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China's Next Challenge: Mastering the Microchip

Seeking to enter the top tier of industrial powers, the country is on a crash program to compete in semiconductor work.

October 22, 2002|Evelyn Iritani | Times Staff Writer

SHANGHAI -- Richard Chang, a devout Christian raised in Taiwan and educated in the United States, has opened a $1.6-billion semiconductor factory here and plans to build a church for his 3,000 employees.

Chinese officials have displayed a cool, some would say hostile, attitude toward foreign religions. But they have put out the welcome mat for Chang because they desperately need his expertise.

This communist nation has embraced capitalism and become a manufacturing power, exporting toys, appliances and other products to every corner of the globe. Now, government officials want China to compete in a far more challenging arena: the making of semiconductors, the silicon chips that power everything from cell phones to missile guidance systems.

The semiconductor is one of the sophisticated, high-value products that form the cornerstone of an advanced economy. Chinese officials believe that mastery of the 250-step production process for the chips will teach factory managers and engineers the skills needed to lift China into the top tier of industrial powers.

For The Record
Los Angeles Times Wednesday October 30, 2002 Home Edition Main News Part A Page 2 ..CF: Y 11 inches; 420 words Type of Material: Correction
Motorola in China -- An Oct. 22 article in Section A on China's semiconductor industry erred in stating that Motorola Inc. planned to spend $6.6 billion to build 10 semiconductor plants in China. A Motorola spokesman said the company would spend $1.3 billion in China over the next four years, mostly to expand existing research and development facilities. The company said it has no plans to build semiconductor plants there.

With the single-minded determination it once focused on ideological crusades, the government has embarked on a crash program to develop a world-class semiconductor industry, using tax breaks, free land and other incentives to attract foreign companies and know-how.

Though primitive by the standards of the United States, Japan or Taiwan, Chinese chip making has taken a big step in the last few years.

A recent report by the U.S. General Accounting Office said several of China's factories, using foreign capital and technology, are one "generation" or less behind the world's leading semiconductor makers. Chip technology undergoes a significant advance, entering a new generation, every two years.

Chinese leaders are counting on foreign technology experts such as Chang to help them make the next leap.

Under tight security in a cavernous building in Shanghai's Pudong district, employees of Chang's Semiconductor Manufacturing International Corp. work in sterile "clean rooms," producing silicon chips with circuits as narrow as 0.18 micron, barely one-thousandth the diameter of a human hair.

The factory, among the most advanced in China, makes semiconductors for companies in Japan, the U.S. and Europe. The chips are packaged and sold under those firms' brand names and delivered to customers in China, which put them in a variety of electronic products.

"Because of our proximity, it is easy for us to penetrate the China market," said Chang, a 53-year-old engineer who is the company's president and chief executive. "We are not the price leader, but we offer better services in China. And performance-wise, we are first-rate."

China produced $900 million worth of semiconductors in 2000, compared with $11 billion for Taiwan. But it is not only in volume that China lags behind the industry leaders. Sophisticated factories such as Chang's are rare. Nearly all the chips made here are of the rudimentary kind used in microwave ovens and televisions -- "trailing-edge" technology, as it is known in the industry.

China does not make enough even of these comparatively primitive chips to meet the demands of its factories, whose consumption of semiconductors is growing 30% a year. The country imports 85% of its chips.

"Semiconductors are the key to the information technology industry," said Yu Zhongyu, president of the China Semiconductor Industry Assn. "If we want to develop further, we need to have this skill."

Five-Year Plan

Just a few years ago, China's prospects in this high-tech realm seemed poor.

The United States restricted Chinese access to the most advanced American semiconductor technology out of concern that it might be put to military use. Air and water pollution made it hard to create the sterile environment needed for chip manufacturing. Skilled technicians and managers were in short supply, a legacy of the late-1960s Cultural Revolution and its purges of intellectuals.

China also lacked the necessary investment capital. Building a semiconductor factory, or "fab," involves huge start-up costs -- more than $1 billion in equipment alone.

To develop a globally competitive industry, China needed foreign capital and talent. In 1995, the government set out to get both with Project 909, a five-year plan with ambitious goals for building chip plants and developing technical expertise.

China lowered barriers to foreign investment and set up high-tech zones offering free land and tax holidays. To encourage Chinese factories to use chips made in China, the government imposed a 17% tax on imported semiconductors and charged just 3% for those produced domestically.

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