Moving to China: Where Should You Set up Shop?

Travelling the Silicon RoadSo you’ve decided you need to have a presence on the ground in China. Or you’ve decided it’s time to move some manufacturing to China, or expand the sales offices you have there.

Then the question becomes where do you go in China to set up shop?

It’s a big question, and not one with the clear-cut answers it had just a few short years ago. At first glance, it might seem obvious: if you’re talking about electronics manufacturing, then Shenzhen, China’s richest city, is the place to go. If you’re talking about something farther up the food chain, say semiconductor manufacturing, then Shanghai is the place to be, right?

Well, if you’ve been following along as Electronic News has ventured down the Silicon Road this autumn, you know it is not quite that simple. There is some truth to those statements, to be sure. But the industry landscape in China – and foreign companies options – are considerably more complex, to be sure.

But lets look at that conventional wisdom first. Shanghai and Shenzhen are obvious places for a reason. Shanghai is a huge port city with plenty of natural resources, namely water, and an established infrastructure – this is why there are fabs here in the first place, including many that belong to the fourth largest chip foundry, Semiconductor Manufacturing International Corp. (SMIC). You’ll find the Chinese offices of many a U.S. and European chipmaker here in the gleaming new skyscrapers that dot the skyline.

Look at Applied Materials Inc., the world’s largest process tool vendor, and an old hand when it comes to operating in Asia – it’s literally around the corner from its biggest Chinese customer, SMIC, and its headquarters in Shanghai.

At the other end of the supply chain spectrum is Shenzhen, which has blossomed over the past two decades into China’s electronics manufacturing center. It was made a special economic zone for a number of reasons, but those reasons are similar to why Shanghai has exploded — and why Shenzhen is exploding.

For one thing, Shenzhen is a port city. Located in southern China on the eastern edge of the Pearl River delta, just across the border from Hong Kong, it is home to much, if not most, of China’s electronics manufacturing, and has the infrastructure to support that. In fact, it is probably the only place in the world to have a wholesale electronic components shopping mall located in an office tower downtown. That’s right, the SEC Electronics Marketplace: seven floors of components and finished electronic goods available wholesale.

Both cities have abundant human resources, not to mention prevalent universities, particularly Shanghai. In fact, Shanghai is so popular right now — particularly with Chinese engineer-entrepreneurs returning from abroad to take advantage of the advantageous business climate – that there are some 120 fabless companies in various stages of development in Shanghai, according to one chip startup I visited.

Plus, both cities have much to recommend them in the eyes of Western expats. Both cities are relatively clean and pollution free, and are very cosmopolitan; one could easily get by in Shanghai without having to learn Mandarin, or ever having to eat Chinese food, for that matter (why anyone would actually want to do that, however, I wouldn’t know – but I met Westerners in Shanghai who happily pointed this out).

Shenzhen, meanwhile, while much smaller and definitely more “Chinese” than Shanghai, is rapidly approaching that same level of international sophistication, and is so new and clean, it has been labeled China’s garden city. Indeed, the whole city seems at first glance to be sparkling and new, and compared to China’s older cities, green space is much more abundant.

But these very things that make Shenzhen and Shanghai such obvious choices may also serve to make them not-so-obvious choices. Shanghai, for example, is very expensive by Chinese standards – many people I spoke with, both Chinese engineers who had worked in Silicon Valley, as well as Western expats, pointed out that housing costs are approaching San Francisco/San Jose levels – and all of the attendant issues are starting to crop up in Shanghai, too.

“It’s not a problem for us yet,” said Kevin Sun, a marketing manager for Applied Materials China, referring to the high cost of living in Shanghai. “But of course they feel this pressure,” he said of Applied’s local Chinese employees.

It’s Not Just Location, Location, Location: Beijing vs. Shanghai

Another thing to bear in mind is that to do anything in China, you have to have established quan xi with the government – you have to establish and maintain the right relationships. For all of its cultural opening up, for all of its warm embrace of the free market, China is still a party where the Communist Party holds near absolute power.

And while Shanghai and Shenzhen may have a wealth of technological human resources, when it comes to finding brainpower in China, there is no better place than Beijing – which happens to be the seat of political power in China as well.

