Growing a high-tech business in China
08/01/2003
By David Huang, Agilent Technologies Inc., Taipei, Taiwan
As the rest of the world continues to stagnate, the semiconductor industry in China is not standing still. With double-digit economic growth last year, electronics manufacturing in China is booming as high-tech companies pour investment into ventures all along the value chain. While investments into China from foreign sources continue to increase at rates >50%/yr, many Western companies are scrambling to establish footholds in China and are finding it takes a lot more than money to grow a high-tech business there. It's the long-term commitment to the welfare of the industrial growth that counts. In many ways, it requires a strategic blueprint.
 The Watch Tower of the Forbidden City, Beijing. Photo courtesy of Agilent Technologies |
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China represents one of the last low-cost manufacturing areas in the world. While electronics manufacturing has continued to migrate to lower-cost areas in the world (e.g., Thailand, Malaysia, and Mexico), the movement to China has been especially swift and broad, encompassing large numbers of manufacturers from every region and across the entire supply chain. A typical week will see several new announcements of companies planning to start up their operation in China — and the reasons are many.
Considerations for a growing industry
In a 2002 study, Prismark Partners concluded that there are five primary considerations for growing a successful electronics industry: a good supply of low-cost and motivated labor; the right mix of skills available in the location; a large or growing market with good distribution capabilities; trade and financial centers to provide entrepreneurial opportunities; and a favorable political climate. While many developing countries can provide all of these factors to some degree, China is uniquely strong in all five. In particular, many fine Chinese universities have been turning out well-qualified engineering graduates for a long time, creating a skilled talent pool that anticipates creating a better life through technology. And governmental policies of the last decade have definitely favored investment and development.
The potential market for semiconductors in China is staggeringly large. Electronics executives can be forgiven for their enthusiasm as they contemplate 1.3 billion people, each with a cell phone, a PC, and a CD player. Some have predicted that China will grow to about half the size of the huge Japanese market for electronics within three years. And only about one of every four chips currently used in China is produced in China. Such a large local semiconductor market begs for local production with a completely local supply chain.
Although Chinese semiconductor producers are starting behind their foreign competition, giants such as TSMC and UMC of Taiwan have been hampered until recently by self-imposed limits on expansion into the mainland. This has allowed local Chinese companies to gain a foothold in their own market that may be difficult to dislodge. The jobs created by this domestic build-up will provide a higher standard of living, and therefore drive demand for more electronics products. This demand-supply engine will help drive the dramatic growth expected from the Chinese economy.
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The only potential difficulty is the lack of certain local expertise, particularly experienced management, certain specialized IC designers, and process- and application-engineering expertise. The universities can churn out the raw engineering talent, but management and applications experience has to be developed slowly and is likely to correct itself only by the passage of time.
These bottlenecks are areas where foreign companies can help. By supplying some engineering talent, supplemented with liberal amounts of management and applications expertise to jump-start the local companies, foreign companies can guide the development of Chinese managers and applications specialists. In this way, both foreign and Chinese companies benefit from a collaborative and cooperative spirit to solve a difficult problem. The advantage to the Chinese company is obvious, but what about to the foreign company? Most companies cite access to the huge marketplace as reason enough, but that is a shortsighted strategy. As more production is locally owned, the share available for the foreign company decreases, so clearly, another approach is desirable.
Industry milestones
Several companies are going beyond simply setting up sales offices and factories in China to provide their products to the Chinese marketplace. Applied Materials, for example, donated $1 million in R&D funds to Chinese universities between 1994 and 1999 to develop local expertise in Applied's market. Synopsys donated tools to the High Technology Research and Development Center and has entered into cooperative agreements with the Chinese Academy of Sciences to build local expertise in the design of system-on-a-chip (SoC) components and to encourage the development of chip design incubators. In 1998, Intel announced $50M in funding over five years for a research center in Beijing in which it aimed to assemble a world-class team of Chinese researchers. Motorola has also formed R&D organizations employing Chinese researchers, the Motorola China Research & Development Institute and the DigitalDNA-China Labs, as have many other major companies.
