A Future in high-tech: opening a computer chip plant in China teaches many lessons. Ask Richard Chang - Regional Report

Chief Executive, The, August-Sept, 2003 by Rebecca Fannin

The busy Huangpu River in Shanghai serves as a delineation point for this bustling city of 14 million people. On one bank is the Band and its long boulevard of buildings with European architecture from the colonial era. On the other is The Grand Hyatt, a silver sheen that is the world's tallest hotel, the landmark Pearl of the Orient TV Tower and high-rise apartment buildings. This is the Pudong zone. Heading further east, construction cranes, honking cabs and careening bicycles are everywhere before the landscape opens up to marshy plains and canals, and farther out, numerous high-tech industrial parks.

One of the larger high-tech parks in Pudong is Zhangjiang. Here, glistening new semiconductor plants have begun producing chips for computers, cell phones and consumer electronic products. Zhangjiang is being compared more and more to Taiwan's acclaimed Hsinchu Science-Based Industrial Park, as China's fledgling semiconductor business attempts to emerge as a rival to Taiwan.

A sign at the gate of one such plant, Semiconductor Manufacturing Industrial Corp. (SMIC), reflects this burning ambition. Big, bold letters spell out in English, "We're Your Foundry in China."

In the executive suite, CEO Richard Chang, whose family fled the mainland for Taiwan when he was a child, shuffles around in sneakers meant only to be worn inside the buildings.

Chang brings 20 years of experience in developing and operating semiconductor foundries worldwide. Yet he's surprisingly humble and gracious as he describes a business strategy for S-MIC. The business plan could just as well have come from Silicon Valley in its heyday: Start with a vision for transforming a marketplace, expand rapidly and capture market share, become profitable, go public, pay off investors with large returns and reward the employees who own stock.

The scale of this project is one major difference. SMIC has financial backing of $1.5 billion from foreign investors, including Goldman Sachs, Toshiba and several venture capital firms in Asia and the U.S. "When Richard came to us, he had a piece of land, a dream, a vision and a commitment by the Chinese government to turn Zhangjiang into a science park because they had seen what semiconductors had clone for Taiwan," says David Chao, Hong Kong-based vice president at Goldman Sachs, the lead investor in SMIC.

Chao says Goldman "got comfortable" with the deal after eight to 10 months of due diligence, which proved the need for more advanced chipmakers in China. Chang's back ground, including experience building foundries worldwide for Texas Instruments and the successful sale of his own Taiwanese chip-making startup for $515 million in 1999, were also major factors. Chao says that once SMIC goes public, Goldman Sachs expects to earn a return that is double its $50 million investment.

Chang, a devout Christian who says he sought God's blessing for this project, is working all his waking- hours except Sunday morning. This is the first time he's been involved in setting up a chip plant in China and he admits that it's been a lot harder than he could have imagined.

One hiccup occurred when customs officials held up the arrival of his chip-making equipment for several weeks.

But the most difficult challenge he's laced, he says, is training SMIC's 3,100 employees, who have been recruited mostly from China. Chang says he has been forced to hire more overseas engineers--up from 400 originally to 850 today--to make up for shortcomings among local hires. One issue is their skills, but another is their attitude toward work. The task of the overseas staff is not only to design the latest chips but also for each of them to train two young Chinese engineers. The mainlanders get lessons in technical skills and what Chang regards as a must: character-building exercises meant to inspire teamwork, ethical behavior and creativity. Chang says SMIC "is overcoming the challenges one by one."

The first of Chang's two chipmaking plants in Zhangjiang was constructed in a record 13 months and was cranking out the tiny integrated circuits by September 2001. A second foundry began operating three months later, and in September 2002, the company cleared ground for another plant in Beijing. Last year, SMIC had $80 million in revenues and is aiming for revenues of $360 million this year.

SMIC needs to reach break-even, which Chang predicts will happen this year despite weak worldwide demand for semiconductors. But the going could actually get tougher in one key respect: Competition has been slim. Of some 30 foundries in China today, only four use advanced technology, and SMIC has two of those foundries. Motorola and NEC have the remaining two.

But by 2005, Chang expects to see at least 10 more advanced foundries, driven in part by the arrival of the major Taiwanese chipmakers starting later this year. That could alter the dynamics of the market, throwing a another potential curveball at SMIC. "Doing business in Chiua, if you do it right, is very profitable," says Chang. "But it requires patience, trust, time, training, government support--and many lessons."