Now, for people not familiar with China – and perhaps more so for those who are only familiar with Shanghai – it’s important to understand that Beijing is the cultural heart of China, not just the political center. Geographically, Beijing never had much to recommend it, but in China’s distant past, as its dynastic rulers began to consolidate power across this vast country, Beijing became a strategic location, the crossroads of a growing realm. That is essentially why it became the seat of power for China’s emperors, which in turn attracted China’s intellectual and cultural elite, historically.

By and large, this is still the case today. Not only is it the seat of government, it is home to most of China’s premier universities – the Peking University, Tsinghua University, and the China Academy of Science, to name just a few — not to mention most of its millionaires, old and new, and its popular entertainment stars. It is also home to many of its brightest painters, musicians and writers.

And if there is a hot-button issue for the Chinese today – well, there are many, actually, but the rivalry between Beijing and Shanghai is one of them. Of course, the people that live in China’s other burgeoning high-tech cities have their own views on the matter, but most Chinese people in the tech industry in either Beijing or Shanghai, have a strong opinion with regard to the rivalry.

And the people that argue on behalf of Beijing make strong arguments. Beijing may not be a bustling port city, and may not have the infrastructure for manufacturing that Shanghai has, which the city’s proponents readily acknowledge.

If you’re just after cheap manufacturing, then by all means, go to Shanghai, says Liang Sheng, the section chief of the Department of Information Industry of the Beijing Municipal Government. “But if you want to expand your profits, you have to come to Beijing.”

And if you are looking to develop intellectual property (IP) tailored for the booming Chinese market, Beijing is the place to be. “Here we have our own IP,” he said, observing – as many Chinese officials did — that there was a reason SMIC built its first 300mm wafer fab in Beijing.

Liang likens Beijing to Silicon Valley; it is where a big chunk of China’s domestic chip IP is created. China’s only EDA company, CEC Huada, calls Beijing home, and of the 400 design houses in China, 85 are in Beijing. If that ratio isn’t good enough for you, consider this: out of the 16 design houses that achieve more than $100 million in annual revenue, more than half have their headquarters in Beijing.

Of course, there is no official distinction between Shanghai and Beijing when it comes Chinese efforts to lure the semiconductor industry there. Rather, it’s the result of a natural evolution: “it’s just what it is,” remarked Xu Xiao Tian, secretary general of the China Semiconductor Industry Association. “These two cities have their advantages and disadvantages.”

There’s More to China than Beijing and Shanghai

Some of those disadvantages in Beijing, aside from a comparable lack of natural resources, are considerable pollution and horrendous traffic. That is not to say that they aren’t problems in Shanghai, but in Beijing, they are particularly acute. While Beijing has a venerable, effective public transit system, there are still so many people in the city that its traffic jams rival the worst of those anywhere on the globe; it will be interesting to see how Beijing addresses this problem when it hosts the 2008 Olympics.

And it isn’t the only place to find superior human resources in China; consequently, nor is Shanghai the only place to find infrastructure and physical resources for manufacturing. As Xu observed, quite rightly, many companies both domestic and foreign, are looking at other cities around China – Chengdu, Xian, Shenyang, just to name a few. There are resources to be had elsewhere, often without the costs associated with Beijing or Shanghai.

One thing is common to virtually every significantly large municipality in China today: the local governments are playing to their strengths, and doing what they can to lure foreign investment. Wherever you go, whomever you talk to in local governments – as well as the local companies looking for foreign business partners – the phrase “win/win” comes up time and again; incentives are falling out of the metaphorical trees.

And each these other municipalities offers unique cultural environments as well, as followers of the Silicon Road blog know well, be it the food of Sichuan Province, or the warm subtropical climate of southeastern coastal China.

“I want all these cities to be successful with their semiconductor industries,” Xu remarked. “We’re paying attention to all of them.”

Electronic News Travels to ChinaIndeed, if one were involved in optoelectronics, Xiamen would deserve consideration. If software is your company’s forte, then Shenyang may be the place to set up Chinese headquarters. There are many places, places that we couldn’t squeeze into my Silicon Road itinerary, that are burgeoning high-tech and/or industrial centers in their own rights, or soon will be – Xian, Wuhan, Tianjin, Beihai and Guanzhou, just to name a few.

Wherever you decide to set up shop in China, I can say one thing is abundantly clear after spending a month investigating China’s tech industry: now is definitely the time to be there.

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.

