Venture Capitalists Have Eyes on China

Travelling the Silicon RoadStartups all across China in the technology sector are looking for seed money and second-and third-round investments, and are courting foreign as well as local investors, particularly U.S.-based venture firms.

But are the American VCs interested? Do they share in the buzz, the excitement about China?

They most certainly do; the answer is definitely yes. But it’s a qualified yes. American VCs aren’t just handing out money at the drop of a Chinese hat. While there is perhaps a bit of a gold rush mentality in the semiconductor industry with regards to China, perhaps the VCs remember the aftermath of the last technology gold rush – the one that began with the letter “I” — and are treading a little more cautiously.

But that’s not to say that U.S.-based venture capitalists aren’t taking a long, hard look and China, because they are. And they are excited about what they see, and what the future holds.

Only a Matter of Time

Everybody is excited about China for one reason or another, and VCs are no different. While many, if not most VCs in the West are reluctant to invest directly in China-based startups, they often speak as if it’s only a matter of time. And it is a sure bet they are looking at their clients based outside of China and how they can help them do business in China. It is without doubt an important market.

They often cite the use of mobile technology in China, where a lack of a wired infrastructure coupled with an emerging middle class is opening opportunities that don’t exist in older and more developed Western markets, or have a much more limited demand here, such as Internet protocol television and bill paying by mobile phone.

“It’s obviously a great new customer area,” said Mark Gorenberg of Hummer Winblad. “We look at it today as much more potential for our customer base rather than investing for ourselves,” he said. “But we talk about it all the time.”

Dave Liddle, a general partner at U.S. Venture Partners, said his firm has been looking recently at several Chinese-based companies but so far hasn’t made that kind of direct investment. “But that’s just how it’s turned out,” he added.

What’s more common at this point for Western VC firms interested in China typically is to work with a Silicon Valley-based firm that actually has a few people on the ground in China, or has opened an office there, or they work with a U.S.-based company that has set up its manufacturing in China, Liddle said. In fact, China is a market that VCs are encouraging their startups to look at now, ahead of more traditional markets, like Europe, he suggested.

But that’s not to say that U.S. Venture Partners, Hummer-Winblad and others aren’t looking at investing directly in China.

But like any investment, the general rules apply: the market served has to be accessible, and it has to be a cost effective proposition, Liddle explained. “We track that a great deal,” he said of potential direct investments in China. The company maintains a lot of connections within in the U.S. entrepreneurial community that have ties to Taiwan or mainland China.

One firm that is investing directly in China right now — in what is perhaps an example of how the world of capital is changing, and not just with regard to China – is Big Blue, or rather its VC arm, IBM Venture Capital Group.

“The energy in China is just tremendous … all the legendary firms are very much focused on China right now,” said Claudia Fan Munce, a VP and the managing director of IBM’s VC Group. Incidentally, at the time she was interviewed for this article last month, Fan Munce had just returned from China where IBM had hosted a meeting of some 200 VC firms from around the globe.

Rather than make direct investments, IBM’s VC Group operates on what it calls a “give to get” strategy, focusing on relationships that will directly benefit IBM. But it works with other traditional VC firms that do make direct investments

Many foreign VCs are teaming up very quickly with local firms throughout the Asia/Pacific region, and many in China, Fan Munce observed. “Our drive is … what are the best companies and what are the best technology solutions? What kind of partner do we want to bring to market with us? How can our technology help them?”

Big Blue Puts the ‘e’ in YeePay

One of IBM VC Groups success stories in mainland China, and an example of the type of emerging market that exists in China thanks to a relative lack of existing infrastructure, is YeePay. Founded in 2003, YeePay (which translates into Mandarin as “easy pay,” according to the company) is an electronic payment service provider. It enables consumers and businesses to send and receive payments via the Internet, mobile and traditional wired telephones.

In November the two partners, IBM and YeePay, announced that in just five months after the partnership began, YeePay increased its financial transactions handling from just $120,000 per month to more than $1.2 million per month. A lot of that had to do with IBM’s association with the startup; IBM is a revered brand in China. In fact, IBM’s laptops are so venerated there that some Chinese consumers were not excited but worried when domestic PC maker Lenovo bought IBM’s PC unit, worried about the future quality and performance of the Thinkpad laptop.

But it wasn’t all just success by association, said Fan Munce. IBM provided servers and middleware to YeePay, helping them build an infrastructure based on open-standards hardware and software – not to mention access to a global infrastructure — and went with the company when it approached new customers. IBM isn’t a software applications provider; it doesn’t do industry-focused software, but needed a way to serve industry verticals, she explained. “Our mission has always been to identify a pipeline or partner,” Fan Munce said.

