Intel inside

U.S. chip makers, to, boost their high-tech manufacturing in China, face the risk that they are, giving strength to future rivals

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 market.
  Intel's plant is the largest investment in the zone a former patch of farmland where more than 5,000 multinationals have set up shop.
  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.
  China's leading 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.
  Intel, 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 work.
  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.
  Intel has 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 products.
  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.

Following customers
  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.
  Intel's pristine facility in Shanghai, which has 2,000 employees, sprawls across three buildings housing production lines and offices.
  Intel won't 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 Tan.

Export limits
  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 chip industry.
  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.
  Despite such 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.
  As 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 Pudong's infrastructure.
  "In my dream Pudong will be another Silicon Valley," said Dai Haibo, deputy magistrate of the district.
  China has 56 wafer-fabrication plants in operation and 12 more under construction.
  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 Organization rules,
  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 2.
  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 overseas.

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 wafer.
  As China's manufacturing and design abilities improve, its semiconductor industry could compete with Intel someday, Barrett concedes.
  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 China."