CHINA’S ELECTRONICS INDUSTRY
William Andrew Publishing
Sina Ebnesajjad, Editor in Chief (External Scientific Advisor)
CHINA’S ELECTRONICS INDUSTRY THE DEFINITIVE GUIDE FOR COMPANIES AND POLICY MAKERS WITH INTERESTS IN CHINA
Michael Pecht Center for Advanced Life Cycle Engineering University of Maryland, College Park, USA
Copyright © 2006 by William Andrew, Inc. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the Publisher. Cover by Hannus Design Library of Congress Cataloging-in-Publication Data Pecht, Michael. China's electronics industry: the definitive guide for companies and policy makers with interests in China / Michael Pecht. p. cm. Includes bibliographical references and index. ISBN-10: 0-8155-1536-7 (alk. paper) ISBN-13: 978-0-8155-1536-4 (alk. paper) 1. Electronic industries--China. 2. China--Commerce. I. Title. HD9696.A3C523657 2006 338.4'76213810951--dc22 2006016793
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NOTICE To the best of our knowledge the information in this publication is accurate; however the Publisher does not assume any responsibility or liability for the accuracy or completeness of, or consequences arising from, such information. This book is intended for informational purposes only. Mention of trade names or commercial products does not constitute endorsement or recommendation for their use by the Publisher. Final determination of the suitability of any information or product for any use, and the manner of that use, is the sole responsibility of the user. Anyone intending to rely upon any recommendation of materials or procedures mentioned in this publication should be independently satisfied as to such suitability, and must meet all applicable safety and health standards.
China’s Electronics Industry Contents
Foreword .................................................................................................................xi Preface ...................................................................................................................xiii Acknowledgments ................................................................................................xvii Chapter 1 General Information ............................................................................ 1 1.1 1.2 1.3 1.4
1.5
1.6
1.7
Geography .................................................................................................................. 1 Population and Ethnic Groups.................................................................................... 2 Language .................................................................................................................... 4 Religion ...................................................................................................................... 5 1.4.1 Indigenous Religions.................................................................................... 5 1.4.2 Imported Religions....................................................................................... 6 1.4.3 Official Policies towards Religion in China................................................. 6 Education.................................................................................................................... 7 1.5.1 Literacy ........................................................................................................ 7 1.5.2 The Formal Education System ..................................................................... 7 1.5.3 Education Expenditures ............................................................................... 7 1.5.4 Prognosis...................................................................................................... 8 Political Structure ....................................................................................................... 8 1.6.1 The Communist Party of China.................................................................... 8 1.6.2 Administration ............................................................................................. 9 1.6.3 Military Organization................................................................................... 9 1.6.4 Judicial Organization ................................................................................. 10 Brief Overview of Modern Chinese History ............................................................ 10 1.7.1 China under Mao Zedong........................................................................... 11 1.7.2 Economic Reform after Mao...................................................................... 11 1.7.3 The Future .................................................................................................. 12
Chapter 2 Economic Conditions and Policy....................................................... 15 2.1 2.2
2.3
2.4
General Economic Conditions.................................................................................. 15 International Economic Angst.................................................................................. 18 2.2.1 China’s Entry into the WTO ...................................................................... 19 2.2.2 Where Does China Stand on Its Commitments to the WTO? .................... 22 Foreign Economic Relations and Trade ................................................................... 22 2.3.1 Current Trading Status ............................................................................... 22 2.3.2 Trade Policy and Administration................................................................ 23 2.3.3 Major Trade Regulations............................................................................ 24 2.3.4 Policy Instruments to Promote International Trade.................................... 25 2.3.5 China’s Barriers to U.S. Exports................................................................ 26 Special Economic Zones .......................................................................................... 27 2.4.1 Special Economic Zones ............................................................................ 27
vi
2.5 2.6
2.7 2.8
2.9 2.10
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2.4.2 Open Coastal Cities / ETDZs ..................................................................... 27 2.4.3 High-Technology Development Zones ...................................................... 28 2.4.4 Foreign Investment Policy in the Electronics Industry .............................. 28 China’s High Technology......................................................................................... 29 Foreign Investment in China .................................................................................... 30 2.6.1 Liberalization Influencing FDI Flows........................................................ 31 2.6.2 China/Hong Kong Closer Economic Partnership Arrangement and FDI Flows .................................................................................................. 31 2.6.3 General Investment Climate....................................................................... 32 2.6.4 Permitted Forms of Foreign Direct Investment.......................................... 34 2.6.5 U.S. Export Controls .................................................................................. 36 Financial System ...................................................................................................... 37 Fiscal Structure......................................................................................................... 40 2.8.1 Turnover Taxes .......................................................................................... 40 2.8.2 Enterprise Income Taxes............................................................................ 41 2.8.3 Personal Income Taxes .............................................................................. 41 2.8.4 Import Tariffs............................................................................................. 41 2.8.5 Most Favored Nation Trade Status............................................................. 41 Chinese Government Policy towards Cross-Border Mergers and Acquisitions ....... 43 Evolution of Foreign Investment Project Catalogs................................................... 44
Chapter 3 China’s Science and Technology ....................................................... 47 3.1 3.2 3.3 3.4
3.5
3.6
3.7
3.8 3.9
History of China’s S&T Development ..................................................................... 47 Overview of China’s S&T Policies .......................................................................... 50 China’s R&D Expenditures...................................................................................... 51 China’s S&T Organizational Structure..................................................................... 53 3.4.1 Ministry of Science and Technology.......................................................... 54 3.4.2 Ministry of Education ................................................................................ 55 3.4.3 Commission of Science, Technology and Industry for National Defense.. 55 3.4.4 Chinese Academy of Sciences ................................................................... 55 3.4.5 Chinese Academy of Engineering.............................................................. 56 3.4.6 National Natural Science Foundation of China.......................................... 57 China’s S&T Infrastructure ...................................................................................... 57 3.5.1 CAS-operated Institutes and Laboratories ................................................. 57 3.5.2 Universities and Colleges........................................................................... 58 3.5.3 National Engineering Research Centers..................................................... 59 3.5.4 Science Parks ............................................................................................. 60 China’s Major S&T Development Programs ........................................................... 61 3.6.1 National High-Technology Research and Development (863) Program.... 61 3.6.2 National Basic Research Priorities Program .............................................. 61 3.6.3 Torch Program ........................................................................................... 62 China’s Major S&T Development Efforts and Achievements ................................. 62 3.7.1 China’s Indigenous IC Development ......................................................... 63 3.7.2 China’s Avionics and Space....................................................................... 64 3.7.3 China’s Development of the Global Positioning System ........................... 65 3.7.4 China’s Supercomputers ............................................................................ 65 3.7.5 China’s Telecommunications Effort .......................................................... 66 3.7.6 China’s Development on Wi-Fi ................................................................. 67 3.7.7 China’s Effort in Audio-Visual and DVD Development ........................... 67 3.7.8 China’s Efforts in Nanotechnologies ......................................................... 68 Promoting Innovation and Creativity ....................................................................... 68 Summary .................................................................................................................. 69
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Chapter 4 Development of China’s Electronics Industry ................................. 71 4.1
4.2 4.3 4.4 4.5
4.6
China’s National Five-Year Development Plans...................................................... 71 4.1.1 The First Five-Year Plan, 1953-1957......................................................... 71 4.1.2 The Second Five-Year Plan, 1958-1965 .................................................... 71 4.1.3 The Third and Fourth Five-Year Plans, 1966-1975 ................................... 72 4.1.4 The Fifth and Sixth Five-Year Plans, 1976-1985....................................... 72 4.1.5 The Seventh Five-Year Plan, 1986-1990 ................................................... 72 4.1.6 The Eighth Five-Year Plan, 1991-1995 ..................................................... 73 4.1.7 The Ninth Five-Year Plan, 1996-2000 ....................................................... 73 4.1.8 The Tenth Five-Year Plan, 2001-2005....................................................... 74 4.1.9 The Eleventh Five-Year Plan, 2006-2010.................................................. 75 Government Organizations – The Ministry of Information Industries ..................... 76 Foreign Trade and Investment in China’s Electronics Industry ............................... 78 Imports and Exports of Electronics Products ........................................................... 80 Major National Electronics Projects......................................................................... 81 4.5.1 Golden Bridge Project................................................................................ 81 4.5.2 Golden Card Project................................................................................... 82 4.5.3 Golden Customs Project............................................................................. 83 4.5.4 Golden Taxation Project ............................................................................ 84 4.5.5 909 Project ................................................................................................. 84 4.5.6 Electronic Air Traffic Control Project........................................................ 85 4.5.7 Three Gorges Electronic System Project.................................................... 86 Major Electronics Companies .................................................................................. 86
Chapter 5 Semiconductors................................................................................... 93 5.1 5.2 5.3
5.4
5.5 5.6 5.7
A Brief History of China’s Semiconductor Industry ................................................ 93 Semiconductor Production and Market Size ............................................................ 96 China’s Current Semiconductor Industry ................................................................. 97 5.3.1 Discrete Semiconductor Sector ................................................................ 100 5.3.2 Integrated Circuit Sector .......................................................................... 101 5.3.3 IC Design ................................................................................................. 103 Major Domestic Semiconductor Manufacturers..................................................... 107 5.4.1 Semiconductor Manufacturing International Corporation ....................... 108 5.4.2 Shanghai Hua Hong (Group) Co., Ltd. .................................................... 109 5.4.3 Hejian Technology (Suzhou) ................................................................... 111 5.4.4 Advanced Semiconductor Manufacturing Corporation............................ 111 5.4.5 Grace Semiconductor Manufacturing Corporation, Ltd........................... 112 5.4.6 Shougang NEC Electronics Corporation.................................................. 113 5.4.7 Wuxi China Resource Microelectronics Co., Ltd. (formerly Hua Jing Electronics Group Corporation) ............................................................... 113 5.4.8 Shanghai Belling Stock Holding Co. Ltd................................................. 115 5.4.9 Hua Yue Microelectronics Corporation ................................................... 116 5.4.10 Others....................................................................................................... 117 Involvement of Foreign Capital and Technology................................................... 118 Intellectual Property Protection Issues ................................................................... 120 Challenges and Strategies....................................................................................... 121
Chapter 6 Electronic Manufacturing Service Industries ................................ 123 6.1
6.2
China’s Device-Level Electronic Packaging Industry............................................ 123 6.1.1 Overview.................................................................................................. 123 6.1.2 Foreign Manufacturers ............................................................................. 124 6.1.3 Domestic Manufacturers .......................................................................... 126 6.1.4 Adopted Technologies and Levels ........................................................... 127 China’s PCB Fabrication Industry.......................................................................... 128
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6.3
6.2.1 Foreign Manufacturers ............................................................................. 128 6.2.2 Domestic Manufacturers .......................................................................... 129 6.2.3 Adopted Technologies and Levels ........................................................... 131 China’s Printed Circuit Board Assembly Industry ................................................. 134 6.3.1 Major Board Assembly Companies ......................................................... 134 6.3.2 Adopted Technologies and Research Abilities......................................... 135 Summary ................................................................................................................ 137
6.4
Chapter 7 Connectors, Cable Assemblies, and Backplanes............................ 138 7.1
7.2 7.3 7.4
7.5 7.6
7.7
Connectors and Cable Assemblies by Design Type and Sector ............................. 140 7.1.1 Computer Sector ...................................................................................... 140 7.1.2 Telecom Sector ........................................................................................ 141 7.1.3 Connectors, Cable Assemblies, and Backplanes in Communications / Wireless Sector ........................................................................................ 142 7.1.4 Connectors, Cable Assemblies, and Backplanes in Datacom / Network Sector ........................................................................................ 143 7.1.5 Connectors, Cable Assemblies, and Backplanes in Military / Aerospace Sector...................................................................................... 144 7.1.6 Connectors, Cable Assemblies, and Backplanes in Automotive Sector... 145 7.1.7 Connectors and Cable Assemblies in Consumer Electronics Sector........ 145 Analysis of Connector Production in China ........................................................... 147 Analysis of Suppliers in China ............................................................................... 147 Doing Business in China ........................................................................................ 148 7.4.1 Housing .................................................................................................... 150 7.4.2 Meals........................................................................................................ 150 7.4.3 Four Types of Business Operations in China ........................................... 151 7.4.4 Export License ......................................................................................... 151 7.4.5 Business Strategies Differ by Region of China........................................ 151 7.4.6 Import to and Export from China............................................................. 151 Major Customers in China...................................................................................... 152 Leading EMS / ODM Companies .......................................................................... 153 7.6.1 Flextronics International .......................................................................... 153 7.6.2 Jabil Circuit .............................................................................................. 153 7.6.3 Hon Hai Precision Industry...................................................................... 153 7.6.4 Sanmina-SCI ............................................................................................ 154 7.6.5 Solectron .................................................................................................. 154 7.6.6 Quanta Computer ..................................................................................... 154 7.6.7 Compal Electronics .................................................................................. 154 7.6.8 Asian EMS / ODM Companies................................................................ 155 Manufacturing Processes in China ......................................................................... 155 7.7.1 Connectors ............................................................................................... 155 7.7.2 Cable Assemblies ..................................................................................... 156
Chapter 8 Computers ......................................................................................... 158 8.1
8.2
8.3
China’s Computer Market ...................................................................................... 159 8.1.1 Market for Business Computers............................................................... 160 8.1.2 Market for Home Computers ................................................................... 161 8.1.3 Market for Notebook Computers ............................................................. 162 Major Domestic Computer Manufacturers............................................................. 162 8.2.1 Legend Group/Lenovo ............................................................................. 162 8.2.2 Founder Group ......................................................................................... 164 8.2.3 Great Wall Group..................................................................................... 164 8.2.4 Others....................................................................................................... 164 Major Foreign Competitors .................................................................................... 165
Contents
8.4
ix
China’s Super Computers....................................................................................... 166
Chapter 9 Telecommunications Industry ......................................................... 168 9.1 9.2
9.3 9.4 9.5 9.6
9.7
9.8