TI China Engineers Straddle Two Different Cultures (part 2)

Travelling the Silicon RoadSHANGHAI – Editor’s Note: Electronic News Senior Editor Jeff Chappell continues to discuss how working for a U.S.-based international chip company means more than straddling geography and time differences with China-based Texas Instruments engineers Tan Hui, a member of the technical staff and an application manger in the industrial and home appliance semiconductor group; Michael Wang, system engineering manager in the portable power management semiconductor group; Eric Braddom, director of DLP products for TI’s Asia semiconductor group; and Yu Zhen Yu, a senior member of the tech staff and director of the industrial and home appliance group and China application and development center in TI’s semiconductor group. What follows are excerpts of that conversation.

Chappell: How does China’s nascent design and IP business affect a company like TI coming into China to do business?

Braddom: What’s different in China from an IC design perspective is that they are much more welcoming to a complete system solution. Their advantage here is in low-cost manufacturing, so bringing in a whole system solution works here. This is very different in many other places. The converse is also true, here. Because design is not so strong, you may not be able to sell an individual chip here.

Yu: But you have to be careful who you sell that system to. Companies here haven’t learned, as those in the West already have, that you have to concentrate on your core competency. People here haven’t learned that lesson yet. People don’t realize how difficult it is to bring a new product to market from scratch. If you do all the work designing and creating that system, and then the customer’s product isn’t successful, you don’t get any return on your investment.

Wang: There are a lot of small companies here, and they don’t always know what they’re doing – we don’t know who will win. It really is like Taiwan was four or five years ago; the market really hasn’t stabilized yet. Just to give you an example: A year ago there were 400 makers of MP3 players in China, and now there are 200. I’m pretty sure in six months, it will be 100. As a systems provider, how do we deal with this? It’s a very fragmented market here, and everybody wants to do what’s hot.

Yu: Yes, look at automotive electronics. There are more than a thousand automotive electronics company in China, because a few years ago the government decreed that China has to get into auto electronics. We just have to watch and see who emerges, and then do business with the winners.

Chappell: So for you two, Mr. Wang and Mr. Yu, what were the biggest changes that occurred in China while you were in the United States?

Yu: Well for one thing, like I said before, there is guan xi. In business in the U.S., when I know both sides bring value, I know we will have a strong relationship, even without a prior history together. Here, it is different. After having been in the U.S. 14 years, I have a tendency to be too straightforward and blunt. It took me about two and a half years to really understand the internal relationship dynamics with customers.

Wang: I’m not engaged with a lot of local customers here, so I can’t address that. But Shanghai has changed so much, I didn’t recognize it. There are so many skyscrapers here now. A skyscraper is defined as any buildings that extend above an 18th floor; by that definition I read somewhere that there are more here than in New York. It’s really changed. I’m from a town a couple of hours from here by train, Hongzhou. You can put me in the middle of my hometown and tell me it’s a different city, and I wouldn’t know otherwise. It’s so different from when I was growing up, I don’t like going back there now, in a way. Also, having lived and worked in the United States, I found that I didn’t have much in common anymore with friends that I knew when I went to college here.

Yu: I lived in Beijing for 11 years prior to 1989 when I went to live in the United States. … I’m really shocked at how big a change has taken place in the city there. I’m glad that it’s growing, but I one thing I feel strongly about – the environment, the weather and the air, has all deteriorated so much, there is so much dust and smoke and smog. I was just there for a tradeshow, and I had all sorts of problems, I had to take nasal decongestants, and carry a bottle of water with me wherever I went. It was awful. And this season, autumn, is traditionally supposed to be its best season.

Braddom: There is a city in central China – I’m not going to say its name – but it is a very beautiful, historical city. But the air quality there is so bad, the people there say that the dogs start barking when they see blue sky, it’s so rare.

Wang: It’s the big cost for the speed of China’s economic growth.

Yu: It is a very high price.

Chappell: China has come a long way in the past five years in moving toward a market-based economy, and generally opening up. The central government just announced its next five year plan; where do you see China in five years?

Yu: There are certainly a lot of big issues the country is facing right now. At the same time, you can tell the government is trying to fix these things, the gap in economic development between eastern and western China, between urban and rural, and the gap in the standards of living. It’s actually bigger than Westerners tend to believe. Five years from now I hope they will be able to make some progress.

