Experience and expectations when investing in Western China
08/01/2001
Henry Leung, ON Semiconductor, Phoenix, Arizona
overview
Semiconductor manufacturer ON Semiconductor learned from its business relations with China's Leshan Radio and established a facility in China's Chengdu-Leshan area. This relationship has resulted in local government's sharing in the enthusiasm for a manufacturing facility, often going the extra mile necessary to smooth the path.
When you look at the future of Western China, our case-study experience is not "a China investment horror story." Instead, with more than six years of manufacturing electronic chips in Western China, we are overwhelmingly positive.
Clearly, we can analyze that experience and draw some lessons for those who want to follow our example and for the Chinese companies and local governments with which they will be working.
At ON Semiconductor, we design and manufacture ICs for use in power management and broadband. We are the second largest manufacturer in the world of power management chips, and we are among the top five producers of broadband chips.
Our power management products are used primarily in electronic controls, communications systems, computers, and consumer products and, of course, the all-pervasive Internet. Our broadband products play a vital role in telecommunications infrastructure and networking systems. They are also an essential building block of the Internet.
In 2000, we shipped 25 billion units globally, worth more than US$2 billion. We didn't think that was bad for a company that is about to celebrate its second anniversary. Of course, ON Semiconductor was formerly the Semiconductor Components Group of Motorola, beginning as an independent company in August 1999.
Leshan-Phoenix Semiconductor
Initially, Motorola owned 55% of Leshan-Phoenix Semiconductor Company Ltd., our manufacturing entity in Sichuan. The balance was held by our local joint venture partner Leshan Radio Company. Following the creation of ON Semiconductor, the equity participation was rearranged so that today ON Semiconductor holds 51% of Leshan-Phoenix and Leshan Radio holds 39%, with Motorola retaining a 10% interest.
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Leshan-Phoenix Semiconductor started life in March 1995. It was Motorola's first joint venture in China and has an approved total investment of about US$280 million. It makes surface-mount chips that are used mainly in wireless communication products such as pagers and mobile phones.
One of the largest foreign investment enterprises in Sichuan Province, Leshan-Phoenix has been the largest joint venture electronics exporter in the province since 1997.
Leshan-Phoenix employs 1600 people, almost all of them local Chinese. In fact, only four are expatriates, and they are the team from our plant in Malaysia who led the joint venture. Most of the employees are involved in production, but we also have people working in process and equipment engineering, manufacturing, quality control, and administration.
Leshan Radio
While we at ON Semiconductor are enthusiastic supporters of the Chinese government's Go West policy, it had not been formulated in 1995. The decision to go to Sichuan was taken solely on the merits of the proposal before us, at a time when the coastal provinces were the main focus of foreign investment.
What prompted us to buck the trend of the time and go west? The critical factor was the quality of our local joint venture partner. We had talked to about eight possible partners in all parts of the country, but none impressed us as much as Leshan Radio. Here was a company that had already established itself as a leading domestic producer of small signal discrete semiconductors. It ranked 164th among the 500 largest national enterprises producing electronic communication equipment.
In addition, Leshan Radio had also won many awards, including being named one of Sichuan Province's advanced export-oriented enterprises in 1993.
Back when we started, all this looked good. There was a clear synergy with our products, and there was no doubt that the company had the necessary resources. But there was more to it than that. No matter how good the objective fit may be, a successful joint venture depends on subjective factors:
- Does management really understand our objectives and priorities or are they just telling us what they think we want to hear?
- Is the work force genuinely motivated or are they just going through the motions?
- Do we have sincere commitment from local and regional governments or are we going to run into unexpected tax or regulatory problems as soon as the business begins to look good?
Leshan-Phoenix came into being because we were able to put these doubts behind us. We were particularly impressed by the quality of Leshan Radio's management under the leadership of its president, Pan Minzhi. They were hard-nosed yet imaginative; focused, but not averse to business risk. Above all, what impressed us was their openness.
Unusually for the Chinese cultural environment, they were willing to speak their mind, give as good as they got, tell us when they thought we were wrong, yet accept good ideas even when they ran counter to what the company had done before. The situation was similar with the work force.
Local talent
The Chengdu-Leshan area in China has 17 universities and 11 technical colleges, producing 69,000 graduates each year. Leshan alone has 38 high schools graduating 5900 students a year.
For us, there was no doubt that we would have access to a considerable talent pool both at the level of technically competent engineers and at the level of well-educated production-line staff.
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Again, though, it is the subjective factors that count. We intended to introduce some radical employment policies at Leshan-Phoenix — radical for Sichuan, at least. For example, remuneration would be linked to productivity. The preventive maintenance team would be required to work shifts around-the-clock, seven days a week. Every new hire would be required to spend three weeks in the classroom and 10 weeks undergoing on-the-job training. We would also require them to achieve product quality equal to, or better than, world norms.
Would these high expectations alarm or excite our potential employees? To our delight, we found great enthusiasm for our ideas. Their flexibility, their willingness to listen to ideas and try them out, and their commitment to corporate goals went way beyond our expectation.
We also found that we had ready partners in the Leshan municipal authorities and in the Sichuan provincial government. The city proved very amenable to our requirements for services and utilities. At the provincial level, we found more of the openness that had impressed us at Leshan Radio. The officials' willingness to face problems head-on was refreshing. What's more, they have been notably cooperative and supportive of the venture at all stages of its development.
Some rough water
While our overall experience has been a success story, it has not all been calm sailing. For example, we did encounter problems with electricity supply, which is often a problem in China. A high-technology plant like ours is absolutely dependent on a reliable source of power, but the Leshan supply was just not up to the job.
