development of the domestic chip industry.

“It’s a live or die industry,” said Yang Xue Ming, an analyst with the Institute of Chinese Electronic Industry Development, part of the central government’s Ministry of Information Industry. Information technology is a modern engine for China’s economy, just as it is elsewhere in Asia and in the West, he explained, and the IC is in turn the foundation of IT – “without the chips, information technology is just a slogan.”

One of the key ways Yang suggests China will continue to build its domestic chip industry is cooperation, as opposed to domination.

“Cooperation is based on mutual understanding,” said Yang. “The deeper the understanding,” he added, “the more successful the cooperation will be.” And he sees many opportunities for Sino-U.S. cooperation.

Yang, who spent some 20 years as an engineer in China’s chip industry before getting involved in management and government, is quick to point out this is his own opinion, and not necessarily a reflection of the official position of the Chinese government. And yet, he notes that the Chinese government has paid special attention to the chip industry, and how it is connected to China’s macroeconomic environment.

Domestic Demand Outstripping Growth

Yang doesn’t see China alone being able to build so many fabs in the next few years that it causes a global capacity glut. Currently China’s fab lines produce approximately $2.2 billion (18 billion yuan), but it wants to triple that capacity by 2008. Factoring in die size shrinks, the transition from smaller wafer sizes to 200mm and 300mm wafers and the process capabilities of domestic chipmakers, this translates into 10 to 15 additional fabs to be built in China over the next three years, according to Yang.

Even with this aggressive expansion, China will still need to import an estimated 70 percent of the chips it will consume. According to Chinese government estimates, the domestic market demand for semiconductors will reach $61.8 billion (500 billion yuan) in 2008, but only $21 billion (170 billion yuan) of those will be produced in domestic fabs; the remainder will come from outside China.

Against that backdrop, he observed that the rise of Japan’s chip industry in the 1980s is completely different from China’s ascension in the semiconductor world. China recognizes that it can’t come close to fulfilling its domestic demand; even so, it recognizes the need to foster a domestic industry, said Yang. Thus, China doesn’t have the ambition to be a leading chip producer in the world, rather it just wants to put a dent in that trade imbalance and fulfill its own needs, or at least part of it.

This has been one of the major drivers behind China’s opening up to foreign investment and privatizing state owned businesses, and its joining the World Trade Organization, he said – the country realizes that if it is going to make strides toward self reliance in the chip industry, it is going to need foreign investment to do so. The chip industry is a global one; no one country can realistically go it alone, and China recognizes that the benefits of global cooperation and participation in the WTO outweigh the deterrents, according to Yang.

In China, prior to 2000, the domestic chip industry was totally supported by the state. But then, the government shifted its stance, determining that it would continue to support domestic R&D efforts, but would encourage private industry, recognizing that it was only through outside investment that China would gain the ability to participate in the global chip industry in a significant way, said Yang.

In short, China recognized that it needed to create an environment via federal policy that attracted both local and foreign capital that would fund China’s development and growing economy, creating local jobs in the process. And it learned this from a nearby neighbor.

“This lesson has been taught by the Taiwanese,” Yang said. “The Taiwanese are very good at this strategy.”

There’s a Reason Its the Capitol

China also realizes that to support its own domestic need for technology, it not only has to take further steps to protect the intellectual property (IP) of foreign companies investing in China, but that it has to begin to develop its own IP as well. And while it looks outside of China to investors and companies to help it foster that IP, those looking in might not be seeing the whole picture, suggested Liang Sheng. In fact, some executives may be downright shortsighted.

Liang is the section chief of the Department of Information Industry of the Beijing Municipal Government. When most people in the West think of the chip industry in China, the first word to come to mind is Shanghai. And if cheap labor costs and manufacturing are all that a company is looking for in China, then Shanghai is the place to be, Liang acknowledged.

But if companies want to get in on the ground floor, they need to be plugged into China’s traditional capital: Beijing.

“Here in Beijing, we have the IP,” said Liang, observing that China’s Semiconductor Manufacturing International Corp. (SMIC), while having its principal production fabs in Shanghai, has its headquarters and is building its 300mm fab in Beijing.

Of the 400 design houses in China, 85 are in Beijing; out of the 16 design houses that achieve more than $100 million in annual revenue, nine are in Beijing, Liang noted. And China’s only EDA company, CEC Huada, also resides in Beijing. The bulk of China’s technical universities are also here.

Electronic News Travels to China“The Chinese market is so big, it grows so quickly, it is impossible to depend on imports – we need our own technology, our own standards,” he said. Which is why he wants foreign investors and foreign chipmakers to be aware of Beijing, and what it has to offer in terms of local IP opportunity, as opposed to just cheap manufacturing.

“If you want to do something in this area, you have to cooperate with Beijing,” Liang said.

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