insideU.S. chip makers, to, boost their high-tech
manufacturing in China, face the risk that they are, giving strength to future
By Kristi Heim: Knight Ridder Newspaper:
April 5, 2004
SHANGHAI,China- In the heart of a
bustling free-trade zone in Shanghai, a $500 million Intel plant readies the
flagship Pentiium-4 chips that run the latest generation of computers. Hundreds
of Chinese workers in lab coats monitor diamond-tipped wafer saws and other
automated equipment, testing and assembling chips for the world
Intel's plant is the largest investment in the zone a former
patch of farmland where more than 5,000 multinationals have set up
But just down the road, China's own Silicon Valley is, emerging.
In a vast high-tech park, gleaming glass-and-concrete buildings are sprouting up
along boulevards lined with freshly planted trees.
domestic chip company, Semiconductor Manufacturing International (SMIC), is
churning out chips from its campus, where it operates bilingual schools, a
shopping center, apartments and a church for employees. SMIC and other Chinese
ventures in this park are striving to someday challenge U.S. companies as tech
leaders of the future.
These two zones show both the promise and the
challenge China represents. U.S. tech companies are rapidly expanding their
partnerships with China. They are eyeing the nation's huge domestic market and
tapping its cheap labor for skilled manufacturing and, increasingly, the
brainpower for creating tech innovations. At the same time, the American tech
companies are looking warily at an emerging rival.
People in China
"are capable of doing any engineering job, any software job, any managerial job
that people in the United States are capable of doing," said Craig Barrett,
Intel's chief executive officer, in an interview in Beijing.
with 2,400 employees throughout China, will have invested more than $1 billion
by the end of next year into the world's most populous country, making memory
chips and microprocessors and hiring top Chinese engineers for development
But Barrett remains ambivalent about the long-term implications
of China's development.
"As CEO of Intel, my allegiance is to the
shareholders of Intel and to the success of the company," he said. "We go after
the most cost-effective resources around the world, no matter where they are."
However, "as an American citizen, I would have to be worried about whether jobs
that are created are created outside the U.S. ... As a citizen, I see all these
resources and I think this puts my country in danger.
steadily deepened its involvement in China and moved more sophisticated work
there in the past five yearsThe company has progressed from its first foray
assembling data-storage chips in 1998, on to more complex chipsets in 2001 and
finally to the top-of-the-line Pentium 4 processors in 2002. Intel plans
to build a second testing and assembly plant in China this year for $675 million
in Chengdu, in southwestern China.
In addition to sales offices in 14
Chinese cities, Intel has invested in 30 Chinese tech startups. And it runs
three research-and-development labs working on technologies for future Intel
Barrett says such projects have proved so successful - and
inexpensive - that any expansion of Intel's
research in the future will be done outside the United States, in places like
China, India and Russia.
Like other leading tech companies, Intel has been expanding its presence in
China to follow its customers. China has become the largest consumer of mobile
phones in the world and is expected to surpass the United States as the biggest
buyer of personal computers in six years.
By that time, China is also
expected to be the world's second-largest chip market. But China has to import
about 80 percent of the chips it needs.
Already, more than 10 percent
of Intel's yearly revenue of $30 billion comes from China the company' s biggest
customer outside the United States.
Yet Intel is only willing to go so
far to cater to the fast-growing Chinese market.
The company recently,
said it wouldn't conform to the Chinese government's requirement that all
imported wireless-networking products carry its security technology by June 1.
That will probably mean that Intel will have to stop selling some of its
wireless chips in China, although it will continue sales of its main laptop
chip, the Pentium M.
pristine facility in Shanghai, which has 2,000 employees, sprawls across three
buildings housing production lines and offices.
disclose what it pays Chinese employees, but said it is consistent with wages of
$200 a month for a skilled manufacturing worker in Shanghai and more than $500 a
month for a whitecollar worker.
At Intel's Shanghai plant,
workers changing shifts empty their pockets and pass through a metal detector.