Braddom: In terms of business and the market, you can’t afford not be here. Just look at the size and the growth of the domestic market. There are 300 million people in China right now with cell phones – that’s more than every man, woman and child in the United States. China is already the second largest big screen TV market. Business is exciting here. Yes, there are economic gaps, and there will be fluctuations in growth; things could go awry. But from a business perspective, can you afford not be here?

Yu: In dealing with [Chinese] customers on a day by day basis, and seeing them finish a design and bring it to market … one of the good things I see is that a lot of companies in China are growing up. … They are starting to be able to design products on their own. And in other industries, things are changing. In many markets, foreign companies that have traditionally had a solid lock on a domestic market, a lot of traditional manufacturers are being supplanted by local Chinese companies. It is happening fast.

Braddom: TI China’s managing director, Gerald Kuo, has kind of a famous quote about doing business in China, that I think sums it up nicely: There are three rules to doing business in China: 1) Anything is possible. 2) Everything is difficult. And 3) If someone says it’s no problem, that means it’s a big problem. It’s a great climate for starting a business, I think. But personally, I still have problems mailing a letter or getting money out of a bank.

Yu: Yes, many travelers to China, who are here only for a short time, only see the skyscrapers and fancy airports, and they don’t see all the problems here. What they see is, “Ooh, China is developing rapidly, it’s a threat.”

Braddom: There is another famous quote by a Western ambassador to China, about how it appears very Westernized on the surface, but when you peel back the sheets for a closer look, the truth emerges. There is a big city façade here, that’s true. It’s when you get into the details, this is when you realize things are very different.

Chappell: Are there any other observations about China that you’d care to offer? Anything that Westerners planning to come to China to do live or do business should know?

Braddom: One of the things we did during TI’s cultural training class before coming to China was spending half a day as if we were in a Chinese classroom, as elementary school students. We were treated just like regular students; there was no speaking English. It was very tough; I don’t think I could have hacked it as a student. Heck, I’m not sure I could now. The school system is very different here, and I think it’s important to understand that. A lot of the cultural behavior of engineering students coming out of school here originates within that system. It’s a big part of life here, the education system. The teamwork issue that we face is only one aspect of that.

Yu: There was a study done in the past by U.S. and Chinese educators comparing the U.S. and Chinese schools systems. After studying each other’s educational systems, the Chinese concluded that the U.S. educational system was in complete failure; students didn’t pay attention and there was seemingly no discipline. The U.S. educators, meanwhile, thought that the Chinese had a good system. That was 30 or 40 years ago, I think. Look at what the U.S. education system has generated since then, more Nobel prize winners than any other country.

Electronic News Travels to ChinaIn the Chinese education system, there is a tremendous importance placed on individual high scores and class rankings. It is such that Chinese students tend not to listen to what other students are saying, because only what the teacher says and thinks is important to them; it is the teacher that has the impact on scores and rankings. I believe that in the future if the government does the right things, they can fix the problems that face China. But the school system, that is an issue they don’t know how to fix. There are just so many people here, how do you educate them all?

This article is Part Two of a Q&A session run by Electronic News Senior Editor Jeff Chappell as he traveled the Silicon Road through Shanghai. Click here for part one of his roundtable discussion with Texas Instruments engineers in 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.

TI China Engineers Straddle Two Different Cultures (part 1)

Travelling the Silicon RoadSHANGHAI – Editor’s Note: At the behest of Texas Instruments Corp.’s Jeff Smith, deputy director of Asia Semiconductor Communications, as well as worldwide manager for analog media/analyst relations, four TI China engineers sat down with Electronic News Senior Editor Jeff Chappell to talk for an afternoon, but not about TI or its latest products. Rather, they discussed the experience of being an engineer and working for a U.S.-based, global company doing business in China.

The four engineers — three of them Chinese — are a microcosm of what you find in a large foreign tech company doing business here. One, Tan Hui, has only been out of graduate school six years, and has worked for TI in China since graduation. He is currently a member of the technical staff and an application manager in the industrial and home appliance semiconductor group here.

Another, Michael Wang, grew up in a city not far from Shanghai, and is currently a system engineering manager in the portable power management semiconductor group here. While he has worked for TI for several years, he came back to China a year ago after spending two years at TI headquarters in Dallas.