In a country that already has more mobile phone users than the entire population of the United States, and skyrocketing activation rates, YeePay was naturally attractive to Big Blue. There is a high risk, Fan Munce acknowledged, but huge potential for high returns. And that’s important for IBM, where more than half the company’s revenue is derived from services. And as Fan Munce observed, “We don’t really care who caries the brand.”

And there is a larger story beyond the IBM/YeePay, foreign-VC-success-in-mainland China story, and that story is the emergence of the corporate VC firm; IBM is far from the only big technology company to get involved in the venture capital game. Big Blue rival and fellow chipmaker Intel is a prime example; at the other end of the technology spectrum Cisco Systems is another.

The emergency of corporate venture capital as a means of growing a business and driving revenue is a definite trend that has emerged just within the ten years, Fan Munce agreed. And it has blossomed; just take IBM. When Fan Munce joined the IBM VC Group in 2000, it was involved with some 21 startups; as of last month, it was involved with 964 scattered around the globe.

Rules Still Apply for VCs with Regard to China

So what is the implication for China? In the future the technology industry is likely to see more partnerships a la IBM and YeePay, aside from interest on the part of more traditional VCs.

And as for VC firms looking to get involved in China, they face the same issues that anybody looking to do business in China faces, such as intellectual property protection, and establishing and maintaining the proper relationships needed to get things done. Both Liddle and Gorenberg acknowledged that while China’s government definitely seems to be stepping up its efforts on IP protection, it is still an issue to take into consideration.

“As a venture capitalist, I focus on companies where the IP has originated with the entrepreneur in China, or with these particular people,” Liddle said. “That’s different than taking IP originated in the U.S. and transferring it into China.”

IP protection is a problem that to some degree is culturally ingrained, Gorenberg observed, and that has to change. But he noted one recent example that it is indeed changing.

With the Olympics coming to Beijing in 2008, the central government has already gotten its marketing efforts well underway – and, in a somewhat ironic development, has had problems with local “entrepreneurs” selling knock-off souvenir paraphernalia, souvenirs that aren’t officially licensed, yet feature copyrighted logos and so forth. The government is already cracking down on this, and that’s a hopeful sign that it will become further involved in efforts to protect corporate IP, Gorenberg suggested.

Foreign VCs looking at China also face the age-old question they always do anywhere and anytime they become involved in a startup: how to pick a winner. This is compounded by the fact that many Chinese startups, not to mention established companies, are constantly turning to what’s hot and trendy at the moment. A year ago, for example, there were some 400 mp3 player manufacturers on the mainland.

“It is difficult,” Liddle acknowledged. Typically, VCs will categorize startups into “brave new world” companies, that have something new, or “faster, better, cheaper” companies, those that have a better product or better way of serving an existing market. In China, most of these fall into the latter category.

Because of that, it’s often not difficult to validate the market a startup wants to pursue; what is often difficult is determining the character of the team involved in a startup. In cases where an entrepreneur or executives in the fledgling company were educated or worked in the industry in the United States or Europe, evaluation is not so difficult. Where it becomes problematic is when the entrepreneurs have spent their entire career in China, Liddle observed.

“We don’t have the same type of references there,” he said. “The trickier thing is to evaluate the senior people in the firm then. That’s hard. It can be done, but it takes a lot of work and it takes a slow process”

Electronic News Travels to ChinaWhich is perhaps why so many VCs are either looking to take their fledgling companies from the U.S. and elsewhere into Asia/Pacific, and namely China, or looking to partner with people and companies already in China. Relationships are the critical element when it comes to doing business there.

“In China people believe — and it’s true by the way – you have to be tapped into the local ecosystem,” said IBM’s Fan Munce. “You have top know the right people.”

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.

Startup Vies for Opto Market with Homegrown IP

Travelling the Silicon RoadXIAMEN, China – Startups and entrepreneurs are popping up all over China and this southern coastal city, which is also a center of the optoelectronics industry in China, is no exception.

Chinese optoelectronics has a bit of a head start over its silicon semiconductor device industry; one of Xiamen’s opto device companies was founded more than two decades ago. But then it also plays host to Xiamen UX High-Speed IC Co. Ltd.

UX was founded less than three years ago by a handful of engineers, including Chinese — one of them local — as well as a couple of natives form the United States and Canada. They put in some time at familiar names: Cypress, ON Semi, Epson and Texas Instruments.