Overview of China’s Telecom Industry ................................................................. 168 Related Government Organizations and Regulations............................................. 169 9.2.1 Telecom Equipment Market Policy: Buy Local....................................... 169 9.2.2 Telecom and Internet Regulations............................................................ 170 Fixed-line Business ................................................................................................ 171 Mobile Communications Business ......................................................................... 171 Development of the Backbone Transfer Network .................................................. 173 China’s Telecommunications Operators................................................................. 174 9.6.1 China Telecommunication Corporation ................................................... 175 9.6.2 China Mobile Communication Corporation............................................. 176 9.6.3 China United Communication Co., Ltd.................................................... 176 9.6.4 China Network Communications Co., Ltd............................................... 177 9.6.5 China Railway Communication Co., Ltd. ................................................ 177 9.6.6 China Satellite Communication Corporation ........................................... 178 China’s Telecom Equipment Manufacturers .......................................................... 179 9.7.1 PuTian Information Group (POTEVIO) .................................................. 179 9.7.2 Huawei Technologies Co., Ltd................................................................. 180 9.7.3 Zhongxing Telecommunications.............................................................. 182 9.7.4 Alcatel Shanghai Bell Company .............................................................. 184 9.7.5 Datang Telecom Technology Co., Ltd. .................................................... 184 9.7.6 FiberHome Telecommunication Technologies Co., Ltd. ......................... 185 9.7.7 Great Dragon Telecom Group.................................................................. 186 Challenges and Prospects ....................................................................................... 186
Chapter 10 Other Electronics Industries.......................................................... 190 10.1
10.2 10.3 10.4
10.5
10.6 10.7
10.8
China’s TV Industry............................................................................................... 190 10.1.1 High Definition TV (HDTV) ................................................................... 192 10.1.2 Digital TV ................................................................................................ 192 China’s DVD Industry............................................................................................ 192 China’s Cellular Phone Industry............................................................................. 193 China’s Automotive Electronics Industry .............................................................. 196 10.4.1 Recent Developments in China’s Automobile Industry........................... 197 10.4.2 U.S. Auto Parts Trade with China............................................................ 198 China’s Avionics Electronics Industry ................................................................... 200 10.5.1 Regulatory Agencies ................................................................................ 201 10.5.2 Aviation Industries Corporation of China I and II ................................... 201 10.5.3 The China Aerospace Science and Technology Corporation ................... 202 10.5.4 China Aerospace Science and Industry Corporation................................ 203 10.5.5 The Civil Aviation Administration of China............................................ 203 The Medical Electronics Industry in China ............................................................ 203 China’s Military Electronics Industry .................................................................... 204 10.7.1 Overview of Government Policy on Defense and Military Market ......... 205 10.7.2 Domestic Military Industry ...................................................................... 206 10.7.3 Export of Military Products ..................................................................... 207 10.7.4 Import of Military Products ..................................................................... 208 10.7.5 Air Force Technology .............................................................................. 209 China’s Space Electronics Industry........................................................................ 209
Chapter 11 Software........................................................................................... 213 11.1 11.2
Overview of Software Industry Development in China ......................................... 213 Policy of China’s Software Industry ...................................................................... 214
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11.3
Central Government Preferential Policies for the Software Industry in the Areas of Finance and Tax............................................................................... 215 11.3.1 Investment and Financing ........................................................................ 216 11.3.2 Taxation ................................................................................................... 216 11.3.3 Exports ..................................................................................................... 216 11.3.4 Revenue Allocation.................................................................................. 216 11.4 Software Education and Training ........................................................................... 216 11.4.1 Basic Education........................................................................................ 217 11.4.2 Tertiary Education.................................................................................... 217 11.4.3 Software Blue Collar................................................................................ 218 11.5 Software Technology Research .............................................................................. 218 11.5.1 Institute of Software................................................................................. 218 11.5.2 The National Research Center for Intelligent Computing........................ 218 11.5.3 China National Software and Service Company Limited ........................ 219 11.5.4 Macao Special Administrative Region..................................................... 219 11.5.5 Hong Kong Special Administrative Region............................................. 219 11.6 Investment .............................................................................................................. 220 11.6.1 Software Parks and Science Parks ........................................................... 220 11.6.2 Zhongguancun Science Park in Beijing ................................................... 220 11.6.3 Special Economic Zones and Costal Cities .............................................. 220 11.6.4 Shanghai Pudong Software Park .............................................................. 221 11.6.5 Southern Software Industrial Park ........................................................... 221 11.6.6 Hong Kong Special Administrative Region............................................. 221 11.6.7 Tianjin ...................................................................................................... 222 11.6.8 Dalian....................................................................................................... 222 11.7 Legal Protection ..................................................................................................... 222 11.8 Outsourcing of Software and IT Services to China ................................................ 223 11.9 Accomplishments of the Chinese Software Industry.............................................. 224 11.10 Potential of the Chinese Software Industry ............................................................ 224
Chapter 12 Conducting Business in China....................................................... 225 12.1
12.2
12.3
The Advantages...................................................................................................... 227 12.1.1 A Low-Cost, High-Quality Labor Force .................................................. 227 12.1.2 A Complete Supply Chain with World-Class Infrastructure.................... 229 12.1.3 Favorable Tax Structure and Low Capital Costs...................................... 233 12.1.4 Large Internal Market .............................................................................. 234 12.1.5 Entrance into the World Trade Organization ........................................... 235 The Cons ................................................................................................................ 236 12.2.1 Shortage of Energy and Resources........................................................... 236 12.2.2 Inadequate Land Transportation System.................................................. 237 12.2.3 Currency Revaluation and Financial System ........................................... 238 12.2.4 Deficiency of Enforcement in Intellectual Property Protection ............... 239 Summary ................................................................................................................ 240
Index ..................................................................................................................... 241
Foreword
China has come to enjoy a remarkable economic growth rate that has averaged nearly 10 percent per annum since the country began to pursue its open-door policy and market-oriented reforms in 1978. As a result, China has transformed from a centrally planned economy into a market economy and effectively strengthened its economic power and raised its people’s standard of living. No country in history has burst onto the world’s economic stage as dramatically as China. With its accession to the World Trade Organization in 2001, China has not only become the world’s third largest trading nation, following the United States and Japan, but also the world’s top destination for foreign direct investment (FDI), and one of the world’s major manufacturing bases. With China’s rapid economic growth, electronics has now become one of the most important industries in the nation. China has become the world’s largest maker of many electronic appliances, such as color TVs, DVDs, and cell phones. China also now has a leading-edge semiconductor industry. This is great for China, since the Asian-Pacific market is projected to grow significantly over the next decade. The future of China is bright. China’s preparation for the Beijing Olympics in 2008 and World Expo in 2010, as well as her successful manned space mission, continues to spur her economic growth and social development and enhance her overall national strength and position in the world. China’s abundant well-trained technical labor, large market, and growing economy provide the ideal conditions. China’s Electronics Industry by Prof. Michael Pecht provides comprehensive information on the latest development of China’s electronics industry and the factors that contributed to its success. We hope that this book gives the readers an opportunity to learn about China and her electronics industry. Minister Counselor Jin Ju Embassy of the People’s Republic of China 2300 Connecticut Avenue, NW Washington, DC 20008
Preface
China made contributions to the world down through the ages, but for a long time conditions have been at a standstill in China and development has been slow. Now it is time for us to learn from the advanced countries. China cannot develop by closing its door, sticking to the beaten track and being self-complacent. You ask us whether it runs counter to our past traditions to implement the policy of opening to the outside world. Our approach is to define new policies according to new circumstances, while retaining our best traditions. - Deng Xiaoping, October 10, 1978
Since the open-door policy began in 1979, China has boasted one of the fastest growth economies in the world. Electronics has been a Chinese pillar of success and is now the largest industry in China with growth of nearly 20 percent annually, and there is no end in sight. China is now the world’s number one producer of TVs, recorders, VCD players, telephones, calculators, refrigerators, and air conditioners. China also has the number one cellular phone market, is number one in IC consumption, has a leading-edge semiconductor industry, and is the largest PC producer. Entry into the World Trade Organization is leading to economic liberalization, simplification of the licensing and foreign investment policies, and targeted government funding in electronics R&D. The Chinese central government is encouraging foreign investment and providing massive incentives in the so-called “pillar industries,” which include the electronics industry, to serve as a multiplier for science, technology, and national economic development. As a result, companies are rapidly transferring science and technology into China. For example, Intel, which already operates three major electronic facilities in Shanghai, is further expanding into Chengdu with two new plants and more than 2,000 employees. Intel is also training engineers and has introduced new textbooks and added courses on semiconductor physics and factory processes to the undergraduate curriculum of the local universities. This book documents the technologies, manufacturing, capabilities, and infrastructure that have made China a major player in the electronics industry. It covers semiconductors, electronic packages, printed circuit boards, connectors and contacts, computer hardware and software, telecommunications, and various electronic systems. Other topics include the role of government, research organizations, educational institutions, science and technology information networks, and major companies in establishing an infrastructure where the electronics industry can flourish. In its coverage of the important aspects of the Chinese electronics industry, this book: •
•
Demonstrates how various factors, such as political structures, government policy, science and technology development, education, and labor force, have contributed to the growth and performance of the industry; Reviews Chinese economy in the post-reform period, including general economic
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• • • •
status, specialized economic zones, monetary and fiscal policies, foreign direct investment and trade, as well as Sino-U.S. economic relations; Presents the development of China’s electronics industry, foreign trade and investment in the electronics industry, and national planning; Evaluates major segments of China’s electronics industry, such as semiconductors, computer hardware and software, telecommunications, and electronics systems; Includes valuable site reports for key companies and other organizations; Provides statistical information and numerous tables and figures that illustrate the text.
A brief description of the organization of the book and the topics in the chapters follows. General Information: Chapter 1 provides a brief overview of China’s geography, population and major ethnic groups, language, religion, education system, and political structure, and a brief overview of her modern history. Economic Conditions and Policy: Chapter 2 overviews China’s economy in the post-reform period, and the methods used to promote international trade and to encourage foreign direct investment, especially in the electronics industry. Topics include the current economic status, China’s foreign trade relations, and the development of special economic zones. China’s monetary and banking systems, foreign exchange systems, and issues of public finance, such as taxes and import tariffs, are then discussed. Trade issues between the U.S. and China have also been discussed. China’s Science and Technology: Chapter 3 outlines China’s science and technology infrastructure, current status and goals of national science and technology policy, and the national management of China’s electronics industry. Development of China’s Electronics Industry: Chapter 4 presents China’s Five-Year National Development Plans and the foreign trade and investment in the development of China’s electronics industry. Major national electronics projects are then discussed. Semiconductors: Chapter 5 discusses the status of technological development and evaluates the future growth of the semiconductor industry in China. The chapter presents the domestic industry as well as the cooperative relationships between the domestic manufacturers and foreign multinationals in designing, manufacturing, and testing semiconductor devices. Electronic Manufacturing Service Industries: Chapter 6 provides a review of semiconductor packaging, circuit board manufacture, circuit card assembly, and system integration industries. It also briefly discusses the activities of foreign and domestic packaging businesses in China. Connectors, Cable Assemblies, and Backplanes: Chapter 7 provides a brief overview of the interconnect industry in China. Data are presented on the leading market sectors, shipments by interconnect category, local production compared to imports and exports, leading interconnect manufacturers, leading contract manufacturers, and basic information on capabilities and manufacturing of interconnects in China. Computers: Chapter 8 presents China’s computer industry. Topics in this chapter include technology developments in hardware, competition among major domestic manufacturers and foreign competitors, government interaction and support, and China’s supercomputers.
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Telecommunications Industry: Chapter 9 discusses the development of China’s communications industry based on three major industrial segments: telecommunications, mobile communications, and data communications. Discussion topics include national telecommunications development, the use of the Internet and the growing electronic commerce in China, as well as the competition in technological network standards in China’s mobile communications market. In addition, foreign joint ventures in China’s communications market and the development goals for China’s communications industry are also presented. Other Electronics Industries: Chapter 10 overviews China’s consumer, automotive, avionics, medical, military and space electronics industries. China's consumer electronics industries include TV, DVD, and cellular phone. The chapter also examines government policies related to this industry and discusses possibilities for future development, along with the opportunities and challenges facing China. Software: Chapter 11 presents China’s software industry and the Internet development. The development of software industry depends on the number and quality of software talents, research in software technology, domestic and foreign investment, and legal protection. The Internet is a catalyst of developments. In this chapter, we review the development and discuss the potentials of the software industry and the Internet in China. Conducting Business in China: Chapter 12 discusses the question of why someone would want to conduct electronics manufacturing in China. To answer this question, the chapter examines the reasons for the strong growth in China’s electronics industry and also identifies challenges. This book is intended for corporate planners, business managers, policy managers, technologists, and engineers. They will find it useful in assisting them to comprehend the current status and future growth of China’s electronics industry; understand the cultural, economic, and technological factors that drive and inhibit market access and success in China; and make decisions on strategic issues such as market entry, establishing joint ventures and strategic alliances with Chinese electronics companies in order to access the world’s largest emerging market. Finally the book is intended to help companies formulate strategy to cooperate and compete in the global electronics industry. Michael Pecht George Dieter Chair Professor University of Maryland College Park, MD 20742 June 21, 2006
Acknowledgments
We are indebted to the companies, universities, and the professional colleagues who provided us with the time and support for writing this book. This book would not be what it is today without their help. We are extremely grateful to the State Science and Technology Commission of the People’s Republic of China, and the Chinese Embassy in Washington D.C. for providing up-to-date information on Chinese economic growth, electronics technology development, and industry strategy and structure. Special thanks go to Prof. Y.C. Chan and the EPA Center for invaluable help in previous editions. We extend our sincere appreciation to those who reviewed the draft of this book and offered many suggestions for improvement. These people include: Honorable Yang Jeichi – Ambassador of the People’s Republic of China to the United States, Honorable Xu Guanhua, Minister - Ministry of Science and Technology - People’s Republic of China, Honorable Jin Xiaoming, Minister Counselor - Science and Technology Office, Embassy of the People’s Republic of China in the United States, Prof. Stephen Y. L. Cheung of City University of Hong Kong, Mr. Daniel K. Lau of Ralong Business Technology Academy, Ms. Samia Islam and Ms. Angie Wong of City University of Hong Kong, Mr. Charles F. Larson of Industrial Research International and Prof. Robert Coogan from the University of Maryland. We also thank Parva Fattahi and the student assistants at the University of Maryland: Reagan Colaco, Nitya Chandrasekharan, Harshal Kuldivar, and Dhaval Mehta, for their help with formatting the book. All chapters in this book are the result of collaborative efforts made over many years. Besides the editor, the following people helped on individual chapters. •
•
•
• • •
• • • •
Chapter 1: Weifeng Liu, Hewlett-Packard Co.; Chee Cheung, Compass Technology Co., Ltd.; James Gao, University of Maryland; and Xiaolu Hu, San Jose State University Chapter 2: William Boulton, Auburn University’s College of Business; Charles Lobo, Tata Consultancy Services; and Ken Davies, Organisation for Economic Co-operation and Development Chapter 3: Greg Felker, Hong Kong University of Science and Technology; Weifeng Liu, Hewlett-Packard Co.; Laurie Sullivan, Electronic Business News; Jingsong Xie, Beijing University of Aeronautics and Astronautics; and William Blanpied, George Mason University School of Law Chapter 4: Chung-Shing Lee, Pacific Lutheran University, School of Business; Weifeng Liu, Hewlett-Packard Co.; and Steve Yang, Intel Corporation Chapter 5: Weifeng Liu, Hewlett-Packard Co.; Zhenya Huang, Motorola; and Bin Zhu, University of Maryland Chapter 6: Ji Wu, CALCE, University of Maryland; Haiyu Qi, CALCE, University of Maryland; Bin Zhu, University of Maryland; Daniel Donahoe, Exponent, Inc.; and Ricky Lee, Hong Kong University of Science and Technology Chapter 7: Fleck Research, a Division of Global Connector Research Group, Inc. Chapter 8: Jingsong Xie, Beijing University of Aeronautics and Astronautics Chapter 9: Bin Zhu, University of Maryland; and Mustapha Ismail, American University of Beirut Chapter 10: Martin Rosman, CALCE, University of Maryland; M. Lee, LG
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Electronics; Ping Zhao, Medtronic; Frank Sun, Western Digital Corporation; Hui Xia, Agilent Laboratories; Wei Li, Logitech, Inc.; Robin Li, National Semiconductor Corporation; Irene Zou, Auburn University, College of Business; and Bin Zhu, University of Maryland Chapter 11: Karl R. H. P. Leung, Hong Kong Institute of Vocational Education Chapter 12: Simon Wong, The Refined Industry Co., Ltd; Hamed El-Abd, WKK Distribution Ltd, HK; Jingsong Xie, Beijing University of Aeronautics and Astronautics; Tao Jin, University of Maryland; and Hong Ye, Beijing Polytechnic University
Royalties generated from the sales of this book will be directed to support research at the Center for Advanced Life Cycle Engineering (CALCE), University of Maryland, College Park.
