The rewards of a direct Subsidiary in the peoples republic of China
11/01/1996
The rewards of a direct subsidiary in the People`s Republic of China
Peter Hanley, Novellus Systems, San Jose, California
Matthew Chan, Novellus Asia, Singapore
In the formative years of the semiconductor industry, few would have predicted that the Asia/Pacific region would one day become the largest equipment market in the world. By the end of the decade, such a prediction will be a reality. Semiconductor industry growth is being fueled by productivity, and paced by its expansion of manufacturing capacity. Around the world, new fabrication plants are being constructed every month to the tune of billions of dollars, and the Asia/Pacific region represents one of the most exciting opportunities in the industry.
For this reason, companies such as Novellus are focusing more of their globalization efforts in Asia, making major investments to expand support infrastructure in this region. An important part of this strategy is the establishment of a strong position in the People`s Republic of China (PRC) in anticipation of large market growth in the next few years. A direct subsidiary provides customers with rapid installation and start-up, high-production availability, and 24-hour support comparable to subsidiaries in other parts of the world.
The Asia/Pacific market is expected to grow significantly in 1996, with the PRC emerging as a major market by the end of the decade. In fact, the PRC`s electronics industry experienced tremendous growth between 1978, when its doors first opened to foreign technology, and the beginning of its ninth Five Year Plan (1995), which has led to the first wholly owned subsidiaries. Data from the Ministry of Electronics Industry (MEI) shows that the PRC produced $320 million in semiconductors last year (Fig. 1), representing more than a 100 percent increase over the country`s 1994 output, yet $1.4 billion were imported to support production of computers and advanced applications in the region. SEMI predicts that the PRC`s production will jump to $700 million in ICs by the year 2000, but notes that this still represents a $2 billion IC shortfall. To meet these goals, the PRC must continue to modernize and attract investments from foreign semiconductor manufacturers.
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Figure 1. IC output in the PRC.
Responding to the PRC`s ongoing industrial modernization efforts and global chip manufacturers` increased commitments to build new production sites in this region, Novellus accelerated its schedule to go directly into China beginning in 1995. Operating through the traditional agent relationship over a six-year period, Novellus not only identified Shanghai as an ideal city for direct operations, it also began to develop relationships with the PRC government and exceeded its goals for customer installations. Novellus was able to secure necessary government approvals for a direct subsidiary within just 60 days, a rare accomplishment for a foreign-owned company seeking market entry into this fast-changing nation of more than 1.2 billion people. The rewards of establishing a first direct operation in the PRC are already proving to be well worth the risks.
Semiconductor manufacturers push for early foothold
The majority of the PRC`s semiconductor production technology remains above one micron, concentrated in a relatively small number of manufacturing facilities. However, strong government commitment to semiconductor industrial zones, coupled with the desire of global semiconductor manufacturers to establish an early foothold in the PRC, have served as catalysts for improvements in many areas.
Semiconductor industry zones include dedicated industrial parks such as the Shanghai Industrial Park, home to the Novellus subsidiary and several of its customers, including Advanced Semiconductor Manufacturing Corp. (ASMC) and the Shanghai Belling Microelectronics Manufacturing Company. The Shanghai Industrial Park is part of a free trade zone, and is managed under the auspices of the Shanghai local government. Not only are land prices cost-effective, but convenience is paramount in these industrial parks. Besides key customers, the airport, banks, and other essential business support services are located nearby.
Favorable policies have been created for foreign investors, particularly in key industries such as electronics. Semiconductor manufacturing equipment and parts can be imported by foreign investors free of the normal 30 to 40% customs duty. Lower tax rates are part of favorable tax treatment for investors in the PRC`s key industries. Leading Chinese universities, such as Nan Kin University in Tianjin, Kjio-Tong University in Shanghai, and Zhejiang University in Hangzhou, offer highly specialized educational programs and degrees in material sciences, solid state physics, and semiconductor manufacturing. Also, the PRC`s "golden projects" include major infrastructure improvements to upgrade the country`s public information backbone network, streamline customs services, and develop new manufacturing centers.
Over the last few years, several world-leading electronics companies have entered into joint ventures with government organizations to create new fabs. These include Philips Semiconductor and the Shanghai government for ASMC; both Northern Telecom and Mietec (of Belgium) for Shanghai Belling Microelectronics Manufacturing Co.; and NEC`s partnership with ShouGang Steel (SG-NEC). New fabrication plants announced or already under construction include Motorola`s $420 million wholly owned facility in Tianjin. The government`s recently announced 909 Project plans to build a new 200-mm fab in Shanghai by the first quarter of 1998 to develop autonomous IC capabilities in CMOS, ASICs, and DRAMs.
Challenges to business development
Despite broad-based efforts to streamline the process of foreign investment, conditions in the PRC still present some formidable stumbling blocks. Foreign companies are required to work with the complex network of PRC state ministries and local governments, and to develop relationships at all levels before being permitted to do business in the region.
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The labor market is marked by shortages of highly skilled bilingual engineers; they are being courted internationally, although they remain under some degree of government control when it comes to placement and transfers.
Foreign technical support centers must still be set up under the auspices of the PRC government.