Photographs on the walls show Chinese leaders touring the facility. Otherwise,
the location could be anywhere in the world.
Under Intel's "copy
exactly" global production strategy, every testing and assembly facility around
the world should function the same way, so products shipped around the globe are
consistent in quality.
"The quality of work here is equivalent to any
of the work we do around the world," said Intel China President Wee Theng
Yet unlike SMIC, which
manufactures chips designed by other companies, Intel must stop short of doing
silicon wafer production in China, the most sophisticated production work in the
That is because the U.S. government limits exports of
chip-making equipment and other advanced technology to China for competitive and
national security reasons. Washington's policy is intended to keep China two
generations behind the most sophisticated chip-making.
restrictions, China is making huge strides in a key industry. Building its own
chip industry is not only practical, it is a matter of national pride, like
sending an astronaut into space.
Much of the chip-industry activity is
taking place in the vast eastern swath of Shanghai known as Pudong.
companies like Intel and SMIC set up plants in Pudong, they helped spawn
semiconductor design houses, software start-ups and chip-packaging and testing
companies. High-rise apartments and villas, swank restaurants and golf clubs
soon followed. The Shanghai government has invested about $13 billion in
"In my dream Pudong will be another Silicon
Valley," said Dai Haibo, deputy magistrate of the district.
56 wafer-fabrication plants in operation and 12 more under
Government incentives such as free land and tax breaks
have helped to fuel the chip boom. Customers who buy chips designed and produced
in China pay just 3 percent tax, compared with the 17 percent tax China levies
on imported chips, a policy the U.S. industry says violates World Trade
China demonstrated its ability to innovate two
years ago, when the Chinese Academy of Sciences designed and built the first
homegrown computer processor - the Dragon chip, equivalent to a Pentium
The two leading Chinese chip makers, SMIC and Grace Semiconductor
Manufacturing, are beginning to challenge Taiwan's contract chip manufacturers,
as the world's electronics giants outsource more of their chip-making to China.
In December, Taiwan Semiconductor filed a lawsuit in California charging SMIC
with stealing its trade secrets.
Shanghai-based SMIC, founded in 2000
with investment from Singapore, the United States and the Shanghai government,
is racing to become a world-class chip producer.
Run by veterans
of the U.S. and Taiwanese chip industries, the company produces memory and other
basic kinds of chips in Shanghai.
But the company is building a
cutting-edge plant in Beijing. In October, it agreed to buy Motorola's
wafer-fabrication plant in China's northeastern city of Tianjin.
Motorola and other large U.S. companies are choosing
not to build expensive chip plants, and rely instead on suppliers like SMIC.
This "hollowing out" of U.S. chip manufacturing has raised worries that the
country is exporting the core of its high-tech capability
Catching up fast
Huann Min Tang, technical
director of design services for SMIC, said China was a decade behind the world's
leading chip makers a few years ago. But "we're probably just a couple of years
behind the world leaders now," he said.
SMIC plans to make its most
sophisticated chips in Beijing, using some of the most advanced manufacturing
technologies today The Beijing plant will make chips from silicon wafers 300
millimeters in diameter, the first such fabrication plant in China. SMIC is one
of the few chip makers besides Intel moving to 300mm wafers, which are larger
than earlier generations and produce more chips from each silicon
As China's manufacturing and design abilities improve, its
semiconductor industry could compete with Intel someday, Barrett
One key difference is that Chinese foundries such as SMIC
produce chips for other companies, while Intel designs and produces its own
chips based on patented technology.
"China has all the right things in
place to become a top-flight technical manufacturer," said George Bums,
president of Strategic Marketing Associates, a Santa Cruz, Calif., research
company that tracks the chip industry. "In five years, they will be the equal of
anybody." For now, the U.S. and Chinese tech industries coexist as
partners and rivals.
"In this high-tech business, competitors and
collaborators are frequently the same company," said George Koo, director of the
Chinese Services Group at Deloitte & Touche.
"I suspect that is
going to be the situation between chip companies in Silicon Valley and