Chapter 1 General Information
The People’s Republic of China (hereafter referred to as “China”) is located in the southeastern part of the Eurasian Continent and on the west coast of the Pacific Ocean, bordering on the East China Sea, Korea Bay, Yellow Sea, and South China Sea. China is the world’s most populous country and the fourth largest in land area. Most of China is located in the temperate zone, with southerly parts in tropical and subtropical zones. Politically, China is under the leadership of the Communist Party. This chapter provides general information about China’s geography, population, ethnic groups, language, religion, education system, and political structure, with a brief overview of its modern history.
1.1
Geography
China is centrally located in East Asia. It borders Afghanistan, Pakistan, India, Nepal, and Bhutan to the west; Myanmar, Laos, and Vietnam to the south; across the seas to Indonesia, Malaysia, Brunei, the Philippines, and Japan to the southeast; the Republic of Korea on the east and Russia and Mongolia to the north; with Kazakhstan, Kyrgystan, and Tadzhikistan to the northwest. Historically, the high mountains and deserts of the west and northwest were almost impassible, and seaborne traffic between China and other countries was difficult and dangerous. This topography insulated China from other major civilizations until the advent of modern communication and technology. China’s mountains, rivers, and other geographical features have also divided the country into distinct north and south regions, marked by differences in climate, agriculture, culinary traditions, dialects, politics, and culture. However, China’s geographic isolation has been a unifying factor incorporating the country into one state for millennia. In area, China is 9.6 million km2, smaller than Russia and Canada and slightly smaller than the United States. Overall, its terrain slopes from west to east, from the 6.44-kilometer-high mountains of Tibet, through high plateaus and desert, to hills and plains, and finally the deltas of the east coast. Over 40 percent of China is mountainous or hilly. Its largest mountain range is the Qinling, extending east from the great Kunlun system of north Tibet. True plains are found in north and northeast China, the Yangtze River system, and the Sichuan basin. China’s coast on the east spans approximately 18,000 km. Most of the coastline is flat and most docks and harbors are ice-free year round. Around 5,400 islands occupy China’s territorial seas, including Hainan (34,000 km2) and many islands, islets, reefs, and shoals in the South China Sea (the Dongsha, Xisha, Zhongsha, and Nansha island groups). Taiwan Island to the east has a total area of 36,000 km2. The Yangtze, at 6,300 km, is China’s longest river and third longest in the world, behind the Nile in Africa and the Amazon in South America. It is navigable by large ships
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year-round for 1,500 km inland from its mouth in the East China Sea. The second longest river in China is the Yellow River with a length of 5,464 km. The Yellow River flows from the Tibetan Plateau and is unnavigable for most of its length. The longest man-made river in the world is the Grand Canal, running 1,801 km from Beijing in the north to Hangzhou in Zhejiang Province in the south. The canal, which links the Haihe, Yellow, Huaihe, Yangtze, and Qiantang rivers, was first constructed in the 5th century B.C. Only 13.3 percent of China’s land is arable, but cultivated crops cover 95 million hectares (ha),1 mainly on the Northeast Plain (wheat, corn, sorghum, soybeans, flax, and sugar beets), the North China Plain (wheat, corn, millet, and cotton), the Middle-Lower Yangtze Plain (paddy rice and freshwater fish in the “land of fish and rice”), the Pearl River Delta (paddy rice), and the Sichuan Basin (paddy rice, rapeseed, and sugarcane). Per capita arable land is about 0.1 ha, only 47 percent of the world average. Grasslands cover an area of 400 million ha, while forests cover only 159 million ha, mainly in the northeast mountain ranges of the Greater Hinggan, Lesser Hinggan, and Changbai mountain ranges. China’s mineral reserves, comprised of 156 different minerals, rank third in the world, and include coal (1,003 billion tons, mostly in Northern China), iron (46 billion tons), salt (402 billion tons), oil (427 fields), natural gas (125 fields), and nonferrous metals such as tungsten, tin, antimony, zinc, molybdenum, lead, and mercury. China’s water resources are vast, with over 1,500 rivers each draining over 1,000 km2. Inland water from rivers and underground springs comprises 1.82 percent of China’s land surface and can provide 6.75 billion kWh of energy, of which 3.79 billion kWh has been developed. China’s hydropower potential is the world’s largest.
1.2
Population and Ethnic Groups
China is the most populous country in the world. The Chinese government reported that by July 2004 China’s population, excluding the Hong Kong and Macao Special Administrative Regions and Taiwan, was 1.299 billion (21 percent of the total world population), of which males accounted for 51.5 percent and females 48.5 percent. The growth of China’s urban areas has accelerated dramatically since economic reforms were instituted in the late 1970s. Prior to that time, urban migration was tightly controlled to prevent runaway urban growth (over 80 percent of the population was rural). Urban populations experienced strict rationing of foodstuffs. In the 1990s, high demand for labor in urban areas provided ample job opportunities for residents, and the end of rationing made life in the cities easier. China’s employment in 2003 is shown in Table 1.1 below. Table 1.1: China’s Employment Structure, 20032 Agriculture
50%
Industry / Manufacturing
21%
Services
29%
Figure 1.1 shows the estimated age distribution of the population in 2004. Life expectancy in China is similar to that in other developed nations – about 70.4 years for men and 73.72 years for women. Another key finding was that the average family size fell from roughly 4 persons to roughly 3.5. 1
Hectare – measure of area in the metric system, 10,000 sq meters McKinsey Quarterly, 2004 – China Today, http://www.mckinseyquarterly.com/category_archive.aspx?L2=21&L3=33, Accessed 3 March 2006 2
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Age 65+, 7.60%
Age 0-14, 21.40%
Age 15-64, 71%
Figure 1.1: Composition of Population3 The Chinese government regards the large size of the country’s population as a multidimensional issue. The growth of the population may be the strongest evidence of the success of the Communist regime in terms of the effectiveness of government measures to feed the nation and provide people with basic health care. The sheer size of the population has provided security to the nation, and has been a source of cheap labor and an immense potential consumer market attracting domestic and multinational businesses. Nevertheless, China has recognized the need to slow population growth due to inadequate per-capita resources. The government has formulated and implemented a population policy to restrict families to one child each, with flexible family planning policies for ethnic minorities and rural areas. As a result, the population growth rate was reduced from 1.47 percent in 1980 to an estimated 0.57 percent in 2004. China expects to control its population to below 1.33 billion. Table 1.2 shows various population-related figures in comparison with those of the United States. Table 1.2: US-China Comparisons on Population-related Indexes (2004)4 China5 Land Area (1,000 km2)
9,597
9,631
Population (million)
1,306
296
Life Expectancy at Birth (years)
72.27
77.71
Infant Mortality (per 1,000 live births)
24.18
6.5
Total Fertility Rate (children born/woman)
1.72
2.08
Adult Literacy (%)
90.9
97
Telephones-Mainlines (million – 2003)
263
268
334.8
194.5
Gross Domestic Product (US$T–2005 estimate)
8.18
12.41
GNP (US$T- 2005)
1.53
11.35
Telephones-Mobile Cellular (million – 2004)
3 4 5
United States
CIA, The World Factbook,, 11 May 2004 Update CIA, The World Factbook, 2005, http://www.cia.gov/cia/publications/factbook/ The following data do not include Hong Kong.
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Although China’s population control efforts appear successful, new problems have arisen. First, the aging of the population has become a concern. Currently, it is estimated that there are about 97 million people over age 65, accounting for 7.5 percent of the national population, well over the internationally recognized proportion of 7 percent for an aging society. This will create a heavy social security burden. Another problem is the growing gender-ratio imbalance. The gender ratio is estimated at 112 boys to 100 girls. Another challenge in China is that the richest 10 percent of Chinese control 45 percent of the country’s wealth, according to Chinese Government figures, and the poorest 10 percent hold about 1 percent. About 250 million people in the country still earn less than US$1 a day – the official definition of poverty n China – and 700 million live on less than US$2 a day. Incomes among rural Chinese have actually declined in the last 4 years, the World Bank reports. This rural 70 percent of China’s population has an average income of just US$318 a year. If benefits such as superior schools and medical care are included in the calculation, the average urban income is seven times greater than the average rural income, the Chinese Academy of Social Sciences has calculated. The majority of the Chinese population is of Han ethnicity, making up about 91.6 percent of the total. The rest of China consists of some 56 different nationally recognized indigenous ethnic groups. The largest minority group is the Zhuang, comprising over 16 million, mostly in the Guangxi Zhuang Autonomous Region. There are 18 other nationally recognized minorities with a population of over 1 million, including the Zhuang, Manchu, Hui (Muslims), Miao, Uygur, Yi, Tujia, Mongolian, Tibetan, Bouyei, Dong, Yao, Korean, Bai, Hani, Li, Kazak, and Dai.
1.3
Language
The Chinese language exemplifies both the diversity and the unity of Chinese culture. On one hand, the standard written language can be understood by all educated Chinese. On the other, the spoken language is fragmented into hundreds of mutually unintelligible regional dialects and their local variants. There are 108 dialects in the province of Fujian alone. Except for Mandarin, no other Chinese major dialect is spoken by more than about 8.5 percent of the population, and most by less than 5 percent. Although all Chinese dialects are tonal, the number and inflection of tones differ markedly between the various dialects, along with significant differences in pronunciation. Consequently, a standard pronunciation is learned by most Chinese speakers throughout the world, often in addition to at least one other dialect. The standard pronunciation of Chinese is referred to as Mandarin in the West; Putonghua, or common spoken word, in China; and Guoyu, or national language, in Taiwan. Putonghua is based on the language spoken in northern China and has been China’s official language for centuries. Putonghua is spoken by at least 71.5 percent of China’s population.6 Of the foreign languages spoken in China, Russian replaced English in the 1950s and was taught in most middle schools and institutions of higher education. However, with economic reform and opening to the outside world, English has resumed great popularity, particularly in the major cities. Japanese may be the second most popular foreign language. Other languages, such as French, Spanish, and German, are taught mainly at the university level. Various training programs and workshops have mushroomed throughout the country, making foreign language study the most successful educational and commercial program. With the surge in foreign imports and international exposure, a flood of foreign words has penetrated the Chinese language, imitating the original sounds but often carrying a hint of Chinese meaning. China’s language modernization efforts include a fairly successful attempt to simplify the pictographic characters of the written language to make learning easier and increase 6 The percentage of the population speaking a dialect is estimated based upon a total of Han Chinese population of 950 million.
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literacy. Simplified characters number 2,238, about one-third of the 7,000-8,000 characters required to write modern Chinese. Critics of China’s simplification program point to the experience of Taiwan, which simultaneously achieved high literacy while rejecting simplification; they maintain that although there are some benefits from the simplified characters, the cultural cost is high, and that simplified characters are more easily confused with each other. Chinese script can be written in any direction. Chinese newspapers sometimes combine left to right, right to left, and up to down on the same page. As the language is taught in all Chinese schools today, the sound of each Chinese character is represented in romanized written form by Pinying.7 With the ever-spreading use of computers, some think it is time to finally romanize all written Chinese; however, with computer-voice interfaces already possible, there may soon be no need to key in text character by character. Most Chinese feel that romanizing the written Chinese characters would be impractical, given the large number of homonyms in the language; that it would degrade understanding of both obvious and subtle meanings; and that it would be an incalculable cultural loss, given the enormous historical, political, and creative value of China’s pictographic written language.
1.4
Religion
The word “religion” did not exist in the Chinese language until modern times, when scholars tried to create a term to match the Western concept. Indigenous Chinese “religious” pursuits, such as the practice of Confucianism, Taoism, and worship of ancestors, gods, and natural phenomena, are not religions in the Western sense but have religious overtones, and are now called Chinese religions for convenience. Religions imported from abroad include Buddhism, Islam, and Christianity, with a Chinese cultural overlay. Except for professional religious practitioners living apart in monasteries, religion in China is very much woven into the broad fabric of family and social life. 1.4.1
Indigenous Religions
Chinese religions can be divided into two types: philosophical, exemplified by Confucianism and Taoism, and human, exemplified by worship of ancestors, emperors, and gods. Confucianism was founded by Confucius (551-479 B.C.) during the Zhou dynasty (∼1123-221 B.C.). It has been dominant through most of the history of China, strongly influencing the East Asian continent, and spread over East and Southeast Asia and other parts of the world. Taoism is also believed to have started in the Zhou dynasty, about the same time Confucianism was established. The first undisputed Taoist master was Lao Tze, the “Old Master.” Taoism became dominant in the Qin dynasty (221-206 B.C.). It flourished over the next several dynasties and has since coexisted with Confucianism and Buddhism. There are now over 1,500 Taoist temples in the country. Ancestor worship can be traced back to the Shang dynasty (∼1751-1111 B.C.). The central importance of the family is a distinguishing characteristic of Chinese society, and the ancestral cult is one of the distinguishing characteristics of the Chinese family. Ancestor worship as a religious act is more a family practice than an individual choice. Put differently, family religion is basic; individual and communal religions are secondary. With respect to worship of the emperor and of deities, it was believed by most Chinese that the emperor, in addition to his official duties, had an essential role to play in mediating
7 Pinying is used in this book to romanize Chinese words. In Taiwan, the romanized spelling is the Wade-Giles method, and another system named Zhuyinzimu (phonetic alphabet) is used to define the standard pronunciation.
