BUSINESSWEEK ONLINE : NOVEMBER 27, 2000 ISSUE
INTERNATIONAL -- ASIAN COVER STORY The Chips Are Up (int'l edition) Shanghai is gunning to become a microprocessor powerhouse Hao Min had plenty of Silicon Valley job offers. After all, the 35-year-old electrical engineer had attended one of China's premier institutions, Fudan University, and done postdoctoral work at Stanford University. Yet in 1998, Hao forsook the U.S. for hometown Shanghai. Why? Because he reckons that, over the next few years, the city will emerge as a global manufacturing and design center for the chips that power PCs and portable devices. Hao is doing double duty to try to make that happen. He holds two jobs: one overseeing the semiconductor lab at his alma mater; the other running Shanghai Hua Hong IC Co., a state-controlled chip-design house. Over the decades, Hao notes, chipmakers chasing lower costs have moved from America to Japan to Taiwan. ''Now,'' he says hopefully, ''they will move to Shanghai.'' BOLD MOVE. China is counting on it. In an effort to take the economy to the next level, Beijing has designated Shanghai as the heart of a 21st century electronics industry that will not only assemble PCs and cell phones but also design them and sell them to the world. The immediate goal is less grandiose: to boost factory capacity so Chinese companies won't have to keep sourcing three-quarters of their chipsets overseas. ''We must do this,'' says Ge Qun, a 24-year-old graduate student involved with an incubator for chip-design startups. ''We must make these chips by ourselves.'' China is now looking to make special application chips for PCs, mobile phones, and a wide array of other products. It's a bold move. While low labor costs give China an edge in PC assembly, the semiconductor industry relies instead on billion-dollar investments in delicate machinery. China's unreliable infrastructure can hinder the operations of a chip plant, which needs to run almost constantly to make money. And even as new Chinese plants gear up to produce 8-inch silicon wafers, Taiwan Semiconductor Manufacturing Co. ( TSM) and others are advancing to 12-inch wafers. ''I don't see China catching up,'' says John-Paul Ho, managing partner of Crimson Ventures Ltd., a Silicon Valley venture-capital firm. China is determined to prove the skeptics wrong. Last year it produced 16.6 billion chips, up 55% over the previous year. Sales grew 51%, to $6.6 billion. Already, the city and the surrounding Yangtze delta are home to some five semiconductor fabrication plants, including joint ventures with the likes of Philips Electronics and NEC ( NIPNY). Local demand for chips is growing as more and more Taiwanese PC makers shift their production to the Shanghai region. And finally, boosters say, the two leading universities, Fudan and Jiaotong, could play a nurturing role similar to the California institutions in Stanford and Berkeley. Eager to woo investment, local officials are doing everything from overseeing plant construction and ensuring quick hookups to power and water to building new access roads. ''The support is excellent,'' says Richard Chang. His Shanghai-based Semiconductor Manufacturing International Corp. (SMIC) plans to open phase one of a $3.3 billion chip foundry in 2001. IBM has announced a $300 million chip factory for Shanghai, while Intel Corp. has broken ground on a $200 million expansion of its current chip-assembly plant. Not all the investment is going into foundries. Since last year, the number of Shanghai chip-design houses has doubled, to 56. A city government-backed incubator called the Shanghai Research Center for Integrated Circuit Design hopes to have 41 tenants by yearend, according to Wang Ye, its director. One of them is Shanghai Fangcun Semiconductor, a startup that designs chips for a mainland company that makes personal digital assistants for schools. BRAIN DRAIN. Foreign design houses are moving to Shanghai to take advantage of wages that are about 80% lower than in the U.S. Newave Technology Co., a Silicon Valley house that creates chips for telecom switches, has shifted all its research and development to Shanghai. The city has ''plenty of talented people,'' says David Chen, Newave's new director of engineering. ''And the market is here.'' Still, there are problems. While Shanghai's two big universities spit out some 1,200 electrical engineering and computer science graduates each year, about half head for the U.S. The tech-worker shortage is so dire that Hao Min of Shanghai Hua Hong is sending staff to night school. Red tape is another headache. The $1.2 billion chip plant opened last year by Shanghai Hua Hong NEC Electronics Co. has trouble importing essential spare parts. ''Customs clearance takes three to five days,'' says Toshio Ohta, an executive vice-president. ''In Japan, it's one hour for urgent needs.'' That means one of Shanghai's largest plants is operating under capacity. Hiccups and headaches aside, Shanghai's push into the semiconductor industry illustrates how quickly China is moving up the global food chain in the electronics industry. Semiconductor makers are making the billion-dollar investments required to put Shanghai at the center of a knowledge-based economy. Who knows? Pretty soon, China may be designing the world's electronic gadgets--from the chips to the plastic boxes they come in. By Bruce Einhorn and Alysha Webb in Shanghai _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Asia's Future (int'l edition) COVER IMAGE: Asia's Tech Future TABLE: The Tech Future Beyond the Lab (int'l edition) CHART: Startup Explosion The Chips Are Up (int'l edition) TABLE: Betting Big Chasing the Dream to Shanghai (int'l edition) Minds over Matter (int'l edition) CHART: Going, Going... A Biotech Hub (int'l edition) CHART: Genetic Express Rewriting the Rules (int'l edition) TABLE: Vietnam's IT Plan INTERACT E-Mail to Business Week Online

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