Solving The Chinese Puzzle

Electronic News, August 20, 2001 by Steven Fyffe

Western semiconductor companies trying to hitch a ride on China's red star on the rise face a crisis, in the Chinese sense of the word. The Chinese symbol for crisis is made up of two characters: "wei," which means danger, and "ji," which means opportunity.

Two of the biggest opportunities appear to be in the wireless and manufacturing branches of the electronics industry. "China will be the biggest market for cellular base stations by 2004, and probably the biggest market for handsets next year," said Will Strauss, president of Forward Concepts of Tempe, Ariz.

Projections like that are fuelling massive foreign investment in China.

"China is very quick to embrace anyone that can bring technology to the country," Strauss said. "But that can be a one-way street. They don't care if you get anything back."

Integrated Silicon Solution Inc. (ISSI) is familiar with both the promise and the potential problems China can pose to outside investors. The Santa Clara, Calif.-based memory maker recently invested $40 million in a foundry start-up venture in Shanghai called Semiconductor Manufacturing International Corp. (SMIC). SMIC is building a minicity complex, including apartments, a small shopping center and a school, around the fab in an attempt to attract senior foreign workers.

"It's an incredible undertaking, but it reflects the difficulty of recruiting on an international basis because housing there is a few generations behind, even in Taiwan," said Gary Fischer, president and CEO of ISSI.

Even before issues such as that arise, there is the initial challenge of getting into China and setting up shop in the first place. It is important to have an insider to help in the process, Fischer said-someone who has spent years cultivating "guanxi" (or close relationships) with key administrative and business officials. For ISSI, that person was Shanghai native Henry Pu, vice president of quality assurance.

Another way to get into China is to partner with a Taiwanese company looking to expand its business to the mainland, according to Taiwan-born Bing Yeh, president and chief executive officer of Silicon Storage Technology Inc. (SST), of Sunnyvale, Calif. "For western companies that want to do business in China, the best way is to go through a Taiwanese company," Yeh said.

However, adding a presence in China is not necessarily the most difficult part of the business equation. Trying to subtract cash from the country can cause multiple headaches, according to Jim Li, executive vice president of San Jose-based IC Media Corp.

"People there are eager to do business," Li said. "They would like to set up the distribution channels, but the problem always comes when it is time to collect your money. You cannot simply get the money out of the country. The government controls all the foreign reserves, and they don't want individual people or businesses to have any control of that."

That problem will probably lessen if, as expected, China is admitted to the World Trade Organization (WTO), Yeh said. "Once they become part of the WTO, they have no choice but to open up or they will not be successful," Yeh said.

Western companies striving to solve the Chinese puzzle need to consider many different pieces. But if the Chinese linguists are correct, all danger comes with its share of opportunity. The greater the danger, the greater the opportunity.