Many business services taken for granted in the US are difficult to obtain in the PRC. For example, it is much harder to find analytical services to measure dopant concentrations and chemical contaminants - tasks normally handed off in the US to independent companies such as Charles Evans & Associates or Balaszs Laboratories. Even the most basic infrastructure services such as electricity and water utilities are not yet firmly established in the PRC.
Novellus` decision to set up a direct operation contrasts with strategies followed by other equipment manufacturers who entered the PRC before 1978 and the enactment of "Open Door" and other beneficial policies. Many of those companies have entered the PRC market but have not yet established direct, wholly owned subsidiaries. Instead, they have foreign representative offices operating under guidelines established by the PRC government some 20 years ago. For example, foreign representative offices must receive approval from the PRC government and must recruit employees exclusively through the Foreign Enterprise Service Company (FESCO). Location of these offices is strictly limited to pre-approved buildings in major cities.
Breaking new ground
Success in the PRC requires an early decision in favor of a strategic, long-term commitment to develop a global support infrastructure in tandem with customers` growth in the Asia/Pacific region. To set up the wholly owned subsidiary, business relationships must be developed with representatives on five different levels: MEI, the Ministry of Foreign Relations and Trade, the Shanghai Economic Development Committee, the Shanghai Foreign Investments Committee, and the Bureau of Industrial Zones.
Today, companies hoping to establish wholly owned subsidiaries in the PRC can approach the government to learn about local operating requirements, appropriate government channels to work through, and potential local sponsors. As with its other subsidiaries, Novellus` strategy in the PRC is to use expatriate talent to develop the direct operation and foster close working relationships between its local staff and customers as quickly as possible. In establishing a direct office in the PRC, Novellus has been fortunate to attract some very talented engineers and managers whose dedication, cultural literacy, and educational background have been exceptional.
Novellus also upholds a philosophy of repatriating and rewarding people who have successfully taken on temporary assignments in the Asia/Pacific region as part of their long-term career path. These employees are re-integrated into Novellus to ensure a smooth, positive transition following their return. One outstanding example was a three-and-a-half-year assignment given to Wilbert van den Hoek to serve as director of technology in the establishment of Nippon Novellus, a direct operation in Japan. Upon his repatriation to Novellus` US corporate headquarters, van den Hoek was offered a key post as program director for the Novellus Speed HDP system, after which he was promoted to the position of vice president, HDP Products.
Semiconductor equipment companies opting to establish a wholly owned subsidiary will have the competitive advantage of being able to offer more capable and comprehensive customer support. In the case of Novellus the advantages include:
Freedom to work with both joint venture (JV)-sector and state- sector companies. This flexibility has made Novellus a proven process equipment supplier in every JV fab in the PRC.
Better access to top engineering and management talent. For Novellus, this access was facilitated through its long-term commitment to the region as well as its ongoing relationships with local and state government representatives.
Building local and global expertise. Novellus hired Chinese or native-born equipment and process engineers, brought them to its US headquarters for in-depth exposure to new process technologies, and then repatriated them to its Shanghai and Beijing offices. With their core knowledge, these engineers are now building the kind of long-term working relationships with customers that temporary expatriates cannot duplicate. Returning to the US for periodic training allows a dynamic
two-way, multinational and multicultural exchange between corporate headquarters and international operations.
Consistently reliable customer support. Novellus support teams in the PRC region are native-born and locally situated. By developing regional strength that transcends both international time-zone and language constraints, companies can deliver customer support around the clock.
Ongoing technology advances. Novellus has put in place the necessary technical resources to help its PRC customers improve their manufacturing process technology and throughput as well as their chip manufacturing.
Continuous operation. Novellus` customers in the People`s Republic can better meet this goal because the company has extensive spare parts stocks in both Shanghai and Beijing.
The rewards
With the advantage of a wholly owned PRC subsidiary, companies can improve the breadth, depth, and quality of support they provide to major semiconductor manufacturers doing business in the PRC. With a direct operation, customers can rely on the company for qualified field service and process support, as well as timely delivery of spare parts. In less than a year, Novellus has achieved a much higher level of customer confidence from major accounts who require training, troubleshooting, and ongoing technology collaboration. Novellus joins others in its industry in hoping for a future of normalized relations between Taiwan and the PRC. Such a breakthrough will pave the way for equipment manufacturers to provide cross-Asian support for a variety of customers. All in all, the establishment of a direct subsidiary can be a significant step for any high-technology company hoping to build a world-class, worldwide support team.
PETER HANLEY is the executive vice president for Marketing and Sales Novellus Systems. His 30 years of industry experience includes previous positions as group vice president of sales and service, and vice president and general manager of the Etch Products Division at Applied Materials. Prior to joining Applied Materials, he was president of Tegal Corp. and vice president of the Semiconductor Equipment
Group at Varian. ph 415/325-8300, fax 415/325-6479
MATTHEW CHAN joined Novellus in 1994 as president of Novellus Asia, and has directed the opening of new sales and service operations at the rate of one every five months, including Shanghai, Beijing, Taiwan at Hsinchu, and Singapore. Novellus Thailand is scheduled to be opened by the end of this year. His previous experience as manager of Southeast Asian Operations at Tektronix involved the set-up of a PRC-based subsidiary and several years spent establishing and managing joint ventures for Tektronix in this region.