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.