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between the forces of nature and the lives of his people. Other people, such as famous statesmen, heroic generals, just and merciful magistrates, patriotic scholars, or even legendary figures, may become gods after their deaths. Temples have been built for them to provide places for people to worship. Cutting across religions, social groups, and voluntary institutions is a series of annual festivals observed by the entire nation, particularly five festivals that have, at least in part, religious origins. Their dates are set by the lunar calendar. Spring Festival is by far the most important and most elaborate of all Chinese festivals. It concludes with the first full moon in the new year; that conclusion is celebrated as the Lantern Festival. The Qing Ming Festival at the beginning of spring is the most important time to visit ancestral tombs, clean and renovate them, and provide offerings (like food) to them. The Double Five Festival, also known as the Duan Wu Festival, Dumpling Festival, or Dragon Boat Festival, has long been understood as a re-enactment of the search for the drowned poet Qu Yuan, who committed suicide because his honest counsel was spurned by his lord. The Moon Festival is celebrated in mid-Autumn when the moon is at its fullest and clearest. 1.4.2
Imported Religions
Buddhism was imported from India, probably in the Later Han dynasty (25 A.D. – 220 A.D.). It flourished over several dynasties and reached the zenith of its influence during the Tang dynasty (618-907). It has been much indigenized and is the most accepted foreign religion, both officially and by the populace. Old temples have been restored and renovated and new ones built; there are some 13,000 Buddhist temples in China today. Some estimate that there are more than 100 million Buddhists in China; however, given the nonexclusive nature of Buddhism, this figure may be misleading. The practice of Buddhism by ordinary people is mixed with the practice of Confucian doctrines and superstitious beliefs. Islam first reached China in the 7th century. Muslims are the second largest religious group (2-3 percent of the population) and live throughout China, with concentrations in the Ningxia Hui Autonomous Region and Xinjiang Uygur Autonomous Region. Both Hui and Uygur are large minority groups that enjoy great freedom of religious and cultural activities. There are now over 30,000 mosques in China. Catholicism reached China in the 7th century and Protestantism in the 19th century. There are now over 4,600 Catholic churches, over 12,000 Protestant churches, and 25,000 other places of Christian worship in the country. 1.4.3
Official Policies towards Religion in China
Officially, China claims to be an atheist state with a belief in “historical materialism” (a Marxist term). While freedom of religion was written into China’s constitution, religion and freedom have different connotations there than in the West. The authorities interpret religious practice only as personal devotion and spiritual self-development or activities by government-recognized organizations. A keystone of China’s current religious policy and a necessary condition for the continued existence of religious organizations is the “three-self” concept, meaning religions must be self-governing, self-supporting, and self-propagating. In other words, there cannot be any foreign influences in terms of ideas, policies, or funds. Superstitious activities are strictly prohibited in China, and the government is very sensitive to any involvement of religious associations in politics. Nonetheless, folk religions, including different forms of worship, have been increasingly practiced and tolerated in recent years.
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7
Education
Chinese leaders face three challenges in designing education policy. First, as a developing country, China faces resource allocation trade-offs between providing many people with relatively little education and training a few in areas that could enhance the nation’s economic, political, and military strength. Second, as an ancient country, China faces curriculum trade-offs between teaching traditional norms to preserve cultural and national identity and teaching modern technology and ideas to be internationally competitive. Third, China’s leadership has a mandate to shape and support the people’s belief in the Communist Party’s ideology, policies, and rules, and the directions the Party has chosen for the country at various periods. 1.5.1
Literacy
The adult literacy rate in 1949, when the Communist Party came to power in China, was only 20 percent. This reportedly reached 22 percent in 1964 and 77 percent in 1982, but declined to 73 percent in 1988. By 2015, the literacy rate is estimated to be at approximately 99 percent (99 percent for men and 97 percent for women).8 This achievement is viewed by the Chinese leadership as the result of many efforts, starting with the language reform efforts that began early in the century. Although the climbing literacy rate is a laudable achievement, the statistics must be interpreted with caution. For one thing, literacy is defined as the completion of a minimum of 4.5 years of education, a rather low requirement. Secondly, the literacy rate in cities is very high, but much lower in rural areas. 1.5.2
The Formal Education System
China’s formal education system is very similar to that of Western countries, since it was imported from the West. Nine years of formal education is compulsory, with either 5 years of elementary education, followed by 4 years of junior middle school, or more commonly, 6 years of primary school followed by 3 years of junior middle school. Primary education, including pre-school and elementary education, begins as early as age three with elementary school beginning with first grade at age six. Regular secondary education comprised of junior and senior middle school completes the 9-year requirement (junior middle school) and extends schooling for another 3 years. Senior middle school may be a vocational school, offering 2- to 4-year programs, training mid-level skilled workers, farmers, and managerial and technical personnel, while technical schools offer 4 years of training for intermediate technical personnel. Higher education in China ranges from 2 to 6 years, including 2-year community colleges, 4-year colleges and universities, and institutions offering advanced degrees. Adult education includes all of the foregoing and adult primary education, secondary education and higher education, with specialized training for various occupations. 1.5.3
Education Expenditures
The percentage of gross domestic product (GDP) devoted to education in China was 4.4 in 2002.9 According to the World Bank data, the average education expenditure is 3.4
8
National Literacy Policies China, http://www.accu.or.jp/litdbase/policy/chn/, accessed 10 January 2006 UNESCO Institute for Statistics (United Nations Educational, Scientific and Cultural Organization), 2005, Correspondence on education expenditure data, March, Montreal, http://hdr.undp.org/statistics/data/indicators.cfm?x=190&y=1&z=1 9
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percent of GDP in low-income countries and 4.4 percent in middle-income countries compared with 5.6 percent in high-income countries.10 State schools at all levels, including institutions of higher learning, have been tuition-free until recent years. In the past several years, various fees have been charged to raise money at all levels. Colleges and universities started charging tuition in 1997. Private schools and colleges are growing rapidly in affluent areas. 1.5.4
Prognosis
While the educational level of China’s population as a whole is rising, as is the number of persons with undergraduate and postgraduate degrees, economic reform has in some ways slowed and even reversed some of China’s education gains. In rural areas, the elementary school dropout rate has increased. Many intellectuals have left educational institutions for better paying jobs. A large number of the brightest youths are seeking opportunities abroad. Disparities between educational levels of rural and urban dwellers and of intellectuals and workers are not only an economic but also a political problem that cannot be ignored. The country’s low educational mean and its educational disparities are not expected to improve rapidly. Nevertheless, optimists put their faith in the Chinese cultural heritage, which places emphasis on family and education, as most Chinese families make their child’s education one of their highest priorities. Also, the new market-oriented economy increasingly demands educated and skilled workers at all levels, which may help channel more resources into the education arena. Meanwhile, the government is promising to provide more support for education, and the Ministry of Education seeks to bring the literacy rate to 97 percent by 2020, and to increase the average national education period from the current 8 years to 11 years. In higher education, many new universities are being constructed and numerous exchange programs are being instituted with universities abroad in an effort to learn alternative teaching methods and enhance innovation.
1.6
Political Structure
China is a communist state in which the political institutions are largely derived from the Soviet Union. Still, China’s political system has many embedded traditional (feudalistic) elements that make it different from the Soviet model, and many changes have taken place. 1.6.1
The Communist Party of China
The Communist Party of China (CPC) is granted absolute power by China’s constitution, and it is involved extensively in the decision-making processes that determine the social, economic, and political goals for the country. It has the exclusive right to legitimize and control all other political organizations. A conspicuous characteristic of the Party is its hierarchical, pyramidal, and centralist structure. Formally, there are four organizational levels. At the top of the structure, at the national level, are the National People’s Congress (NPC), the Party chairman, the Standing Committee, the Politburo, and the Central Committee. The NPC exercises the legislative power of the country and elects the president, supervises enforcement of the constitution, amends the constitution, enacts basic laws, and approves the premier of the State Council and the Central Military Commission and the president of the Supreme People’s Court. At 10
The World Bank Group, “Beyond Education Growth: Meeting the Challenges of Global Development,” Chapter VII, http://www.worldbank.org/depweb/beyond/global/chapter7.html
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the second level are the provincial and autonomous regional organizations, with their committees and congresses. At the third level are county and city organizations. At the base of the structure are the primary party branches, which cover every cell of the society, such as schools, factories, and communities. The Party’s oversight over the government bureaucracy is generally tight, centralized, and pervasive. More specifically, the Party retains the authority to select government officials, make policies, and oversee the government’s work. 1.6.2
Administration
China’s civil administration consists of three levels, presided over by the State Council: (1) the provinces and autonomous regions and municipalities directly under the central government; (2) autonomous prefectures, counties, and cities, and (3) townships, ethnic townships, and towns. Municipalities directly under the central government and large cities are subdivided into districts and counties; autonomous prefectures are subdivided into counties, autonomous counties, and cities. Special administrative regions may also be created directly under the central government. China is currently divided into twenty-three provinces, five autonomous regions, four centrally administered municipalities, and two special administrative regions. The capital is Beijing; other major cities include Shanghai, Tianjin, Guanzhou, Shenyang, Wuhan, Chengdu, and Chongquing. The Chinese government bureaucracy makes decisions by a system of “democratic centralism.” Party leaders delegate authority to subordinate government agencies to work out specific policies. If everyone agrees with a proposed policy, the leaders simply ratify it; if some agencies disagree, then it is sent to higher levels for resolution or is tabled. Hierarchical control gives officials an incentive to compromise rather than exercise their veto, particularly when the political climate clearly identifies certain preferences. Self-governing autonomous agencies manage autonomous regions; the central government provides funds and materials to promote development of local economies and cultures. China now has five autonomous regions (Inner Mongolia, Xinjiang Uygar, Guangxi Zhuang, Ningxia Hui, and Tibet), with thirty autonomous prefectures, and 120 autonomous counties and over 1,300 ethnic townships. These agencies enact regulations on the exercise of autonomy; regulate political, economic, and cultural characteristics of the autonomous region; and manage and use all the revenues therein, independently arranging and managing economic development, education, science, culture, public health and physical culture, and protecting, developing, and strengthening their cultures. Figure 1.2 illustrates the hierarchy of China’s state administrative bodies. 1.6.3
Military Organization
National security has been a key determinant of Chinese policy since 1949 and modernizing its military buildup is part of the country’s “four modernizations” drive. Since the 1970s, China has moved to develop intercontinental ballistic missiles and nuclear submarines, and to acquire sophisticated foreign technologies with military applications. In the meantime, China uses all international forums to project its “independent foreign policy of peace.” It continues to open up to the outside world, improve bilateral relations with various countries, and make great efforts for a peaceful settlement of international disputes and conflicts. China’s increasing involvement in international affairs coincides with the growing involvement of foreign countries in China’s economic development. Chinese leaders attempt to encourage foreign participation in China’s economic programs while simultaneously maintaining its independence and heightening the country’s stature in the international community. China’s 3 million armed forces consist of the People’s Liberation Army (PLA), the People’s Armed Policy Force, and the People’s Militia under centralized commandership of
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the Central Military Commission. The political role of the military in the People’s Republic of China has been substantial, and it also serves the country’s economic purposes, tracing back to the guerilla period and continuing to the present economic reform period. The highly respected PLA has long been promoted to the whole society as a moral model.
The National People’s Congress
The Presidency of the People’s Republic of China
Supreme People’s Court
The Vice Presidency of the People’s Republic of China
Supreme People’s Procuratorate
State Council Central Military Commission
Commission for Science, Technology, and Industry for National Defense
State Development Planning Commission
People’s Bank of China
State Ethnic Affairs Commission
Ministries and Ministry -level Organizations
State Economic and Trade Commission
State Bureaus
Figure 1.2: China’s State Administrative Bodies11
1.6.4
Judicial Organization
The state judicial organs are the Supreme People’s Court, with its subordinate local people’s courts and special people’s courts. The state legal supervisory organs are the Supreme People’s Procuratorate, with its subordinate regional and special procuratorates, which are responsible for legal supervision of the judicial and penal systems.
1.7
Brief Overview of Modern Chinese History
For several millennia, China was an isolated but self-sufficient society. Nomadic invaders occasionally dominated the country and were eventually assimilated. Despite dynastic rise and fall, Chinese culture, including Confucianism and Buddhism, embodied in political structure, social order, moral values, and other traditions, has constituted the world’s most homogeneous and extraordinarily enduring civilization. The Opium War of 1839-42 ushered in a period of Chinese history that forced China to open to the outside world, particularly the West. Since then, China has been troubled by both external crises (Western intrusion) and domestic plagues (famine, corruption, and 11
“China in Brief, Political System and State Structure,” http://www.china.org.cn/e-china/politicalsystem/, 2000
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rebellion), which finally led to Sun Zhongshan’s Revolution of 1911 and the establishment of the Republic of China. In the following decades, China witnessed severe disasters of war, including the War against Japanese Aggression and the Civil War between the Chinese Communist Party and the Nationalist Party. Communist leader Mao Zedong, relying on the support of the Chinese peasantry, engaged in a successful Marxist revolution and founded the People’s Republic of China on 1 October 1949. The Nationalist government and its adherents fled to the island of Formosa. 1.7.1
China under Mao Zedong
The Communists, under the leadership of their populist leader Mao Zedong, moved quickly to integrate all the Chinese. The new government unified the nation and achieved a stability that China had not experienced for generations. With the assistance of the Soviet Union, the People’s Republic developed a centrally planned economy in the 1950s, which eventually proved inefficient. For a variety of reasons, Soviet leaders severed their ties with Mao in 1962. Soviet suspension of aid was a terrible blow to the Chinese scheme for developing industrial and nuclear technology. As hostility grew between China and the Soviet Union, China strategically turned to the West in the early 1970s. Despite some admirable achievements, two of Mao’s campaigns ultimately brought chaos and severe economic distress to his people: the “Great Leap Forward” to expedite self-reliant economic growth, and the “Cultural Revolution” to carry revolution and class struggle into all aspects of Chinese society. These ambitious, idealistic campaigns cost the deaths of tens of millions of people and destruction of numberless cultural treasures, and drew China even further behind other nations in scientific, technological, and economic development. 1.7.2
Economic Reform after Mao
After Mao Zedong died in 1976, an early protégé but often outcast pragmatic leader, Deng Xiaoping, regained power in 1978. Almost immediately, he began China’s transition from central planning to a market-oriented economy, coupled with a new policy of opening to the world. Deng abandoned Mao’s program of class struggle and focused the country’s energies on “four modernizations” – of agriculture, industry, national defense, and science and technology. Initial efforts focused on revitalizing agricultural production, followed by a corresponding program to revitalize industry. Deng’s policy meshed with a number of popular initiatives, and results have been widely considered a success. Deng dissolved Mao’s agricultural communes and leased the land back to private households, although without really privatizing the agriculture market.12 Farmers became responsible for output and obtained the right to the income produced, but they were not able to buy and sell their land. As a direct result of agricultural reforms, in the following 6 to 8 years, grain output tripled, cotton production almost tripled, fruit production went up by half, and real farm income almost tripled.13 In his ensuing industry reforms, Deng encouraged private enterprise, worked to upgrade inefficient management styles and antiquated technologies, implemented price reform, encouraged foreign investments and trade, and even approved a stock market.14 However, Deng’s industrial reforms were not as successful as the farming reforms. The industries were owned and controlled almost entirely by the state, and their capital assets could not simply be subdivided as could plots of lands. More radical changes would have called into question the role of the Communist Party. Even so, Deng launched reforms of state-owned
12 13 14
The Economist, 1997, http://www.economist.com/index.html Rohwer, J., Asia Rising, Simon & Schuster, New York, 1996 Ibid
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industries, adopting a policy of attracting foreign business and allowing non-state-owned industries.15 In 1997, Deng Xiaoping passed away, marking the end of an era. Shortly after, the post-Deng Chinese leadership exerted great efforts to ensure the smooth resumption of sovereignty over Hong Kong on 30 June 1997. This was followed by intensive preparation for the Fifteenth National CPC Congress in September, which set national priorities for China’s medium and long-term development, as well as choosing a core team of younger leaders responsible for leading China into the 21st century.16 The Fifteenth CPC National Congress rejected the Soviet-style view that the quality of the socialist state was proportional to the size of the state sector, and that the more state-owned enterprises (SOE), the better. The Congress stipulated that the basic economic system at the initial stage of socialism is a core of public ownership, complemented by other forms of ownership, and called for establishing a long-term economic system based on the principle of “Three Benefits.” First, the domain of the state sector should be narrowed. State capital should withdraw from fields irrelevant to the state’s economic needs. Second, China should develop multiple forms of public ownership to help improve productivity. And finally, the development of the non-public sector should be encouraged to make it an important part of the socialist market economy. The Congress modified the guiding principle of reform from revitalizing SOEs and the state sector, to developing multiple forms of ownership structure.17 In 2003, under the leadership of Hu Jingtao, further change took place, including inviting entrepreneurs to join the CPC, developing a policy of protecting private ownership, and creating a new definition of China’s market economy. China has joined the World Trade Organization (WTO) and adopted numerous measures to honor its WTO commitments by scrapping rules and regulations not in conformity with WTO norms and streamlining the central government’s complex bureaucracy. Driven by the need to be competitive in the global economy, China continues to improve its institutional infrastructure. 1.7.3
The Future
Deng made his reforms by not following a preconceived plan or philosophy, but by “crossing the river by feeling the stones,” formulating only in retrospect an ideological paradigm for change. He rejected the insinuations of communist critics that he was making China capitalist. He insisted that his modernization program was a socialist one designed to make China strong, not democratic.18 With rising expectations among the people due to the economic successes of Deng’s programs, the challenges to present leaders, headed by President Hu Jingtao and Premier Wen Jiabao, are to consolidate China’s gains and move forward in a way that maintains stability. Ongoing reforms are not without anguish and cost, both political and monetary. Efforts at fundamental transformation of economic, governmental, and political organizations cause discontent among some elements of society and are resisted by those who cling to the “iron rice bowl” of guaranteed lifetime job tenure. Beijing’s reform leaders have made repeated calls for party members and government bureaucrats to adopt modern methods. To achieve the country’s ambitious economic goals, China has modified its concept of self-reliance and its historical definitions of socialist economic organization. Foreign specialists have been invited to assist in the modernization process. The country has entered
15 16 17 18
Ibid China’s Political Economy, World Scientific Publishing Company, June 1998 Wu, J., “China’s Economic Reform: Past, Present and Future,” 26 February 2000 Schell, O., “ Deng’s Resolution,” Newsweek, 3 March 1997, pp. 20-27
General Information
13
into the milieu of international bank loans, joint ventures, and the whole panoply of capitalist economic practices. The Chinese debate is no longer about ideological correctness or technical competence. The economic reforms have brought general success. Now the issues include moral degeneration, regional imbalance of economic development, and increasing number of disadvantaged groups of people.