Eric Braddom is director of DLP products for TI’s Asia semiconductor group. A U.S native, he has spent the last two years in Beijing with TI; prior to that he was with the company and also stationed in Dallas.

The fourth member of the group was Yu Zhen Yu, a senior member of the tech staff and director of the industrial and home appliance group and China application and development center in TI’s semiconductor group here in Shanghai. He came back to China two and a half years ago after living some 14 years in the United States; prior that he was based in Houston, Texas.

During the afternoon, the four provided insights that can only come from living and working in China, and in some cases only having been a native who has lived abroad and come back. The following are excerpts from the conversation.

Chappell: First off, tell me what is it like working for a large American chip company here in Shanghai?

Tan: I have no experience working with a domestic company, but one big difference I’ve noticed, since I started with the company in technical support … I think working for a large international company enhances our ability with teamwork. If you want to be successful, you have to have technical expertise, but it’s not the only thing. You need a team, a system to support you. TI has done a good job along these lines. I’ve talked with friends I went to school with who work for domestic companies, and they say it’s not like that. Domestic engineers concentrate on their own work. It’s a big difference.

Braddom: It’s definitely a challenge working with and managing Chinese employees also. They have many strengths and are very strong technically, but cooperation is often a weakness. In the U.S. we’re taught early, we’re forced to do things as a team. That is a management challenge. Chinese students just haven’t had that [teamwork] experience.

Wang: China produces more engineering graduates than the United States or Germany, but the pool accessible to a large international company like TI is relatively very small. They are often not qualified because of one, language, and two, teamwork. Language is a big thing, I think. Just look at the way I work in TI — we have almost daily contact with the mother team back in the United States, and knowing English is essential.

Chappell: What’s the converse? What’s it like for the large American company to come here?

Braddom: One thing about the Chinese workforce, is it produces a real good chance to have diversity. China is a very diverse country, and it’s really nice to have engineers that can converse with customers in their own local dialects. Furthermore, in China I get a lot of strong resumes from women. I’d say about half of our staff are women; in the U.S. it would be a much lower number. There are many opportunities to achieve diversity in China, from a management perspective. I’m not sure it’s valued by everyone, but it’s a good opportunity for us.

Yu: One big problem, however, for Western companies doing business here is motivation of local, native employees. There is often a historical and cultural gap between them and management, who tend to be expatriates, or from Hong Kong and Taiwan. Often employees come to work here or at other large international companies to get exposure, but after a couple of years they get fed up and leave. They don’t have the same feeling the U.S. and European employees have with regard to how they feel about the company.

Braddom: I’ve found that some Chinese employees though do respond to Western style management — it’s an opportunity to achieve that closeness on the staff.

Yu: I think the problem is that companies fall into the same cycle; there are so many managers that are not local — they miss the opportunity to groom local employees for management and leadership positions.

Braddom: Teamwork is not taught in schools here, but there is a strong focus on family and relationships. Even on my team, some of the employees use the [familiar Chinese titles] of older sister or younger brother. Then there is the concept of face. It’s kind of like a bank account. I’ve seen it both demonstrated and used in business here, and it can be quite effective. It really does exist and it’s important to understand. Companies here are just now learning the concepts behind intellectual property laws and merger laws. They recognize that it is important if China is going to do business globally. But it’s more important to have the relationships in place when dealing with Chinese people in business, not just the signed legal documents. You have to know the concept of guan xi.

Yu: That’s very true. After 14 years in the U.S., it is something I had to adjust to again. In the U.S., if you dealt with a colleague and had met each other’s business needs, you were done. But here in China, it’s much more than that. Sometimes, even though you both realize that it’s not a personal relationship, you have to make it feel like a personal relationship.

Braddom: It’s really nothing more different than realizing that people have personal and professional objectives, and can use your help to achieve them. It’s not just going out do dinner together or having drinks together, it’s actually helping one another.

Wang: In my mind, though, I would like to emphasize that compared to other Asian countries, China and the U.S. are not all that dissimilar. Taiwan and China are much more open to Western culture.

Yu: That’s very true. We’re much more open to Western ways of doing business and Western ways of thinking.

Tan: You have to remember, when an Eastern businessman looks at a business deal or opportunity, he sees that there are always reasons for and against it. That’s why the relationship beyond the deal is so important.