Here, we sat down with municipal authorities and talked through the issues. They were understanding and agreed to upgrade the sub-station for our factory, which proved more reliable.
Another problem we faced was in the area of transportation. More than five years ago, it took nearly four hours to travel the 100 miles between Chengdu and Leshan. This delayed shipments and threatened our delivery reliability.
The government advised us that they were building a new three-lane highway and would also build a short cut so that we would have easy access to the plant. The highway was completed in December 1999, and now the detour makes a big difference. The travel time has now been cut to a reliable 1 hr, 15 min.
The ON Semi Road, a shortcut connecting Leshan city with our Leshan-Phoenix factory, was inaugurated in March this year. It facilitates goods and employee access to our plant without having to navigate through a busy market.
What about the future?
It is obvious from the above that ON Semiconductor views Leshan-Phoenix as an important corporate asset. We have been expanding capacity at the plant over the past few years. We are currently in phase three, which began in 2000 and is due for completion in 2003.
In March this year, we announced plans for adding US$100 million to build a six-inch wafer fabrication plant at Leshan-Phoenix. The new investment makes ON Semiconductor the first US company to engage in six-inch analog IC production in Western China.
Leshan-Phoenix is one of our key manufacturing plants worldwide. Its output increased 100% from 1999 to 2000. This plant is critical to ON Semiconductor's China strategy: to become a fully integrated semiconductor manufacturing company, from design to manufacturing to sales and marketing.
From the beginning, we have insisted that Leshan-Phoenix must achieve high quality in addition to high productivity and profitability. We were not willing to accept any trade-off between the two. Indeed, our corporate motto is "We will never sacrifice quality."
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We obtained ISO 9002 certification in September 1996. Two years later we stepped up to QS9000, a superset of ISO 9000 that incorporates more stringent requirements defined by the US automobile industry. We have also achieved six-sigma status. This is a key measure of quality in the electronics industry and allows for a maximum of 3.4 defects/million transactions. We have surpassed that standard, however, with zero customer incidents for 36 months.
We are acutely aware that these facts and figures and our experience in Leshan have been very different from that of other foreign investors in China. It seems almost impossible that we could have achieved so much when the average success rate of joint ventures in China is approximately 10%.
Of course, our joint venture was guided by a strong team of expatriates who led by example. I am convinced that this is one of the key reasons for its success. They were prepared to challenge the status quo, and they genuinely earned the respect of the local people.
So the lesson is?
I think it is important to distill what we have learned — the various threads of our experience — into a series of recommendations that may help other multinationals to achieve similar success:
- Define your objectives. In our case, we were expanding our global manufacturing locations. We not only found China to be low cost but were lucky to find a pool of highly talented people who would be able to support our mission of building a world-class plant. This was ideal to serve the international market.
- Select an appropriate local partner. Don't rush it. This is probably the most serious decision of all. If the joint venture works, you are going to have a long-term relationship with your Chinese partner. You must be confident of their ability and commitment. Are they a fit with your way of doing things? This is all-important.
- Talk to local and provincial governments. Try to assess their sincerity. Almost all officials will sound good on the general issues. The key test is how they respond to specific demands? Are they flexible or set in their ways?
- Explore the local supply situation. Are there quality suppliers within reach of the proposed plant or are you going to have to look for components all over China? Encourage partners in your supplier chain to build factories in the vicinity.
- Look at labor and education. Do you have access to a sufficient pool of quality people? Are they the kind of people who will respond to the challenge of working to multinational standards?
- Pay attention to details. Inadequate water, power or transportation can hold you back at best. At worst, they can be make-or-break. Look for concrete assurances, not vague promises.
- Finally, trust is very important if you are to achieve a common goal. In our case we wanted Leshan-Phoenix to be a world-class facility in terms of quality and cost. To do this, it was essential to build the confidence and understanding of our local partner.
So, try your best to work on the gray areas. If you have lingering doubts, they are probably justified. To local companies looking to enter into joint ventures with overseas investors, our advice is:
- Do your homework. I don't just mean researching how multinationals operate and what they expect. You have to try and break out of specific Chinese mindsets and understand the way other people think. They will be doing the same, I assure you. They will do their best to meet you halfway. But in a joint venture, both sides — not just one — need to compromise.
- Cement your government relationships. You must be able to show your overseas partner that you can open the right doors when necessary.
- Dedicate a senior executive team to the partnership. Some or all of them should be prepared to make the transition into management of the joint venture at a high level.
The message for locals
Local and provincial governments must note that many foreign companies have had a bad experience investing in China. They go home and tell tales of woe. Other companies hear these stories. They become cautious and suspicious.
To overcome such doubts and fears, local and provincial governments must be open and sincere. Tell them what you can do to help them. But also be open about what you cannot do, even if you find this embarrassing.
Above all, make everything clear to them from the start. Don't attract them with promises, then change your mind, or make new demands. Treat your foreign investors as genuine partners in the development goals of the region, not as cash cows that you can milk indefinitely for tax dollars.
Conclusion
ON Semiconductor is delighted by the success of its joint venture in Western China. We found in Leshan Radio a local partner with a drive and a commitment to quality that matched our own. In Sichuan Province and Leshan City, we found governments that shared our enthusiasm and went the extra mile to smooth our path. We found in the people of Sichuan an excitement and a flexibility that bodes well for their future and ours.
I cannot guarantee that any multinational following our example will be as fortunate — but it sure worked for us.
Henry Leung received his BS in telecommunication engineering from Essex University in the UK. Leung is president of Asia Pacific for ON Semiconductor, 18/F, Tower II, Grand Central Plaza, 138 Shatin Rural Committee Road, Shatin, Hong Kong; ph 852/2689-0038, fax 852/2661-0793, [email protected].