Aiming to be a big attraction: Changjiang Delta
02/01/2003
By Arthur Xu, Consultant, Ningbo, China
China's large potential semiconductor industry market, along with increasingly favorable governmental policies, has attracted many foreign enterprises to the country. A majority of investments are in the Changjiang Delta, an area including and surrounding Shanghai, because of low labor costs, good location, and helpful local governments.
Local focus
In 2000, the State Council issued Document #18, a policy to encourage the software and IC industries, which stimulated semiconductor industry investment in China and was partially responsible for its rapid growth. Key elements of Document No. 18 are listed in the "Summary of Document #18 provisions." However, local governments, attempting to attract investment to specific geographic areas, provide added incentives. Besides favorable tax treatment, local entities discount interest loans, provide free land use, add to investments with local funds, and ensure infrastructure support.
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For example, the Beijing government's key policies for the IC industry are land use, capital, and discounted loans. The Beijing government provides road, water, drainage, electricity, telecommunications, gas, heat, and land to the IC enterprises, for a 30-year period. The company, however, is not allowed to use the land for other purposes, nor can it transfer ownership or its mortgage.
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The Beijing government will also infuse capital to IC enterprises that meet certain requirements. For example, an infusion of 15% of the registered capital into qualifying enterprises can be made by the government, yet the government will not have voting power on management, nor will the government join in profit sharing.
For the construction of wafer fabs, the Beijing government gives a 1.5–2% discount on the interest during the construction period for a time not to exceed three years. Beijing follows the central government's policy with respect to value-added tax and tariffs. For projects with 8 billion RMB of investment capital or for 0.25µm technology projects, the Beijing government has a "5 exempt, 5 half policy" (i.e., for the first 5 years of profit, an enterprise does not have to pay income tax to the government, for the next 5 years, it only has to pay half of the income tax it would normally owe, and the income tax rate will be set at 15%).
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Projects that cannot meet the above requirements, or those that are foreign-capital-invested hi-tech enterprises, or, if the total investment reaches US$30 million, can get a "2 exempt, 3 half" policy, with government approval, and the income tax rate will be set at 15%.
The Shanghai government's key policies on encouraging the IC industry include: providing a loan with a 1% discount; helping IC manufacturers to get listed in the stock markets; free customs duty and free importation value-added tax for the raw materials and consumables used for the company's own production; and quick and convenient customs services (e.g., a special import/.export window for IC manufacturers in the customs area).
For semiconductor design companies, the Shanghai government offers set-up services for IP libraries, and provides technical design support. There is also no income tax for a company's overseas IP and technology transfers to domestic design companies.
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The Changjiang Delta: A good investment
The Changjiang Delta area generally includes the following cities: Nanjing, Suzhou, Wuxi, Changzhou, Yangzhou, Zhenjiang, Nantong, Taizhou in the Jiangsu province, Hangzhou, Ningbo, Huzhou, Jiaxing, Shaoxing, Zhoushan of the Zhejiang province, and Shanghai — 15 cities in all. Among these, Shanghai, Suzhou, Wuxi, and Ningbo (see map) have attracted most of the semiconductor industry investment.
According to the China Center of Information Industry Development (CCID) statistics, in 1H02 the Changjiang Delta produced 63.7% of total IC output, or 1.83 billion units, and even more capital is pouring into the area. Among the investments are 8-in. wafer fabs such as SMIC, GSMC, Belling, ASMC, and packaging plants such as, Intel, ACE, National Semiconductor, Amkor, VIA, and Philips. More wafer fabs are in the planning stage: TSMC, UMC, and other companies may set up fabs in the Changjiang Delta (Table 1).
In the 1990s, China established industrial parks nationwide with favorable policies to attract businesses. The Chinese market has a huge potential for growth because of the large gap between China's IC market demand and internal supply (see "China supplies <13% of ICs").
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Many semiconductor plants are located in industrial parks in the Changjiang Delta (Table 2). SMIC and GSMC set up 8-in. lines in the Shanghai Zhangjiang Hi-Tech Park — the most famous industrial park in China. By November 2002, this park was home to three wafer-manufacturing plants, seven maskmaking and assembly companies, 25 IC design companies, as well as companies providing a support infrastructure. By the end of 2001, the capital introduced to the Zhangjiang Hi-Tech Park had already reached US$6.2 billion with about $US5.3 billion coming from overseas (Table 3).
Another reason to invest in the Changjiang Delta is the low cost of labor. China's labor cost is only 1/10 that of developed countries (Table 4). For an operator, the basic salary is normally <1000 RMB (US$120). Adding taxes and other fees a company has to pay for the employee (about 40% of the basic salary), the total salary is still less than 1500 RMB/month. If a company hires 500 operators, it can save labor costs of about US$500,000 just on the salary difference.
The delta is a concentrated area of scientific talent. In Shanghai, there are about 50 universities, and more than 1300 scientific research institutes. Every year the city provides 100,000 college graduates.
According to a Taiwanese report, the 10 Chinese cities with the best investment conditions are Wujiang, Ningbo, Hangzhou, Kunshan, Fenghua, Shanghai, Wuxi, Suzhou, Zhenjiang, and Wenzhou — all located in the Changjiang Delta [1]. Other organizations have done surveys on investment conditions, and nearly every one indicated that the Changjiang Delta is the best place for investing.
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The Changjiang Delta is also in a good geographical location. To the east is Japan, to the northeast is Korea, to the South are Taiwan, Singapore, etc. Travel and transportation are very convenient for overseas companies, too. Generally, a traveler from Japan or South Korea can arrive at most of the industrial parks within half a day. In the eastern end of the delta area is the Changjiang River with the ports of Shanghai, Ningbo, Nanjing, Zapu, Zhoushan, Zhenjiang, and Nantong — the largest harbor cluster in China.
While favorable tax policies are very attractive, they are also available in other regions of China, but the local governments in the Changjiang Delta additionally provide comprehensive services to companies. In Kunshan, for example, a service center will assist foreign management or professionals having difficulties such as seeing a doctor, going to school, taking a trip, and so forth.
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The Changjiang Delta is also a region regarded as having very good credit and legal environments. The government's work is relatively transparent. For example, the industrial parks will tell investors up front all the costs to set up a company, i.e., how many procedures will have to be followed, how much electricity, water, telephone, and other utilities will cost, etc. In the Wuxi New Area, assistance in doing paperwork is provided to new companies. To attract investments, many industrial parks have reduced the charge to the lowest rate. The Wuxi "New Zone" is an example: it only charges four kinds of fees, which are decided by the state. There are no other charges, so Wuxi calls itself the "zero charge area."
Conclusion
China's central and local governments have made investing and doing business in China attractive to foreign investors. The goal is unprecedented economic growth with a special emphasis on high-tech. While policies have been implemented throughout the country, the Changjiang Delta region is particularly well positioned to take full advantage of the potential for growth, and has attracted a major share of semiconductor industry investments.
Reference
1. 2001 Survey on Mainland China's Investment Environment and Risk, issued by TEEMA, the Taiwan Electrical & Electronics Manufacturers Association.
Arthur Xu wrote this as an independent consultant before accepting a position as marketing manager with Sinomos Semiconductor (Ningbo) Inc. He has held positions at China Huajing Electronics Group Corp., Lucent Technologies Expert Office Wuxi, Wuxi CSMC-HJ Co. Ltd., and Japan M. Y. Corp., Shanghai office. He can be reached at [email protected].