Chapter 2 Economic Conditions and Policy
Since Deng Xiaoping initiated economic reform in 1978, China’s gross domestic product has increased over 9 percent annually, from US$44.2B in 1978 to an estimated US$1.98T in 2004. China’s real GDP growth is forecast to average 8 percent per year from 2005 to 2009, similar to the rate recorded in the previous 5 years, according to the Economist Intelligence Unit (EIU). There is no doubt that China is undergoing one of the largest economic booms the world has ever seen. In little more than a decade and a half, 50 million Chinese have leapt into the middle class, while the country is on course to overtake Japan as the world’s second-largest economy in just 10 years.1 In 1992, the Chinese Communist Party’s National Congress made three policy decisions of far-reaching significance: (1) to seize opportunities to speed up economic development; (2) to establish a socialist market economy as the goal of economic restructuring in China; and (3) to implement Deng Xiaoping’s theory of building socialism with Chinese characteristics. China’s Tenth Five-Year Plan (FYP) continued the vision for its modified version of capitalism. New efforts were implemented to reorganize the state-owned enterprises (SOEs), attract foreign investment, and enhance research and development activities. There were also policy measures to fight corruption and install a sound regulatory system. Developing and sustaining competitiveness in the face of global competition is still China’s major challenge. This will depend upon the following factors: •
• • •
The degree to which foreign investment in sectors, such as services, other than manufacturing, is allowed to enter China and contribute to raising technology, productivity, and quality control to global standards The degree to which SOEs are transformed from politically controlled bureaucracies to dynamic, market-driven firms with competitive quality, cost, delivery, and service The degree to which labor markets effectively allocate talents and skills as required by the various business sectors The degree to which China’s abundant capital can be efficiently channeled by functioning capital markets into productive investment
According to China Daily,2 the economic blueprint set for 2006 includes (1) maintaining fast and stable economic growth; (2) raising farmers’ income, speeding up construction of roads and telecom facilities, and increasing investment in education, culture, and public health in rural areas; (3) sharpening competitive edge of domestic enterprises; (4) saving resourses and protecting environment; (5) deepening reform and opening wider to the outside world for win-win results; and (6) building a harmonious society fast. 1 2
Gumbel, P., “Pack Your Bags for the Orient Express,” Time Magazine, Vol. 164. No. 16, 18 October 2004 “Economic Goals Set for Next Year,” China Daily, 2 December 2005
China’s Electronics Industry
16
2.1
General Economic Conditions
China’s growth rates have surpassed those of any other country (Table 2.1). Its GDP is estimated at US$1,5862B in 2004, well over double that in 1993 (at constant prices). In 2005: • • • • •
China was the world’s largest producer of steel, cement, aquacultured food, and television sets, and is the second-largest producer of electricity and chemical textiles.3 China was the world's third largest sugar producer and consumer.4 China is the world’s fifth-largest crude oil producer.5 China manufactured 75 percent of the world’s toys, 58 percent of the clothes, and 29 percent of the mobile phones.6 More than US$1B in foreign direct investment arrives each week.7 Table 2.1: General Economic Indicators of China8, 9, 10,11, 12
Year
GDP (US$B)
Real GDP Growth (percent)
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
483 613 559 728 858 955 1021 1084 1195 1321 1271 1450 1700 2262
14.2 14.0 13.1 10.9 10.0 9.3 7.8 7.6 8.4 8.3 9.1 10.0 10.1 9.9
Retail Price Index 5.4 13.2 21.7 14.8 6.1 0.8 -2.6 -2.9 -1.5 0.0 -1.9 -0.1 N/A N/A
Urban per Capita Income 331 406 406 513 583 624 656 709 760 830 931 1,024 1168 1301
Rural per Capita Income
Unemployment Rate (percent)
142 160 142 189 232 253 261 267 273 286 299 317 364 404
2.3 2.6 2.8 2.9 3.0 3.1 3.1 3.1 3.1 4.0 4.0 4.3 N/A N/A
N/A N/A
N/A N/A
Estimated Real GDP Growth13 2006 2007
N/A N/A
8 7.3
N/A N/A
N/A N/A
By 2008, China will be the world’s third-largest exporter, and by the decade’s end its economy will be larger than that of France and the United Kingdom.14 3
“China’s Environment in a Globalizing World,” http://cmbi.bjmu.edu.cn/news/report/2001/yiwen/prev/2.pdf, June 2005 4 “Outlook for Sugar Traders Goods,” 29 December 2005 http://en.chinabroadcast.cn/855/2005/12/29/
[email protected], 5 “Oil-Price Hikes: Will China Feel The Pinch?” http://www.btmbeijing.com/contents/en/business/2004-06/focus/oilprice, June 2004 6 “ About the Chinese Economy,” http://www.chinatelecomusa.com/content.asp?contentid=417 7 http://www.mckinseyquarterly.com/article_page.aspx?ar=1483&L2=7&L3=8, 2004 8 National Bureau of Statistics of China, “China Statistical Yearbook,” 2004 9 International Monetary Fund – International Financial Statistics, http://ifs.apdi.net/imf, 10 December 2005 10 Economic Intelligence Unit, http://www.economist.com/index.html, accessed 13 January 2005 11 Based on China’s official exchange rates with respect to the US Dollar: 1991 (5.32), 1992 (5.52), 1993 (5.76), 1994 (8.62), 1995 (8.35), 1996 (8.30), and 1997- 1999 (8.27). 12 Based on China’s official exchange rates with respect to the US Dollar: 1992 (5.32), 1993 (5.76), 1994 (8.62), 1995 (8.35), 1996 (8.30), 1997-2004 (8.27), 2005 (8.06) 13 http:// www.economist.com, Economist Intelligence Unit
Economic Conditions and Policy
17
China has over 300,000 SOEs, which include about 118,000 industrial firms. SOEs accounted for 50 percent of all Chinese firms, excluding smaller firms owned by local townships. Running the nation’s infrastructure, energy, transportation, and telecommunications services, SOEs account for around 35 percent of China’s gross national product and 60 percent of all state revenue. SOEs, ranging from large manufacturing plants to small service providers, employed 100 million workers.15 Before the onslaught of foreign competition, SOEs dominated industries like steelmaking, machine-tool building, and petroleum production. Many operated at a loss and relied on government subsidies to stay in business. Now, under the policy of “grasp the big, let go of the small,”16 small, inefficient SOEs are being turned over to local governments for conversion into village and small-town enterprises. From 1995 to 2002, 7,798 SOEs went bankrupt. However, China’s State-owned Assets Supervision and Administration Commission (SASAC) said, by the end of 2002, there were still 159,000 state-owned or state-controlled industrial and commercial enterprises, with an overall asset volume of US$2.2T.17 About 2,000 to 3,000 companies are scheduled for bankruptcy by 2006, including over 200 military companies. Foreign and private funds or companies are now welcome, as the government becomes more aggressive in reshaping state assets. “There are no restrictions on foreign and private companies that want to buy stakes in restructuring state-owned companies,” said Lu Hao, vice-mayor of Beijing.18 As of mid-July 2003, Beijing had listed 104 key industrial enterprises that foreign and domestic companies could acquire.19 A fallout of the predominance of SOEs is the misallocation of capital. Private companies and collectives generate nearly half of China’s industrial output, but account for only 20 percent of all loans by value. This misallocation of capital starves productive private enterprises of funding and might ultimately slow down economic growth. However, this must be sustained if China’s economy is to absorb the hundreds of thousands of workers laid off annually from restructured SOEs and, more importantly still, the millions of people migrating from rural areas20 (Figure 2.1).