While some companies are just beginning to enter the Chinese market, Agilent Technologies (formerly as Hewlett-Packard) took a longer path. Bill Hewlett and Dave Packard, co-founders of HP, made the early decision to enter the Chinese market after a visit there in 1979. In 1985, the first high-tech joint venture in China, China-Hewlett-Packard, opened for business. Since that time, Agilent has completed a series of projects to develop a larger presence in the Chinese electronics industry, including the Shanghai Analytical Products Co., the China Software Design Center, and Agilent Technologies (Shanghai). Agilent has gradually expanded to five regional sales offices in China.
In Beijing in 2000, the company opened a branch of Agilent Labs — the basic research engine for its product divisions — employing exclusively Chinese researchers in one of only four such labs worldwide. Recently, further investments in China Communications Operation — a testing lab designed to create strong local R&D resources and product development capabilities to serve China's growing wireline and wireless communications industry — were brought on line. The company has been active in courting the favor of government officials by helping them to achieve national goals.
With the Tenth Five-Year plan (for 2001–2005,) there is now special emphasis on the development of a local Chinese semiconductor industry in seven specific regions. With the success of its customers, Agilent gains further respect within the government and government recognition then leads to further projects. Several recent projects illustrate the way Agilent's China strategy is beginning to contribute greatly to the goals of both China and Agilent:
- The Shanghai Application Development Center (ADC) was established in March 2001 by Agilent, representing a significant investment in Chinese infrastructure for the benefit of both China and the company. ADC's staff of Chinese software professionals were trained in top-ranked Chinese universities and they work to provide applications support for the semiconductor-manufacturing industry, both in China and elsewhere. ADC was recently ranked among the top 10 "Star Enterprises" in software export by the Shanghai government.
- By providing equipment and assistance to ARCA technology, this local Chinese company was able to introduce Arca, the first homegrown CPU, as well as its second-generation version, the Arca-II. The Chinese government had vigorously encouraged the development of a homegrown processor.
- A collaboration with the China Integrated Circuit Design Center (CIDC), a local IC design company, was formed earlier this year to create the first center for design verification and test of SoC devices for IC design houses in Beijing's rapidly growing semiconductor industry. While CIDC is a design house itself, dedicated to providing high-quality IC products in a number of product areas, it is able to offset some of the costs of acquiring test and verification equipment by offering these services to other design houses for a fee. Results are promising so far for accelerating the introduction of new designs into the Chinese market. As the first commercialized semiconductor company in China, CIDC has received positive government attention for its efforts to develop key semiconductor industry infrastructure.
- The School of Microelectronics of Fudan is being established on 74 acres in the Pudong Zhangjiang High-Tech Park in Shanghai. This is a joint effort between Fudan University, one of the premier national universities in China, and Agilent. It will create the first semiconductor academy in East China to foster the necessary skills and talent for the nascent semiconductor industry, a key to sustaining the necessary growth. Agilent provided a testing facility with high-tech equipment, experienced lecturers, and practical training exercises.
- Success has been achieved by hiring the best people in its own organization to provide examples of best practices in management and engineering. The president of Agilent Technologies-China, Hai Su, is so highly regarded in China that he has been named one of the top 10 best managers in the country.
To grow a high-tech business in China is a big undertaking, with the promise of great rewards offset by many risks. Minimizing the risks requires a long-term strategy of laying a sound foundation and building on each success; working with the Chinese government and the nascent private sector; and building relationships with key individuals. Growth in China has been a lengthy process since the foundation was laid, but it is now finding success.
David Huang received his EMBA from National Taiwan University. He is currently VP and GM for the global subcontract manufacturing business operation of the Automated Test Group at Agilent Technologies, 20 Kao Shuang Road, Ping Chen 324, Tao-Yuan, Taiwan; ph 886/3-492-8087, fax 886/3-402-3851, [email protected].