It is somewhat familiar story by now in China: UX’s founders felt they had learned all they could learn abroad in business, so they returned to China to start the company because the time seemed ripe, according to company president and Chinese native Xu Ping, who put in six years in Silicon Valley himself before returning to China.

He espoused the same logic many do here: China’s chip market is booming, in part because of domestic demand and in part because of the government’s encouragement to develop a semiconductor manufacturing base. Even if China’s domestic chip production capacity grows exponentially, it will be decades before that capacity comes anywhere close to fulfilling the domestic consumption.

“It does need a lot of technology and people,” Xu remarked of his native country. “Right now, most Chinese companies can only do simple chip designs,” he continued. “We feel like we have more growing room in China. After two-and-a-half years, we feel we can continue to do well.”

Xu estimates that to start UX, which now has a team of 18 people, most of whom are dedicated to R&D, the start up cost in China was about one-fifth to one-tenth of what it would have been in the United States.

The company right now is looking for second-round funding; like many startups here, it is looking to foreign venture capital (VC), namely that in the United States, to find it. While UX enjoys support from the local Xiamen government, and just closed the terms on a low-rate loan, the domestic Chinese VC scene is still nascent, that’s why so many companies like UX seek out foreign VC firms.

As for products, UX right now concentrates on high-end mixed-signal/RF IC chips, transceiver chips for front-tend fiber optic network communications applications, such as transimpedance amplifier, limiting amplifier and laser diode driver chips. Like many startups in China, the company is concentrating on high-end applications, where it has a chance of capturing some market share, rather than the crowded market for high-volume, low-end applications, such as consumer — a particularly crowded domestic market in China right now.

While the company originally set out to develop 10gigabit per second (Gbps) chips, it decided to focus in the short-term on the mainstream market for fiber communications, meaning 155megabit per second (Mbps) chips. It already is in production with IBM/Chartered Semi as its foundry partner with two 155Mbps chips, which it has begun selling, garnering interest outside of China as well, Xu said. The market for 1.5Gbps and 2Gbps is also developing rapidly, he noted.

Xu suggested that his company has an advantage over its competitors, in that while many of them are moving their fiber module manufacturing to China, most of their chips are still being exported out of China. As a domestic fabless company whose foundry partner is in nearby Singapore, and whose chips are packaged by a backend company here in China, UX is poised to grab market share in China, and in the future go head to head with its competitors beyond the country’s borders.

He noted that one of the chips that it has in production right now, a 155Mbps laser driver, can attain speeds up to 311Mbps, and is manufactured with standard low-cost CMOS, rather than BiCMOS or bi-polar technology, more commonly found in optoelectronic apps.

But the company is nevertheless still pursuing advanced technology and its own intellectual property (IP), according to Xu. It has developed and produced chips with 0.13-micron designs, as well as silicon germanium (SiGe) BiCMOS technology, in addition to standard CMOS.

“We’re one of the first companies to use SiGe in a BiCMOS process,” Xu noted. UX has also garnered two patents concerning indium phosphide technology, and has two other patents in the final stages of examination, while it has applied for three additional ones.

He agreed that developing domestic IP is an important issue for China right now. With so many engineers coming back to China, and so many other positive factors in place to foster startups, there is no real reason why China can’t foster its own IP, Xu suggested.

Electronic News Travels to China“I think in China, at least some of these [new] companies should have their own IP,” he said. “I think it’s important to come up with a good product.” Up until recently, China has relied mostly on modifying designs from foreign companies for the domestic market, meaning much of the profit leaves China; this has been one of the significant barriers to IP development in China, he acknowledged.

“First you have to have the people, and then you have to have the technology. If you don’t have these, you won’t get money,” he continued, either in the form of profit or investment capital. “Right now, the engineers are the most important things.”

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.

Getting From Lab to Fab: a Chinese Challenge

Travelling the Silicon RoadSHANGHAI — One of the challenges peculiar to China as a developed nation but with a relatively nascent chip industry is that of getting technology out of the lab, into the fab, and into the hands of users.

And thereby making some healthy yuan in the process.

Even while government and industry officials, as well as executives acknowledge that homegrown IP is critical to China’s developing chip industry – not to mention its ability to meet its exploding domestic demand — it has had a poor track record in getting technology developed in the lab into commercial production. It is a task that is difficult at best – for every R&D achievement hailed as a breakthrough, few translate into commercial profit.