100% 80% 60% 40% 20% 0% % of Enterprises Contribution to GDP Share of Loans (%) (%) Local Private Enterprises
Quasi-Private Enterprises
SOEs
Figure 2.1: Allocation of Capital Among Enterprises21 Pitsilis, E. V., Woetzel, J.R., and Wong, J., “Checking China’s Vital Signs,” The McKinsey Quarterly, 2004 Some economists believe that the bad debt accumulated by SOEs could destabilize China’s entire banking system. 16 Zhang, A., “China Joins the WTO: The Impact on Foreign Trade,” http://www.pwcglobal.com 17 “SOE bankruptcies planned,” http://www.chinadaily.com.cn, 3 August 2003 18 Ibid 19 Ibid 20 Pitsilis, E. V., Woetzel, J.R., and Wong, J., “Checking China’s Vital Signs,” The McKinsey Quarterly, 2004 21 China Securities Regulatory Commision, China Statistical Yearbook, China Financial and Economic Publishing House, Beijing, China 14 15
China’s Electronics Industry
18
As the dominant economic institutions in China, SOEs have been burdened with much of China’s social welfare responsibilities, including housing, education, medical services, and retirement incomes. As SOEs restructure to improve financial performance, unemployment has grown. The number of China's registered urban unemployed by March 2005 came to 8.32 million, and the unemployment rate was 4.2 percent, the same as that of 2004. The number of laid-offs from Chinese SOEs was 1.49 million by the end of March, 2005. About 820,000 of them have signed agreements with the official re-employment service centers, which offer training and job information as well as pay social insurance premiums.22 Restructuring of SOEs has advanced more quickly than is generally recognized. The contribution of SOEs to China’s GDP was only 17 percent in 2003, for example. Yet some of the largest SOEs have become extremely profitable: energy company PetroChina had operating profits of US$12B in 2003, while telecom companies China Mobile and China Telecom made US$6B and US$4B, respectively. These companies, operating in infrastructure-based sectors, are world leaders in scale and help offset the losses of the SOEs in declining industrial sectors. Even the basic-materials sector – coal and steel – has undergone a substantial turnaround in profitability during the past few years, largely as the result of a rapid increase in derived domestic demand. China’s state-owned enterprises posted a combined profit of US$113B in 2005, up 25 percent from a year earlier, based on data from the Ministry of Finance. Revenue at the nation’s government owned companies jumped 19 percent on-year to US$1.44T. Enterprises controlled directly by the central government contributed 70 percent of the total profit of atate-owned companies. The profitability of these companies provides financial breathing space the government can use to restructure and shrink underperforming SOEs. Meanwhile, the process of selling them off and shutting them down continues. Struggling companies tend to operate in relatively deregulated and highly competitive markets, where they face both local private and foreign competitors. A lingering concern is the concentration of declining, money-losing SOEs in places such as northeast China, where only a limited amount of industry has sprung up to replace lost jobs. Such areas have the greatest potential for social unrest.23
2.2
International Economic Angst
The common notion of capitalism and communism almost certainly needs to be refreshed. Capitalism, as a recognizable economic system, began in the 16th century in Europe and came into full bloom only during the industrial revolution in the latter part of the 18th century. It was actually an outgrowth of feudalism. Therefore, the oft-held business concept that free enterprise goes back into antiquity is a misconception. Modern capitalism is a relatively new invention. Humankind is still working out the wrinkles inherent in it. Unlike the traditional laisse-faire attitude towards the government role in economy, many modern economists, such as those from the Keynes’ school and institutional school, call for government control and use of macroeconomic instruments. Communism is even a newer economic invention, primarily beginning in the later 19th century. Communism started, in large part, as a reaction to the shortcomings of 19th century capitalism. Most communist countries have given up rigorous central economic control policy over the last two decades and adopted market economies; others have experienced dramatic social turmoil due to political reform. Today, diametrically opposed economic systems of capitalism and communism are evolving into a hybrid of regulated market capitalism mixed with socialist humanitarian policies, but only time will tell how successful this development will be. “China’s Unemployment Rate Maintains at 4.2 Percent in First Quarter,” People’s Daily Online, 21 April 2005, http://english.people.com.cn/200504/21/eng20050421_182202.html, 2 January 2006 Farrell, D., Gao, P., and Orr, G.R., “Making Foreign Investment Work for China,” The McKinsey Quarterly, 2004
22
23
Economic Conditions and Policy
19
Trade is defined on a worldwide basis. That is to say that large-scale economic interaction, in the sense of a profound supply chain, exists today between nations. Understanding the salient details of this evolutionary refinement of economic processes in light of political evolution sheds light on the situation today. We are moving towards a world in which national consumer markets and production are merging into an interdependent global system–that is globalization. Before delving into attitudes outside the U.S., it is important to note the growing concern about globalization of the U.S. trade balance due to loss of domestic jobs, especially to China. These concerns, as noted above, are beginning to stir political discussion in the U.S. The proponents of globalization appear to be, primarily, big businesses. For example, in the Wall Street Journal, the voice of U.S. big business, an editorial begins, “Trade with China is becoming a hot topic… Before things get carried away, we’d like to put a few facts on the table that show just how much trade with China helps the U.S.”24 Many in China and in much of the developing world share a suspicious point of view about the U.S. and the other developed countries. This is based on both past and current conduct of the more powerful countries, and the legitimacy of these views must be honored in order to form long-term business relationships. Increasing American hegemony is feared. These worldviews include fears of economic marginalization and political destabilization by the powerful triad of the U.S. and its allies, the European Union and Japan.25 An example of the mistrust is the perception of misstated trade balances. 26 Many countries see the U.S. and its allies as monopolists. Just a handful of countries have a de facto monopoly on technology, finance, natural resources, communications, and weapons of mass destruction.27 These anxieties are buoyed by the institutionalized power of the Group of Seven (G7) dating from 1975 (U.S., France, Germany, England, Canada, Japan, and Italy). The Group of Seven28 is not just a group monitoring the international monetary system; the members are also the major powers of the International Monetary Fund (IMF), the World Bank, the United Nations Security Council, and the North Atlantic Treaty Organization (NATO). The General Agreement on Tariffs and Trade (GATT), the predecessor to the World Trade Organization (WTO), was, after all, set up by these players. The efforts to ensure intellectual property rights under the WTO are seen by many as just an effort to maintain a monopoly on technology.29 The U.S. bellicose posturing under the Bush administration is perceived as a new kind of colonialism under the guise of globalization. In this new colonialism, supported by unchallenged military might, trade has shifted from pre-19th century agriculture to 21st century electronic components and manufactured goods. These accusations of a new colonialism or militaristic imperialism are counterbalanced by U.S. domestic concerns about China’s military buildup. Chinese military spending should be understood, however, in the context that the U.S. spends ten times more U.S. on its military.30 International posturing by any country, especially when based on misinformation, can only increase international tensions with respect to the angst of globalization. One overriding issue with the American macro-imbalance is the trade imbalance. The U.S. deficit 31 grew to US$136.9B in the first quarter of 2004.32 The imbalance of trade has been steeply increasing since the early 1990s. 33 The imbalance with China alone is approximately US$10B per month, about twice the imbalance with Japan, Mexico, and 24 Wall Street Journal, “A China Trade Primer,” 19 August 2003, http://online.wsj.com/article/SB106125789232506600,00.html 25 Amin, S., “Capitalism in the Age of Globalisation,” London: Zed Books, 1997 26 Fung and Lau, “ How Big is it Really?, http://www.ciaonet.org/wps/fuk01/, 2003 27 Amin, S., “Capitalism in the Age of Globalisation,” London: Zed Books, 1997 28 “Who are the Group of Seven?,” http://www.womensgroup.org/G-7REPOR.html 29 Ibid 30 Eland, I., “Is Chinese Military Modernization a Threat to the United States?,” Policy Analysis, 23 January 2003 31 Exports minus imports 32 US Census Bureau, 2005, http://www.census.gov/ 33 The U.S. Trade Deficit, 2003
China’s Electronics Industry
20
Canada.34 The overriding issue with the American macro-imbalance is the trade imbalance. The U.S. deficit was US$195.8B in the third quarter of 2005.35 To make things worse, the U.S. is borrowing money, both in the private and public sectors. U.S. consumer debt totaled US$2031.2B in May 2004.36 The U.S. Government has a debt of US$7.3T, with ballooning federal deficits expected to grow to US$477B for 2004.37 China has a policy of holding the yuan at a constant trading rate with the dollar. Therefore, trading partners like China accumulate huge surpluses of U.S. dollars. China’s banks are forced to reinvest these dollars back into the U.S. or hold the currency. Due to the U.S. Government’s demand for money to meet the deficit and the Chinese need to reinvest these excess dollars, foreign investment is supporting 25 percent of the U.S. economy.38 If this trade imbalance involved any country other than China, a currency correction would have begun long ago. Large inflows of foreign money to China have attempted to push up the value of the renminbi (RMB). But the Chinese authorities have bought US$15B to US$20B per month for several years to maintain their fixed rate against the dollar, generating an RMB undervaluation against all currencies that now averages 20 to 40 percent.39 These are a few of the factors that create discomfort for the international players in today’s globalizing economy. It is important to understand the perspectives of each member state in trade transactions. 2.2.1
China’s Entry into the WTO
China’s accession to the WTO was announced on 10 November 2001 in Doha (capital of Qatar), at the fourth Ministerial Conference, after 15 years of negotiation with key trading partners, especially the United States and the European Union. The WTO’s equal treatment principle requires the government to grant equal rights to all enterprises, whether they are state-owned or private. Under the WTO accession agreement, China must dismantle the license and quota system by 2005. The government has initiated a campaign to clarify and unify governmental regulations to meet the WTO rules. In the first half of 2002, more than 2,300 regulations were abolished or revised by 30 departments under the State Council. China’s commitments include a comprehensive package of liberalization measures for opening up its domestic market to foreign products and investment. Its commitments must be concluded by 2005, including the following measures: •
•
•
34
Average tariffs for agricultural commodities must be reduced to 17.5 percent and those of fisheries to 10.6 percent by 2005. The average tariff on agricultural products of U.S. priority interest will be 14 percent. China will use a tariff rate quota (TRQ) for all sensitive agricultural items, eliminate export subsidies, and substantially reduce domestic subsidies. The industrial tariff will be reduced from an average of 24.6 percent to an average of 9.4 percent. Non-tariff barriers for industrial products will be removed and licenses and quotas system will be eliminated by 2005. Restrictions on service sectors, such as telecommunications, banking and insurance, distribution and professional services, will be phased out. Restrictions for all products in distribution services will be phased out in 3 years from the date of accession, and foreign service suppliers will be allowed to establish joint ventures within 1 year of accession.
U.S. Census, 2005, http://www.census.gov/ Bureau of Economic Analysis, U.S. Department of Commerce, “U.S. International Transactions: Third Quarter 2005,” 15 December 2005, http://www.bea.gov/bea/newsrel/transnewsrelease.htm, accessed 12 January 2006 36 Federal Reserve Statistical Release, http://www.federalreserve.gov/releases/g19/20040708, 8 July 2004 37 Congressional Budget Office Monthly Review, http://www.cbo.gov/showdoc.cfm?index=4967&sequence=0 January 2004 38 Liu, H., Global Economy, “Two Cents Worth,” http://www.atimes.com/atimes/Global_Economy/EH14Dj02.html, 14 August 2003 39 Bergsten, C. F., “Clash of the Titans,” Newsweek, p 23, 24 April 2006 35
Economic Conditions and Policy
21
With entry into the WTO, China should become a more transparent economy with lower domestic subsidies, which means greater access for foreign companies to the domestic markets of China. Unresolved first-year implementation problems included agricultural and industrial quotas and tariff-rate quotas, standards for genetically modified organisms applied to agricultural trade, unreasonably high capital requirements for establishment of service businesses, a variety of tax measures that continue to discriminate against foreign products, the continuing absence of promised regulations regarding auto finance operations, and ongoing problems of insufficient regulatory transparency and intellectual property rights protection. The Ministry of Commerce (MOFCOM), set up in 2004, consolidates the internal trade authority of the former State Economic and Trade Commission (SETC) and the former external trade mandate of the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) into a single ministry. This reorganization should allow Chinese trade officials to streamline trade policymaking and strengthen the hand of supporters of WTO implementation vis-à-vis sector-specific (often protectionist) line ministries (see Table 2.2). Table 2.2: The Departments of MOFCOM General Office Policy Research Department Department of Planning and Finance Department of Western Asian and African Affairs Department of American and Oceanic Affairs Department of International Trade and Economic Affairs
Department of Foreign Trade Department of Scientific and Technological Development and Trade in Technology Department of Commercial Reform and Development Department of Foreign Investment Administration Department of Foreign Economic Cooperation Bureau of Industry Injury Investigation Protocol Department
Department of Human Resources Department of Treaty and Law Department of Asian Affairs Department of European Affairs Department of Taiwan, Hong Kong and Macao Affairs Department of WTO Affairs (WTO Notification and Enquiry Center of Chinese Government) Department of Import and Export of Electromechanical Products (National Office of Import and Export of Electromechanical Products) Department of Market System Development Department of Market Operation Regulation (National Office of Cocoon Silk Coordination) Department of Foreign Aid Bureau of Fair Trade for Import and Export Department of Information Technology Office of the Representative for International Trade Negotiation and the National Office of Rectification and Standardization of Market Economic Order
Different industrial sectors in China will be affected by the accession in different ways. Labor-intensive sectors like textiles, footwear, toys, consumer electronics, sporting goods and equipment, furniture, and plastics are poised to grow rapidly. Some high-tech products, such as computer and office equipment manufactured by foreign and newly emerging Chinese firms, will be in an advantageous position to grow their production and exports and thereby firmly establish China as a global sourcing point.
22
China’s Electronics Industry
The World Bank has estimated that China’s share of world trade will triple to 10 percent by 2005 (including services). China’s share of world exports will increase from 3.5 percent in 1999 to 6.3 percent in 2005 (1.8 percent higher than without WTO membership), and imports will grow much faster. Official Chinese government studies estimate that WTO membership will boost GDP by 3 percent to 5 percent, double the value of foreign trade to US$890B by 2010, and create millions of new jobs. China’s foreign trade dependency ratio, the total value of foreign trade to GDP, is predicted to rise from 45 percent in 2000 to over 65 percent in 2005, close to the typical level of large developed countries such as the UK.40 Manufactured industrial goods account for about 80 percent of China’s exports. Roughly 65 percent of this is made up of products manufactured in China for re-export by multinational corporations. This percentage is predicted to grow as more multinational corporations shift production to China in their efforts to reduce labor costs and create efficiencies of scale. They will also get strong support from the Tenth FYP, as it lays emphasis on greater involvement in global production chains. Local companies that suffer from capital shortages, obsolete technology, and poor management are likely to be involved in only the exporting of cheap industrial goods, while importing high-value-added manufactured goods.41 For China as a whole, accession to the WTO requires total economic transformation in just 5 years. The opening of China’s markets and deregulation of industries put enormous pressure on SOE executives who must overcome the legacies of central planning and government control, and learn to compete in the global marketplace. The impact of undertaking this transformation extends beyond economics, since such rapid and far-reaching reforms will inevitably transform Chinese society. 42 This is a serious challenge for the government and its leadership in China. 2.2.2
Where Does China Stand on Its Commitments to the WTO?
December 2004 marked the third anniversary of China’s accession. Over the past 3 years, the country has moved to meet the core commitments it made at the time of entry, and it is largely on schedule. Nonbank auto finance companies have been established, for example, foreign life insurance companies have been permitted to operate in more cities, retail opportunities have opened up, and regulators act far more transparently. The one major case in which the United States took China to the WTO for violating a resolution – refunds of value-added taxes on semiconductors – was recently resolved. China is also opening itself up much more extensively to foreign agricultural products, including genetically modified (GM) ones—though it has at the same time imposed a new prohibition on foreign investment in research into GM crops in China. Farm exports to China, such as soybeans from the United States and Brazil, are therefore increasing rapidly. What is more, the country is becoming adept at using the WTO rules to its advantage, with about 20 investigations begun last year, mainly against Japan and South Korea.43 The financial sector is expected to open up largely as planned, with the major changes coming in 2007, when greater foreign involvement in domestic retail banking will be allowed. Also scheduled for liberalization are the various forms of asset and funds management, but this move is likely to have less immediate impact, since the sub-sector is relatively small. In a number of instances, barriers remain. For example, while foreign retailers can establish stores almost anywhere, they must meet local-planning requirements to fit in with a city’s financial and development programs. Unfortunately, various requirements are vague and open to subjective implementation.
40
Zhang, A., “China Joins the WTO: The Impact on Foreign Trade,” http:// www.pwcglobal.com Ibid Bhaumik, T. K., “Implications of China’s Entry into WTO,” World Affairs, Vol. 5, No. 4 (October–December 2001), http://www.ciaonet.org/olj/wa/wa_oct01b.html 43 Orr, G. R., “What Executives Are Asking About China,” The McKinsey Quarterly, 2004 41 42
Economic Conditions and Policy
23
Also, in several sectors – including telecommunications – the regulatory function still has not been fully separated from the government or the operator. The resulting conflicts of interest may hurt competition and, at a minimum, add to the kind of uncertainty that can hold back investors.44
2.3
Foreign Economic Relations and Trade
Trade is vital to China’s economic reform. Following the successful strategies of the other newly industrialized economies of Asia (the East Asian “Tigers”), China implemented an export-led growth strategy. The increasing openness of the Chinese economy, measured by the trade per GDP ratio, has been the highlight of its growth path. 2.3.1
Current Trading Status
In 1999 China’s foreign trade, including Hong Kong, totaled US$36B, making it the fourth largest trading nation in the world. China’s foreign trade grew about 15 percent to US$590B in 2002. The composition of goods traded by China has changed since the late 1970s. The proportion of finished industrial products among all goods exported was about 91 percent in 2001, while the proportion of primary products was about 10 percent in 2001. Export of China's high-tech products grew at an average annual rate of 20 percent between 1996 and 2001, 12 percent higher than the national economic growth rate in the period. U.S. exports to China of high tech products nearly tripled between 1998 and 2004 rising to US$8.7B.45 Overall, mechanical and electronic exports rose 15 percent in 2001 to US$239B, or 47 percent of China’s trade volume. Major exports included computers, telecom equipment, audiovisual devices, air conditioners, and microwave ovens. Major imports include raw materials, energy products, and transportation equipment, which are in short supply in the growing domestic market. High-tech imports from China to the U.S. between 1998 and 2004 quadrupled to US$68.2B.46 China’s role as the world’s “processing house” is well recognized as shown in Table 2.3. See Table 2.4 for trade volumes. Table 2.3: Principal Components of Trade, 200347 Principal Exports, 2003 (US$B)
Principal Imports, 2003 (US$B)
Office machines, data processing equipment
62.6
Electrical machinery
79.8
Apparel
52.1
Petroleum and related products
26.7
Telecommunications equipment
45.0
Office machines, data processing equipment
24.2
Electrical equipment
42.4
Machinery for other industries
21.0
Footwear
13.0
Telecommunications equipment
19.5
2.3.2
Trade Policy and Administration
The Chinese government has allowed some 8,000 SOEs to import and export. The difficulty for government administrators to effectively regulate such large-scale economic 44
Ibid Sperling, E., “US, China Growing Closer,” Electronic News, 16 November 2005 46 Ibid 47 http://www.economist.com, Economist Intelligence Unit 45
China’s Electronics Industry
24
activities is reflected in the decline in the government-planned share of total foreign trade. The state, however, still retains some control through licensing, which must be approved by and registered with China’s new Ministry of Commerce. A tax of 10 to 20 percent (depending on the technology involved and the existence of an applicable bilateral tax treaty) is withheld on royalty payments. Table 2.4: Foreign Trade Volume in China (US$B)48,49
Year 1950 1965 1978 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
2.3.3
Import
Export
Total Trade Volume
Trade/GNP (percent)
Foreign Exchange Reserves
0.58
0.55
1.1
N/A
N/A
2.0
2.2
4.2
N/A
N/A
10.9
9.8
20.7
9.1
1.6
20.0
18.1
38.1
13.1
2.5
42.3
27.4
69.7
23.9
12.7
53.3
62.1
115.4
31.2
29.6
63.8
71.9
135.7
35.7
43.7
80.6
84.9
165.5
38.1
20.6
104.0
91.7
195.7
40.1
22.4
115.6
121.0
236.6
45.4
52.9
132.1
148.8
280.9
41.0
75.4
138.8
151.1
289.9
35.5
107.0
142.4
182.7
325.1
36.0
142.8
140.2
183.8
324.0
33.7
149.2
165.8
194.9
360.7
35.85
146.2
214.7
249.1
463.8
43.92
165.6
232.1
266.1
498.2
43.9
212.2
281.5
325.7
607.2
47.36
286.4
393.6
438.3
831.9
48.26
403.3
551.5
584.9
1136.4
N/A
609.9
660.1
762
1400
N/A
818.9
Major Trade Regulations
The MOFCOM drafts and issues the catalogues of goods and technologies whose import or export is restricted or banned. China’s 1996 Foreign Trade Law governs issues of both commodity and technology trade. As the fundamental law in the area of foreign trade, the Foreign Trade Law prescribes the procedures for foreign trade enterprises to import and export most goods and technologies. It dictates quotas and licenses to be used to control trade in prohibited or restricted items and other regulations including tariffs, import taxes, and licenses.