Electronic News Travels to ChinaYu: People do emphasize relationships a lot. Let’s say you are trying to gain 10 different customers, in the end, it’s the ones that really benefit from what you have to offer that become successful. And that’s when, in turn, the relationship becomes stronger. But fundamentally, you do have to bring value to the table. It’s not just guan xi.

Wang: I think this idea that relationships are so important originates from dealing with the government. I don’t always see it at my level.

Braddom: For my part, I’ve have seen it used it myself.

Return to Traveling the Silicon Road tomorrow for the second part of this article.

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.

Sobering Realization in Shanghai

Travelling the Silicon RoadSHANGHAI — Well, we’re sitting in the Shanghai Hongqiao airport, waiting to board a flight to Xiamen.

The voyage along the Silicon Road is half over; two weeks down, two weeks to go. There is so much to write about in terms of this blog after traveling two weeks in China, I hardly know where to begin. I thought a few days’ break over the weekend would be good — a chance to ponder everything I’ve absorbed since I’ve been here.

But I’m still not sure where to begin.

One important thing I’ve realized the past few days in talking with people and conducting interviews is that I was coming close to making the same mistake that I think many Westerners make when they see a developed foreign country: they assume it’s just like the West.

Shanghai especially encourages this mistaken line of thinking, given its history and its present role as a port city key to international trade. If there is a laowai-friendly city (“laowai” means Caucasian foreigner to those of you haven’t been paying attention), it is Shanghai.

And I think I may have given some readers the idea that indeed China is just like America, only it’s crowded and they talk funny and eat strange things like donkey and dog. It’s true that China perhaps shares more similarities with the West than other Asian cultures — it is more open to Western ideas and ways of doing things.

But this is a culture that is thousands of years old, and like any culture that history permeates it even today, even as modern Chinese culture is shaped by modern-day influences, such as its Communist government, economic growth — and problems — and the related overcrowding in its cities. It is a very different place culturally from the West.

A Problem to Address?

Nowhere is the gap between the Chinese nouveau riche and poor evident than here in Shanghai. Yesterday I gave Tony the Interpreter the day off to go visit old college chums that he hasn’t had a chance to see in two years. Of course this was the day that China’s ATM network decided to give foreigners problems, forcing me to wander far and wide outside my hotel in search of an ATM that would work.

Not knowing where I was going, I just kind of wandered, keeping my eyes out for banks and ATMs. It’s something I think every traveler should do in a foreign city — maybe not the safest thing when alone, but you see the city in way that you won’t from the back of a taxi or train. I quickly realized that while homeless and urban poverty are a problem in many cities in the U.S., it is on a much bigger scale here.

My stroll around the hotel last night only confirmed that opinion. Tony showed back up around 6 p.m., and wanted to go see The Bund at night. The Bund is one of the old colonial sections of Shanghai, where the European architecture is evident, but surrounded by gleaming new skyscrapers and office towers, all lit up spectacularly in the evening. Right on the Huangpu river, The Bund is a popular destination for both foreign and Chinese tourists , and it’s a good place to buy a “Rolex” for about 100 yuan, or about $12.50.

So after playing tourist we returned to the hotel about 11 p.m. I decided I needed some fresh air — too much wine with dinner, and too many thoughts swirling around inside my head, and the air in the hotel felt stuffy. Our hotel was right outside the central train station, in a cluster of business class hotels, so I walked around the block, circumnavigating the train station. There were many homeless people camped out in doorways, under awnings and roof overhangs — any place that offered shelter. Local police walked among them with flashlights — looking for what, exactly, I don’t know — but otherwise seemed to leave them alone.

There was also the Shanghai version of ladies of the evening out and about, risking harsh punishment under Chinese law. They consequently dress very discreetly, as ordinary people, and often pretend to hand out flyers to local restaurants or hotels to travelers, until a business prospect wanders by. Then the sales pitch changes; I quickly ascertained, and Tony later confirmed, that laowai businessmen, which are rich by Chinese standards and often traveling alone, are preferred customers.

It was quite a contrast to walking around The Bund and around the Shikumen Road area of Shanghai, where Tony and I had hung out earlier in the week. Back in 1920 the Communist Party held its second national meeting in the Shikumen Road neighborhood; today it is a trendy, upscale place of bars, clubs, shopping centers and bistros, many of them offering Western fare. Shikumen, incidentally, means “new world” in English. Indeed.