It’s a universal problem, noted James Gao, founder and president of Shanghai-based startup Apexone Microelectronics Inc., a fabless, high-end analog and mixed signal chipmaker.

“It not only exists in China,” Gao said. “It’s a similar kind of issue back in the States.” Gao studied in the United States and worked in the chip industry before returning to China to start Apexone in 2002.

The problem, as his company experiences it, is hiring fresh graduate students with great ideas — ideas they brought to fruition in the lab — who want to apply it to Apexone’s products. But the optimal power conditions used in the lab don’t exactly emulate the lower power demanded by a commercial mobile device – in other words, what worked in the lab often experiences problems or just won’t work under real world conditions.

“That is a major challenge for university lab students,” Gao said.

Narrowing the Gap

But it is apparently a particular problem for China. As some students and executives here suggest, part of it is the legacy of communism and state-owned business. It isn’t like China hasn’t had a chip industry for some time. But in the previous climate of a state-owned economy there was little incentive for innovation. And now, as China continues to convert to a market based economy, there is a gap between what Chinese chipmakers can produce and the leading edge in the rest of the world.

Most domestic chip designs originating in China today are at .35-micron to .25-micron, according to Hou Jinsong, manager of the software department at Beijing-based CEC Huada Electronic Design Co. Ltd. (HED). HED was the first fabless design house in China. Hou’s unit within the company is the first domestic Chinese EDA software developer.

Very few designs below 0.18-micron are produced in China. Below that parasitic problems are still an issue for most Chinese design houses, Hou noted. That’s why companies all along the food chain are courting foreign VC investment and joint ventures — to help fund the needed R&D in China.

“I think the gap will be narrower (in the future), but it depends on the investment,” Hou said. “If you don’t have enough (proprietary) IC designs, you won’t grow rapidly. For the EDA industry, investment is very important.”

Converting Brain Power to Economic Power

It’s not that China doesn’t have the EEs or the research programs at universities and institutes to create that necessary domestic intellectual property. It’s the conversion to the commercial market like Apexone’s Gao described that many here say is problematic, and perhaps a new idea for the Chinese, as they move from state-owned enterprises to a free-market system.

Take Beijing, for example. There is a reason Intel recently chose Beijing as the location for a new R&D center. The capitol of this country for centuries, it was cast and maintained as the capitol not because of abundant natural resources – which it doesn’t have – but because of its strategic geographic position.

Over the centuries and into the present it has become the heart and soul of Chinese art and culture and in many respects its brain. The central government is here, as well as many of China’s most prestigious and research institutes and universities, such as Tsinghua University and the China Academy of Science.

“The only difficult thing in Beijing is how to realize the potential of all the brains here,” said Liang Sheng, himself a possessor of a doctorate degree and the section chief of the Department of Information Industry within the municipal government. He is also deputy director of the Beijing Semiconductor Industry Association.

It is a problem that China has worked on for years. One that Liang and others in China suggest was one of the reasons the central government decided to move towards a market-based economy. While the situation has improved markedly in China in recent years, there is still plenty of room for improvement, Liang acknowledged.

But China is learning. One piece of evidence to support that is the start-ups that have been launched out of China’s universities. It’s not a lot, especially when compared to the United States or Europe. But it’s growing. The aforementioned Tsinghua University, for example, has spawned three large start-ups. Beijing University has launched two. North East University in Shenyang has launched six companies.

Many of those companies are retaining close ties with their respective universities, participating in and sponsoring related research programs. In some cases, the two are tightly conjoined, as in the NEU Information and Technology Co. Ltd., a spin-off of North East University (NEU), which also plays host to the Shenyang Embedded Technology and Engineering Research Center.

“The company is a platform for product development,” explained Deng Qingxu, a doctorate and a graduate of NEU, and VP of NEU Info. and Tech.

But while the situation has improved considerably in recent years, the problem of turning Chinese brains into Western-style profit still persists here in China, he acknowledged. “It’s not totally overcome,” he said, adding that probably no more than 50 percent of what gets developed in research labs here makes into a commercial application.

He observed that government support still tends to focus on pure research, as opposed to letting market demands drive research. And the government is still aggressively pursuing research, to be sure.

In addition to encouraging innovation and IP development through the tried and true method of market demand, it is putting a lot of financial resources into R&D. On one hand, it is doling out money to support companies large and small with promising IP. Semiconductor Manufacturing International Corp. (SMIC) is an oft-mentioned example of this. SMIC is manufacturing 90-nanometer designs for certain customers at its 300mm fab in Beijing, the only 300mm fab in China.