48
National Bureau of Statistics of China, “China Statistical Yearbook,” 2004 Note: The increase in trade/GNP ratio from 1978-1994 partly reflects the depreciation of Chinese currency (yuan). The decline of this ratio since 1994 mostly reflects the appreciation of the yuan at the beginning of that year. Source: China Statistical Yearbook; China Customs Statistics; State Administration of Foreign Exchange; www.ecnomist.com, Economist Intelligence Unit. 49
Economic Conditions and Policy
2.3.3.1
25
Tariffs and Import Taxes
The most extensive guide to Chinese customs regulation is the Official Customs Guide, compiled by the Customs General Administration (CGA). In addition to assessment and collection of tariffs, the CGA collects a value-added tax (VAT), generally equal to 17 percent, on imported items. Certain imports are also subject to an excise tax. Import tariff rates are divided into two categories: the general tariff and the minimum (most-favored-nation or MFN) tariff. U.S. imports are assessed the MFN rate, since the United States has an agreement with China containing reciprocal preferential tariff clauses. China’s five special economic zones (SEZs,) open cities, and foreign trade zones offer preferential duty reduction or exemption. On 1 October 1997, China’s average tariff level was reduced from 23 to 17 percent. In 2002, the average import tariff rate was cut to 12 percent. With accession to the WTO, China committed to reducing tariffs to an average of 9.4 percent for industrial goods. 2.3.3.2
Import Licenses/Quotas
China currently administers a complex system of non-tariff trade barriers, which include individual quotas on imports of machinery, electronic equipment, and general goods like grain, fertilizer, textiles and chemicals; automatic and non-automatic import license requirements on a smaller number of goods; and a tendering system applied to both quota and non-quota commodities, including machinery and electronic equipment. Three-hundred-fifty line items are reserved for designated foreign trade corporations. Import quotas for machinery and electronic items, as well as carbonated beverages, are set by the State Economic and Trade Commission under the State Council, while the State Planning Commission administers quotas for a variety of general commodities. The Commodity Inspection Law stipulates that all goods included on a published inspection list (or subject to inspection pursuant to other laws and regulations or the terms of the foreign trade contract) must be inspected prior to importation, sale, or use in China. The State Technical Supervision Bureau, which is responsible for standard-setting for domestic production, also imposes safety certification controls over certain electrical products such as leakage protectors, insulating wire and cable, power-driven tools, refrigerators, electric fans, air conditioners, televisions, radio receivers, and tape recorders. International Electrical Committee standards have also been adopted for these products. 2.3.4
Policy Instruments to Promote International Trade
China’s policies for encouraging foreign trade include the following: •
•
• •
•
The government has designated 5 SEZs, 14 open coastal cities empowered to exercise the same policies as the SEZs, and a series of zones along the Chinese coast connecting the SEZs and open cities to form a coastal opening belt; these offer attractive incentives for foreign investment and trade. A government-sponsored export network includes several hundred factories nationwide, producing a range of products; participants receive guaranteed supplies of electrical power, raw materials, tax reductions on inputs, and attractive purchase prices. Special investment funds are made available by MOFTEC for the technological upgrading of selected enterprises. Preferential treatment is given to Sino-foreign joint ventures if they are categorized as either export-oriented or technologically advanced projects; for example, enterprises that export 70 percent or more in value of their products may reduce their income tax liability by half at the end of the tax reduction or exemption period. Local enterprises are exempted from import duties on raw materials provided by overseas suppliers to meet export contracts or for use in manufacturing exports.
China’s Electronics Industry
26
•
The People’s Bank of China (PBOC) offers trade credits in domestic currency to exporting enterprises (most of them foreign trade corporations (FTCs)) to finance exports. PBOC offers export seller’s credits to Chinese enterprises selling electronic and machinery equipment in the international market. Credits (in foreign currency) are extended to buyers of complete sets of Chinese-made machinery and electronic equipment valued at a minimum of US$1M per transaction.
• •
2.3.5
China’s Barriers to U.S. Exports
China maintains several hundred formal non-tariff measures to restrict imports, such as import licensing requirements, import quotas, tendering requirements, and standards and certification requirements. China’s restrictive system of trading rights severely limits foreign-invested enterprises’ ability to directly import and export, and raises the cost of imported goods. In most transactions, U.S. suppliers are unable to sell directly to their ultimate customer. Table 2.5 lists Chinese and U.S. tariff rates for major electronic products. Table 2.5: China and U.S. Import Tariff Rates for Major Electronic Products (percent) for Most Favored Nation (MFN) and Non-MFN Tariff Heading
8540
8541
8542
8528
China Description of Goods Color cathode-ray tubes Data/graphic display tubes (color) Microwave tubes Diodes other than photosensitive or light emitting Transistor, other than photosensitive transistors Photosensitive and other semiconductor devices Light emitting diodes (LEDs) Mounted piezo electric crystals Cards incorporating electronic integrated circuits (“smart cards”) Metal oxide semiconductors (MOS technologies) Circuits obtained by bipolar technologies Hybrid integrated circuits Electronic microassemblies ICs and microassembly parts Video monitors/projectors; reception apparatus for television
MFN
U.S.
General
MFN
NonMFN
18
40
9-15
60
12
17
3.6
35
12
17
3.6
35
10
30
Free
35
10
30
Free
35
10
30
Free
35
10
30
0.3
20
10
30
Free
35
10
21
Free
35
6
24
Free
35
6
24
Free
35
6
30
Free
35
6
30
Free
35
5
30
Free
35
20-45
100-130
0.8-5
25/35
In 1992, the United States and China signed a Memorandum of Understanding (MOU) on Market Access that commits China to dismantle most of its trade barriers and gradually open its markets to U.S. exports. As a direct result of the Market Access MOU, China removed over 1,000 quotas and licenses on a wide range of key U.S. exports such as telecommunications digital switching equipment, computers, and medical equipment.
Economic Conditions and Policy
27
Despite the Market Access MOU, the imbalance in bilateral trade between U.S. and China continues to widen. Under the terms of the WTO accession, China is expected to dismantle its non-tariff barriers by 2005 and lower overall tariff rates as previously discussed.
2.4
Special Economic Zones
Special economic zones, “open coastal cities,” the Shanghai Pudong New Area, numerous other special zones, and 53 high-tech industrial parks have been established in China to promote export, restructure and upgrade industries, and attract foreign investment. These economic zones enjoy relatively dynamic economic and technological operations, advantageous locations, and preferential policies. The basic policy behind the special zones is to promote acquisition of and domestic capability in advanced technologies that can be used in both industry and agriculture in practical applications, and to entice foreign investment and expertise to help speed up China’s modernization process. Incentives are not automatically granted for foreign investors, who must apply and sometimes negotiate for these benefits with relevant governmental authorities on a case-by-case basis. Incentives are given to those firms offering unique capabilities or technologies listed as high priority. 2.4.1
Special Economic Zones
In July 1979, the Central Committee of the Communist Party of China (CCP) and the State Council agreed to experiment with Deng Xiaoping’s recommendation to establish special economic zones. Four SEZs established in 1979, and a fifth in 1988, included Shenzhen, Shantou, Zhuhai, Xiamen, and Hainan Province SEZs. The first three are located in Guangdong Province adjacent to Hong Kong and Macao. The fourth SEZ is located in Fujian Province opposite Taiwan. The fifth SEZ was approved in 1988 as the largest special economic zone in China. China’s SEZs were given authority to provide50 access to cheaper labor and land, a maximum 15 percent rate of income tax, compared to the standard 33 percent rate for foreign investment in non-open areas, even lower tax rates for export-oriented high-tech projects with investments of more than US$5M, exemption of income tax on foreign-invested enterprises for the first two profit-making years, exemptions from import duties for production inputs and income tax on reinvested profits, additional tax concessions for investment in certain Hainan infrastructure projects, and options for foreign investors to purchase stocks and bonds and lease SOEs. The SEZs became major magnets for international investment and trade because of their proximity to overseas markets and their preferential government policies. Their incentives are now being challenged under WTO regulations. 2.4.2
Open Coastal Cities / ETDZs
In 1984, 14 coastal cities were empowered by the State Council to practice almost the same policies as the SEZs to attract overseas investment. These cities are Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang, and Beihai. All can directly approve investment projects of less than US$5M. Additionally, Dalian is authorized to approve projects costing up to US$10M, and Tianjin and Shanghai are authorized to approve projects costing up to US$30M. 51 The coastal cities also have the authority to approve matters pertinent to equipment imports and to send delegations abroad regarding foreign investment projects. 50 51
Ma, J., “China’s Economic Reform in the 1990s,” www.members.aol.com/junmanew//chap6.htm, January 1997 Ibid
China’s Electronics Industry
28
After over 10 years of development and construction, about 200 such zones have opened in municipalities across the country. The tax incentives used in SEZs were extended to the Economic and Technological Development Zones (ETDZs) and some areas of the open coastal cities (currently 17). Most recently, the Pearl River Delta economic region has been expanded to include Shenzhen, Shantou, and Shuiai SEZs, including 42,000 km2 and 25 million people, or about 23 percent of the population of Guangdong Province. Its economic importance is underscored by its capacity to supply 70 percent of gross provincial output. 2.4.3
High-Technology Development Zones
With less success than hoped for in diffusing advanced technologies developed and practiced within SEZs and ETDZs, Beijing initiated new “high-technology development zones” or “Torch” zones in 1988. The focus was on linking technology with production and on commercializing indigenous new technologies, research, and export.52 The State Science and Technology Commission is the implementing authority. Key technological fields developed under the program include new materials, biotechnology, electronics and mechatronics, information, energy saving, and environmental protection technology. By 1998, there were 53 Torch zones, all located in areas surrounding research institutes and manufacturing entities, or within existing special zones such as open ports, SEZs, or ETDZs. China’s ongoing experimentation with special commercial zones includes establishment of free trade zones in Pudong, Tianjin, and Shenzhen that have the least restrictive rules for foreign trade and investment as long as products are destined for export. One special zone receiving much attention is the Pudong New Area of Shanghai, established by the Chinese government in April 1990 adjacent to Shanghai’s urban districts on the east side of the Huangpu River. Covering 522 km2 and having a population of more than 1.4 million, it is by far the largest of China’s special investment zones, and the home of all four of Shanghai’s national development zones (Lujiazui Finance and Trade Zone, Zhangjiang High-Tech Park, Waigaoqiao Free Trade Zone, and Jinqiao Export Processing Zone). Over 5,000 foreign-funded industrial, financial, commercial, trade, and real estate development projects had been started there, involving over US$20B in contracted capital investment – more than 20 percent of such capital in China. In addition, Pudong is home to more than 150 research and development institutions of high-tech enterprises, with transnational companies having set up 75 research and development centers. According to Pudong New Area People’s Government, tax payments by foreign-funded enterprise totaled more than US$605M in the first half of 2002, a growth rate of 37 percent compared with the same period in 2001. 2.4.4
Foreign Investment Policy in the Electronics Industry
China’s SEZs are the instruments for its investment policy. Each zone or industrial park clearly identifies specific technologies that qualify for special incentives. Incentives strongly encourage foreign investment in the manufacture of the following electronics products: • • • • • •
Large-scale integrated circuits (LSICs) New electric and electronic components (including IC chips) Photoelectronic devices and sensors Mainframe and mini-computers Top-end personal computers with 32 bits or higher CPUs 900-MHz digital cellular mobile communication equipment
Department of Commerce (DOC), Office of Technology Policy, China: Strategy for Technology, 1998, http://www.ta.doc.gov/AsiaPac/china.
52
Economic Conditions and Policy
• • • • • • • •
29
DS-5 or higher SDH fiber-optic communication equipment and network management equipment Digital microwave communications systems and measuring equipment Asynchronous transfer mode (ATM) switching equipment Mercury-free alkaline manganese batteries, lithium batteries, and hydrogen-nickel batteries Key components for facsimile equipment (such as heat-sensing printing heads and picture-sensing elements) Digital magnetic tape recorders and players for compatible digital television and high definition television (HDTV), and laser disc players Satellite communications terrestrial earth stations (TES) and data earth stations (DES) and their key components Commercial satellites, satellite payloads, and satellite applications
China also encourages foreign investment in the development and production of the following: • • •
New semiconductor and photoelectronic materials Software (including computer and telecommunications software) New fields — information and communications networking technology, international economic, scientific, and technological information services, and the like
The government also discourages investment in technologies that are well established in China. Foreign investment is restricted for the production and manufacture of specific electronics and telecommunications components, products, and equipment, such as: • • • • • • • • • • • • • •
Radio cassette players Black-and-white television sets Personal computers with 16 bits and below CPUs (including 16 bits) Radio telephone equipment with frequency bands of 450 MHz and below Radio and television broadcasting systems Color television sets and tuners and remote controls CRT and glass shells for color TV sets Video cameras (including camcorders and VCRs) Magnetic heads, magnetic drums, and video recorder core components Analog mobile communications system (cellular handsets, pagers, and cordless phones) Fax machines Satellite television receivers and key components Microwave relay communications equipment below 140 Mbps rate Central office switches and private automatic branch exchanges (PABXs)
Foreign investors are prohibited from investing in the following areas: • • • •
Operation and management of posts and telecommunication services Operation of radio and television stations at any level (including cable television networks, broadcasting stations, and relay stations) Production, publication, and distribution of radio or television programs Construction of telecommunications projects that jeopardize the safety and effectiveness of military installations
China’s Electronics Industry
30
2.5
China’s High Technology
China is clearly the fastest-growing economy in the world. Foreign direct investment (FDI)53 in China has reached US$53B, surpassing US$40B of FDI inflows to the U.S., despite the negative impact of SARS in 2003 (OCED Report, June 2004). Comparative data on high technology countries is provided in Table 2.6. Table 2.6: Comparison of Technology Countries54
GDP (US$B)
U.S.