My colleague from EB China, Alma Wang, described Shikumen Road in recommending it to me as “crowded by a swarm of Shanghai bourgeois and also hippies.” Throw in a bunch of Western tourists and business types, and it describes the area perfectly.

As China embarks on its next five-year plan, with one of its stated goals being to narrow the gap between rich and poor, I can’t help but think of Western history, and the many times the rise of a bourgeois class led to violent, bloody struggles between rich and the poor. You never hear it in the censored Chinese state media, and reports rarely make it into media outlets outside China, but this country has already had problems in recent years with economic-related riots.

Electronic News Travels to ChinaI’m growing rather fond of this country’s people and their culture, though, (not their government, so you right-wing types, just relax) and I hope that it manages to keep history from repeating itself here. I think from now on, when I hear some chip executive rave about Shanghai, I won’t be able to help but think about the people outside the Shanghai train station after dark. …

Editor’s Note: As explained at length elsewhere on this site, this is a blog entry of mine that originally appeared on the now-defunct Electronic News’ website, which is long gone. While its former sister pub Electronic Design News (EDN) currently holds the copyright to all Electronic News copy (to the best of my knowledge), as far as I know, this blog content isn’t hosted anywhere else on the Internet, hence my reproduction here.

Original Comments

at 10/24/2005 12:21:59 PM, VANNROX said:

I’m going back to China this friday. This will be my fifth trip this year. This one will be a long one. Three to four weeks. Believe it or not, I have taken to the multi course meals in the little private rooms, and the after dinner karaoke’s. The Chinese conduct their business quite well.

But it is MUCH different than western business practices. You MUST go native to successfully conduct business there. That is the only way to be successful. While I spend much of my time inShen Zhen, and Shunde (Foshan City). This trip will take me to Ningbo, Hang Zou (in Guangdong provence) and to Shijiazhuang in Hebai Provence.

I hate to say it, but their level of technology, and infrastructure is far superior to that of the US. Afterall, they have been on a construction and industry expansion for the last 20 years. When was the last time you saw two new high rise buildings under construction within one glance? In China, they are everywhere. In a drive from Shenzhen to Shunde, I counted over 300 on the trip and then stopped counting… Its a great place, with wonderful people.

at 10/24/2005 12:53:01 PM, Paul said:

I just returned to the States after living in Shanghai for over five years. One small correction to your article. XinTianDi means “new world”. That is the name of the shopping/entertainment area you were in. Shikumen is the traditional Shanghai house design style.

at 10/24/2005 1:28:34 PM, Billd said: There are a lot of clues in the media pointing to problems that China may be getting into problems relating to the widening disparity between rich and poor. It is interesting that it is a stated goal of the Chinese government to narrow that gap. However, how real can such effort be when the enfranchised class would have to sacrifice in an attempt to divide their wealth among an essentially infinite poorer class?

On the other had, communist philosophy is founded on the notion that such redistribution is the imperative. Further the PLA is largely recruited from the poorer classes, and has a history of social activism. This is the eternal economic conflict, but in China, conditions could make it nastier than usual, and with a flare up relatively soon. .

at 10/24/2005 2:27:18 PM, Xie said: Those people sleep around the train station might be migrant workers, haven’t settle down until they find jobs, or poor travelers that try to save the money of an overnight hotel stay while waiting for their train (sometimes it is in midnight or very early in the morning). They are temporal homeless. Not exactly like those in the States.

But on the other hand, the homeless people in the States seldom poise a threat to me, but these crowds around Chinese train station do bother me a bit since robbers tend to hide among them. A

t 10/24/2005 3:00:29 PM, Ron Bauerle said: Should your last sentence read “won’t be able to _not_ think about…”?

at 10/24/2005 5:51:08 PM, Mike said:

It wasn’t that long ago that I saw the very same sceen you’ve discribed. I was about 20 years old and I had arrived at the train station. I stepped over the homeless sleeping any and everywhere. I was met by, in this case, overt hookers. I saw a delta between the social classes as different as night and day. The only differene is that I was in NYC in the late 1970’s.

at 10/24/2005 6:31:37 PM, David-wang@ti.com said:

Welcome to ShangHai next time,I think more changes will be occured and you will enjoy it as your fatherland 🙂 at 10/25/2005 11:00:01 AM, Infogleaner said: A “man on the street” news report… This description of another side of Chinese life is what you seldom if ever hear of in mainstream media. Blog on, dude….let us see the truth throught your eyes….

at 10/25/2005 5:57:48 PM, Maurice in Shanghai said:

The train station is a pretty hectic, messy spot which takes some getting used to. Those homelss folks are moslty migrant workers waiting for their train to go back to their home towns, there’s a lot of migrant workers here. I do contract manufacturing in town and things are going very well. The electronics scene in Shanghai is vibrant, anyone in the business should make a point to get out here for a first hand look. Cheers, Maurice

at 10/25/2005 10:08:42 PM, Jeff Chappell said: I’m always amazed by what readers will read into a piece, things that aren’t explicitly there … but then people always tend to see what they want to see (and I’m not implying that I’m any different. But let me set the record straight: I didn’t say Shanghai wasn’t a beatiful, amazing, vibrant city in many respects. It is. As is China.

Nor did I mean to imply that the Chinese people are anything but warm, wonderful and amazing; they truly are. But Shanghai, and China at large, have a lot of problems to address as well, something the Chinese people will be the first to tell you. As for the folks outside the train station being migrant workers, I’m sure many of them were. But you’re talking to someone who has lived in several urban areas in the U.S., and someone who has been known to sleep in or outside of a train station or two in his youth, too cheap/poor to spring for a hostel or a hotel. I think I can tell the difference between a temporary homeless person and a truly homeless person — and like I said, I wandered some distance from the train station … and it’s not just Shanghai, you see this in Beijing and Shenyang as well.

at 10/25/2005 10:19:51 PM, Jeff Chappell said: Of course, you should know that communism as the Chinese have developed it is not really the same as the communism espoused by Marx and Lenin; indeed, I don’t think it is really communism at all, if it ever was.

The Chinese, are very pragmatic; much more so than us in the West, where ideology is more important. You can discuss politics with Chinese people all day, and “from each according to his ability, too each according to his needs” never comes up. I’ll be writing more about this in the days and weeks ahead, but I thhink in a nutshell, you could say that communism is a system that the Chinese found worked for them, for a time, and now it doesn’t, so they are changing that system. Many Chinese — common citizens on the street — still revere Mao Zedong as a great man, even while acknowledging that the Cultural Revolution was a horrendous disaster in which many people died.

I’m not saying that’s right; I’m not saying it’s wrong. I’m simply saying that it’s very hard for us in the West to understand this practical point of view, and I think it’s the source of many cultural misunderstandings and misgivings.

at 10/25/2005 10:26:22 PM, Jeff Chappell said: Yes, Ron, you were right. Thanks for the heads up.

at 10/30/2005 11:19:38 AM, Jim in Phoenx said: Re. your “I’m not saying that’s right, I’m not saying it’s wrong” comment about the killings during the Cultural Revolution, and how it’s difficult for Westerners to understand “this practical point of view.” It isn’t difficult to understand at all–it’s the same point of view that the US government takes with respect to killing foreigners to achieve an imperial goal, it’s the same viewpoint that anyone who makes a God of the state and then lets it decide what’s right and how to achieve it (just as long as they don’t have to pay with their own precious lives) thinks.

Very unprincipled of you to not take a stand on it–I guess you love the Chinese in general, but not as individuals–they all look alike and if a few miilion are killed, there are plenty more to take their place. And it sounds like plenty of them believe the same–so they truly are not so very different from many Americans. Or am I seeing what is not there in your blog? If so, continue to be amazed.

at 11/2/2005 9:19:28 PM, Jeff Chappell said: *sigh* … Yes, Jim in Phoenix, YOU ARE SEEING WHAT YOU WANT IN MY WORDS, AND NOT SEEING WHAT I SAID! It’s simple English: what I said was, I’m not saying that the Chinese reverence for Chairman Mao is right or wrong — NOWHERE did I say that the killing that took place during the Cultural Revolution was right or wrong, NOR DID I SAY OR IMPLY that the Chinese people in general think that the deaths that resulted from the Cultural Revolution was justified.

And it makes me laugh when you call me unprincipled, when people have died to ensure you have the right to free speech, and you don’t even have the guts to put your name to your words, when you exercise that right. …

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.