Another method is through government grants. The central government has set aside some $16 million (130 million yuan) a year specifically for system on chip (SoC) development, for example. The government is also currently building two R&D centers – one in Beijing and one in Shanghai.

Electronic News Travels to China“In my opinion, research should be more practical; there should be more cooperation with industry,” Deng said. “That way you find out what the urgent needs are and concentrate on them.

“Just following random ideas in white papers, this isn’t fruitful,” he added, suggesting that relationships between research centers and industry could be tighter still. “As a researcher, you should take your cues from the factory.”

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.

China Learning the IP Ropes

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 Road
BEIJING — In some respects the Chinese semiconductor industry is like a young child, one that needs to learn the rules to live by in the world.

In other words, it needs to study hard and get good grades in school, and learn how to play well with the other kids, i.e., it needs to develop its own IP and learn how to protect that IP while respecting others. And it is looking to the rest of the world to help teach it.

That’s the analogy that Xu Xiao Tian uses to describe the chip industry here in this sprawling country. Xu is the secretary general of the China Semiconductor Industry Association; he sat down with Electronic News to discuss the current state of the semiconductor industry, namely China’s.

One of the common threads in conversations with Chinese officials here in Beijing right now is that of intellectual property, or IP, and Xu is no different. They realize that even with all the growth and investment in the chip industry here, China is still a very small part of a large global pie.

China’s semiconductor industry as a whole raked in $7 billion in revenues in 2004; by comparison, China’s foundry neighbor, Taiwan Semiconductor Manufacturing Co., saw sales of nearly $7.7 billion last year. United States-based Intel Corp., the world’s largest in terms of sales, saw revenue of more than $30.9 billion. Meanwhile, China’s largest chipmaker, Semiconductor Manufacturing International Corp. (SMIC), had revenues just shy of $1 billion.

Taking the Next Step

And yet, China realizes that information technology is a key to its growth, and if its chip industry — and ultimately China itself — is going to be successful in the long run, this means developing its own domestic IP.

Xu characterized China’s chip industry at this moment as entering its next stage of evolution. It has attracted some $15 billion in foreign investment; it has built fabs and factories, and has plans for more in the near future. SMIC has had a 300mm fab producing 20,000 wafers per month for a year now.

“Now, we need to manage that capital,” Xu said of all the private and foreign investment that has taken place. “We need to focus on developing our own IP.” He observed that developing the chip industry is not like developing a railway system; it’s not just a matter of building it. Without unique intellectual property, the domestic Chinese semiconductor industry will eventually founder, he said.

And while foreign investment is all well and good, and cooperation with companies and governments outside of China is necessary – and the Chinese want that help, Xu says – the profits from joint ventures largely go elsewhere, outside of China.

But there is a problem with IP in China, Xu acknowledges. “Actually, it’s a new concept in China,” he said.

Of the 1 million or so patents filed every year around the globe, about 2 percent are registered in China, Xu noted. And of those registered in China, 80 percent are contributed by foreign joint-venture partners. He returned to the analogy of Chinese industry as a youth that needs education.

“IP is a new concept,” Xu said. “We understand that if you write a novel, that is yours; that it is intellectual property, but in technology, it is a new idea for us.”

And before you write a novel, you have to learn to write sentences, he noted. “China wants help and guidance,” Xu said. “We want to make it clear to the world we are a student. The world should serve as our teacher.”

But China isn’t just waiting around to be taught. The CSIA has set up an IP promotion committee, tasked with educating the chip industry here on IP: what is it and how to manage it, and the importance of respecting the IP of foreign companies.

Xu himself, in fact, has authored a book, “The Frequently Asked Questions of IP in the IC Industry.” Designed to help domestic Chinese companies learn the ins and outs of IP, he said that foreign companies have requested that the book be translated into English, so that they can better understand the perspective of the Chinese companies with whom they do business.

Electronic News Travels to ChinaFurthermore, China as a whole also needs to develop its own public IP platform in the semiconductor industry, in part to teach domestic companies how to manage IP, Xu suggested. China also needs to learn to conduct IP transactions in a transparent environment, letting it be managed by third-party institutions. And companies should be punished for appropriating the IP of others, he added.

Ultimately, if Chinese companies can learn to respect IP while developing their own, they will earn the trust of foreign companies, which will then be more willing to share their intellectual property – an important step for the Chinese chip industry, Xu said.

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.