U.S. laws self-defeating: export laws hinder Chinese business opportunities - News

Electronic News, Nov 11, 2002 by Jeff Chappell

The ailing U.S. semiconductor industry may be salivating over the prospect of huge Chinese markets, but the biggest impediment to accessing those markets may be the U.S. government.

And while the industry worries about China creating a capacity bubble, China still has a long road to travel to become a technological superpower and is more worried about reducing its foreign trade deficit than dominating the world.

The sale of advanced technology to China has been a concern of the U.S. government and was one point of contention to China's accession to the World Trade Organization (WTO). U.S. export laws make it difficult and in some cases outright prohibit export of advanced technology to China. This is obviously an impediment to the semiconductor industry, in particular the purveyors of equipment and process technology, to doing business in China, noted George Koo, director of the Chinese services group at Deloitte & Touche.

Koo was one of three speakers discussing business in China at a forum hosted by Semiconductor Equipment and Materials International (SEMI) last week in San Jose.

In spite of the United States' reluctance to export advanced technology to China, Europe and Japan have no such qualms. Even as the market for used, older-generation equipment and technology blossoms in Japan, advanced technology is making its way there via these channels, albeit not as fast as it is being adopted elsewhere in the world.

"Today we are capable of producing 0.15-micron photomasks," said Samuel Wang, president of Semiconductor Manufacturing International Corp.'s (SMIC) U.S. subsidiary. SMIC, China's largest pure-play foundry, is qualifying its 0.15-micron process and expects to start producing chips with 0.15-micron features in volume production by the end of Q1 next year.

Of the various fab projects it has in the works, SMIC expects to have a production volume 200mm fab with 035-to 0.15-micron technology capability coming on-line next year as well as a 300mm demonstration fab with 0.15-micron capability.

Granted, the bulk of capacity coming on-line in China in the near-term is older-generation technology. But the obvious conclusion to be drawn-one that Koo hinted at-is that the United States is only hurting itself with it's contentious Chinese export laws.

Whether China produces a capacity bubble remains to be seen, but SEMI's speakers don't believe it is likely. Chinese leaders aren't so much interested in dominating the world as in reducing its enormous trade deficit and developing an economy that can support its 1.3 billion people. "They don't have time to think about conquering other countries," Koo said.

While the Chinese market for chips already is measured in multi-billions of dollars, China now only produces 10 percent of the chips and components it consumes domestically in electronic products. The government wants to reduce that gap.

"They're not interested in politics. They just want to grow the economy," agreed Yih Neng Lee, VP and general manager of Agi-lent Technologies Inc.'s worldwide fabless design business. The stated goal of the Chinese government is to grow the domestic economy by 7 percent a year.

China's potential to become a technological superpower is often compared to that of Japan. But unlike Japan, China welcomes and openly seeks foreign investment, the speakers said. Tax holidays for business investment is common. Typically, a foreign company in China will pay no taxes for its first five years of operation, and then pay only 50 percent of the normal tax rate for the next five years. "That's why you see the rush into China for manufacturing," Lee said.

Entry into the WTO is something China actively sought for years to help lure foreign investment, and China realizes it has to abide by international rules to be an international business player, Koo said.

"With the removal of some of the tariff barriers and with the strong economy .. more companies are thinking about being there, thinking about the markets and thinking about the manufacturing," Koo said.

But while the industry may be salivating over the huge potential Chinese market, it is a market that is going to come about gradually, Lee said. Compared to the United States it still has a long way to go; expansion of Chinese markets will be gradual, not explosive, he said. Last year the Unnited States spent $233 billion on electronics R&D vs. China's $11 billion, he explained. Meanwhile, U.S.-produced high-tech products totaled $71.2 billion compared to China's $2.9 billion. PC ownership and Internet access still hovers around only 2 percent among the Chinese population, Lee added.