China
Japan
Korea
UK
10980
6449
3567
855
1664
GDP growth percent
3.1
9.1
2.3
2.8
2.1
Exports (US$B)
714
436
447
159
286
Imports (US$B)
1260
397
346
175
363
Population (M)
293
1299
127
48
60
GDP/person US$1000s (PPP)
38
5
28
18
28
Similar tables use alternative valuations for the domestic output of these industrialized countries (see Table 2.7). One output, apparently favored by the U.S. government, is Purchasing Power Parity (PPP). The idea behind PPP is “the law of one price”—that is, the ability to buy substitutable goods within any two countries at a price that can be rationed to yield the purchasing power parity. However, the idea contains inherent flaws.55 Some high value-added goods cannot be purchased in all countries. Therefore, the World Bank gives quite different numbers for GDP. The World Bank lists the 2002 GDP for China at only US$1.3T and Japan at US$4.0T. Under any alternative economic evaluation, China has quickly grown into a major world economic power. The source of the initial stimulus of investment in Asian electronics was Japan. Japan still remains a dominant economic power in Asia. Japan had invested US$175B in Asia by 1999. In contrast, U.S. companies had only invested US$72.4B in Asia by 1996.56 In 2004, U.S. direct investment in China was US$15.4B, up 34 percent more than 2003. Of that, technology investment accounted for US$1.8B. 57 Interestingly, FDI data from January to July 2005 indicated that the top five sources of FDI in China were Hong Kong, the Virgin Islands, Japan, South Korea, and the United States.58
2.6
Foreign Investment in China
In the 25 years since Deng Xiaoping famously proclaimed that it is “glorious to get rich,” multinational companies have invested more than US$400B in China. Its once-closed economy has become a textbook case of export-led growth, expanding at a furious pace and increasing per capita income fivefold. In 2003, foreign direct investment in China topped US$53.5B.59 The number of cross-border mergers and acquisitions in China increased from 53
Foreign direct investment is investment for operation of a business from abroad. CIA World Fact Book, 2004, http://www.cia.gov/cia/publications/factbook/ 55 Papell, D., “The Panel Purchasing Power Puzzle,” http://www.uh.edu/~dpapell/Puzzle.pdf, April 2004 56 Terry, E., “How Asia Got Rich,” Armonk, NY, M.E. Sharpe, 2002 57 Sperling, E., “US, China Growing Closer,” Electronic News, 16 November 2005 58 “Foreign Investment in China,” The US-China Business Council, 2006, http://www.uschina.org/info/china-briefing-book/chops/fdi-2005.html, accessed 12 January 2006 59 Farrell, D., Gao, P., and Orr, G.R., “Making Foreign Investment Work for China,” 54
Economic Conditions and Policy
31
107 in 2002 to 214 in 2003, contributing strongly to the surge in FDI flows. Relocation of investment to and expansion of operations in China by transnational corporations remained strong. 60 Overall, the focus of foreign investment in China has involved infrastructure facilities, basic and “pillar” industries, capital- or technology-intensive projects, and export-oriented enterprises. In 2002, there were 34,171 projects contracted for a total value of US$82.7B. China drew more than a third of the total foreign direct investment in developing countries in 2002. China overtook the U.S. as the world’s largest recipient of foreign direct investment, taking in US$52.7B. That is equal to 37 percent of the US$143B foreigners invested in developing countries for 2002. According to United Nations Conference on Trade and Development (UNCTAD) economist James Zhan, FDI in China has not peaked although their economic growth rates have fallen. UNCTAD predicts China’s FDI inflow will grow to US$60B in 2004, due to the country’s fast growing economy and regional co-operation. Statistics from China’s Ministry of Commerce indicate, in the first 8 months of 2004, FDI inflows hit US$43B, up 18.77 percent in 2003.61 Table 2.8 depicts the amounts and major sources of FDI in China. Table 2.7: Global Electronics Production 2004 by Market Type and Region (US$M)62 Country
Computing
Industrial
Communications
Consumer
Components
USA
63,248
56,618
82,381
8,204
61,046
271,498
Japan
37,303
14,853
32,453
21,121
92,078
197,807
China
84,806
4,339
26,968
29,778
36,387
182,277
Korea
19,256
832
26,729
5,723
37,744
90,285
Germany
11,108
20,590
14,859
3,149
14,837
64,543
Singapore
18,100
1,314
2,448
1,081
21,159
44,101
UK
11,146
7,559
10,745
2,170
10,350
41,970
Taiwan
6,712
384
6,667
2,266
19,835
35,865
France
5,927
4,418
14,989
1,664
7,473
34,470
Mexico
9,784
1,842
6,741
9,312
3,421
31,100
India
1,045
718
1,187
2,557
1,493
7,001
346,441
147,866
283,129
116,519
382,189
1,275,634
Total for world
2.6.1
Total
Liberalization Influencing FDI Flows
China opened its finance and travel industries to foreign investment, and the country’s Guizhou province opened 13 industries to FDI. It allowed, for the first time, the establishment of educational institutions jointly operated by foreign and domestic investors or institutions. China’s opening up of service industries to FDI is in accordance with its schedule of commitments to the liberalization of services under its WTO accession agreement. United Nations Conference in Trade and Development (UNCTAD), Chapter 2: The Shift Towards Services, World Investment Report 2004, UN-New York and Geneva, 2004 61 “China Overtakes US as Top FDI Inflow Country,” China Daily, 23 September 2004 http://www.chinadaily.com.cn/english/doc/2004-09/23/content_377213.htm. 62 Fletcher, A., “All Eyes on China, Asia/Pacific,” Movers and Shakers, Sixth Edition 2005, 10 November 2005, http://www.reed-electronics.com/moversandshakers/article/ca6277478.html 60
China’s Electronics Industry
32
Restrictions on FDI in such industries as banking and finance, telecom, logistics and distribution, transportation, and retail and wholesale trade are being removed. Thus, by 2008, service industries in China will be largely open to FDI. Aside from relaxing ownership control, China has also eased geographical restrictions and the scope of business operations. So far, the lion’s share of FDI flows to China has been in manufacturing, growing from 63 percent in 2002 to 74 percent in 2003. But with the opening up of service industries, their share is likely to rise.63 Table 2.8: Contracted Foreign Direct Investment in China, By Region (US$M)64 Year
Hong Kong
1979-1989 1990 1991 1992 1993 1994 1995 1996 2000 2001 2002 2003
2.6.2
Japan
USA
Taiwan
Others
20,879
2,855
4,057
1,100
4,569
3,833
457
358
1,000
1,948
7,215
812
548
3,430
3,405
40,044
2,173
3,121
5,543
7,241
73,939
2,960
6,813
9,965
17,759
46,971
4,440
6,010
5,395
19,864
40,996
7,592
7,471
5,849
29,374
28,002
5,131
6,916
5,141
28,086
15,500
2,916
4,384
2,296
15,676
20,686
5,420
7,525
6,914
28,650
25,202
5,298
8,156
6,471
37,641
17,700
5,054
4,199
N/A
19,200
China/Hong Kong Closer Economic Partnership Arrangement and FDI Flows
The Closer Economic Partnership Arrangement between China and Hong Kong was signed on 29 June 2003. Under it, Hong Kong firms benefit from zero tariffs on a wide range of products exported to the mainland, subject to meeting the Hong Kong rules-of-origin requirements. Eighteen service industries were opened to Hong Kong firms, starting 1 January 2004, with value-added telecom services having been opened on 1 October 2003. The Arrangement involves the progressive elimination of tariff and non-tariff barriers to trade in goods, liberalization of trade in services, and the promotion of trade and investment between the two economies. In the area of services, foreign service suppliers residing in Hong Kong will enjoy preferential treatment under the Arrangement, provided they have been engaged in substantive business operations in Hong Kong for a specific period of time and satisfy the following conditions: (i) have been incorporated in Hong Kong for 3 to 5 years (depending on the industry); (ii) are liable to pay a profits tax; (iii) own or rent premises in Hong Kong to engage in substantive operations; and (iv) employ at least 50 percent of staff resident in Hong Kong. The service industries cover accounting, advertising, audiovisual, banking, organizing of conventions and exhibitions, construction and real estate, distribution (excluding tobacco), freight forwarding agency, insurance, legal, logistics, management consultancy, medical and dental, securities, storage and warehousing, telecommunications, tourism, and transport.65 These liberalization commitments are expected to lead to higher services FDI inflow to China. In particular, the Arrangement could create a “first-mover advantage” for eligible Hong Kong investors in sensitive service industries. It could also result in a “channeling 63
United Nations Conference in Trade and Development (UNCTAD), Chapter 2: The Shift Towards Services. Globus NTDB – USDoC Papers; Societe Generale Monthly Economic Report 2002; China Statistical Data 2001 65 Ibid 64
Economic Conditions and Policy
33
effect,” whereby foreign firms may invest in the mainland via Hong Kong in order to benefit from the privileges provided by the Arrangement. For instance, Standard Chartered bank plans to incorporate its business in Hong Kong, rather than operating a branch there, to qualify eventually for the benefits accorded by the Arrangement when it invests indirectly in the mainland.66 Who benefits most from this phenomenal wave of foreign investment? In some industries, such as consumer electronics, it has sharpened the competitiveness of Chinese companies and delivered vastly lower prices to local consumers. In others, such as automotive, the main winners have been multinational companies and their Chinese joint-venture partners. General Motors, for instance, earned more than US$2,300 (before taxes) for each vehicle sold in China in 2003, compared with a mere US$145 in the United States. Automotive joint ventures are only now beginning to share these gains.67 2.6.3
General Investment Climate
In general, China’s trade, investment, and regulatory systems have been characterized by a lack of transparency and inconsistent enforcement. A complex and often conflicting system of national, regional, and local administrative controls regulates access by foreign investors to China’s market. Foreign investors in China face such obstacles as limited availability of foreign exchange, the highly personalized nature of conducting business, inadequate protection of intellectual property, absence of a strong contractual and legal tradition, barriers to market access, production controls, unequal treatment compared with domestic companies, and lack of adequate mechanisms for resolving disputes. China has gradually improved its performance in these areas and intends to further improve the investment climate through a series of sweeping reforms, although implementation and enforcement is often difficult. Given China’s historic antipathy to foreign interference, it is crucial for Western businesses to persuade the authorities that they have the interests of Chinese consumers at heart. When the French cosmetics giant L’Oreal entered the market in 1997, it started up a big manufacturing plant in Suzhou. Senior management claim that the plant helped the firm get off the ground because it demonstrated L’Oreal’s long-term commitment. The firm now employs 3,700 people in China and its sales in 2003 rose 69 percent to US$180M. In 2004, the firm acquired two Chinese companies – including one that makes cheaper products than its existing brands. L’Oreal’s goal is to expand its potential market in China from 100 million young urban women to a huge 500 million consumers.68 2.6.3.1
Investment Approval Process
Potential investment projects usually must go through a multitiered screening process, starting with approval of the project proposal. The central government has delegated varying levels of approval authority to local governments and SEZs. New projects exceeding the investment limits (US$30M in SEZs and US$10M in inland regions) require approval by MOFCOM (www.mofcom.gov.cn) for projects of existing enterprises. If an investment exceeds US$100M, it must obtain State Council approval in addition to MOFCOM’s approval. China’s authorities prefer investment proposals that promote exports to earn foreign exchange, introduce advanced technology, and provide technical or managerial training. Other proposal evaluation criteria include the fairness of the contract, the percentage of local content, hiring of local employees, availability of the technology elsewhere in China, and whether China already has sufficient production capacity. “Business Digest,” Far Eastern Economic Review, p. 23, 29 January 2004 Farrell, D., Gao, P., and Orr, G.R., “Making Foreign Investment Work for China” The McKinsey Quarterly Online, 2004 68 Gumbel, P., “Pack Your Bags for the Orient Express,” Time Magazine, Vol. 164. No. 16, 18 October 2004 66 67
China’s Electronics Industry
34
2.6.3.2
Intellectual Property Protection Issues
Lack of well-developed protection for intellectual property is a disincentive to investment and has inhibited the transfer of advanced technologies. In a January 1992 U.S.-China Memorandum of Understanding on the Protection of Intellectual Property Rights (IPR), China pledged to join relevant international conventions and enact or amend IPR legislation. Enforcement of IPR rights either through judicial or administrative measures still remains a serious problem. To meet the standard of WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), China amended some key rules on intellectual property in 2002, including the Law on Copyrights, the Law on Trademarks, and the Law on Patents. The new copyright law underlines that computer software and the lease of films were independent items of property subject to protection by law. The patent law stipulates that patent owners can go to court if they are not satisfied with decisions made by the Patent Examination Commission on their patents. The trademark law provides special protection for renowned brands. All three laws have intensified the punishment for activities that infringe on intellectual property rights, such as piracy. 2.6.3.3
Labor Regulation
In general, foreign invested enterprises (FIEs) are free to pay whatever wage rates they want above a locally designated minimum wage. In addition to basic wages, provision of subsidized services such as housing and medical care is common and constitutes a very large portion of a venture’s labor expenses. The rates for payment of overtime compensation under various circumstances are specified in China’s National Labor Law. Terminating individual workers for cause is legally possible throughout China but may require prior notification and consultation with the local union. The National Labor Law provides for establishment of collective labor contracts to specify wage levels, working hours, working conditions, and insurance and welfare. China’s foreign investment legislation and labor laws require FIEs to allow union recruitment, but do not require an FIE actually to set up the union; on the other hand, most coastal provinces have passed stricter regulations that require unions in all FIEs. Still, the majority of such enterprises do not have unions and some (contrary to Chinese law) have agreements with localities not to establish unions in their factories. 2.6.4
Permitted Forms of Foreign Direct Investment
Foreign investment is allowed in the Chinese economy primarily in equity joint ventures and cooperative (contractual) joint ventures; there are also some wholly foreign-owned enterprises. The fundamental legislation dealing with foreign investment in China is the Law on Chinese-Foreign Equity Joint Ventures and the Law on Wholly Foreign-Owned Enterprises. Joint, cooperative, and wholly foreign-owned ventures in China must be approved by and registered with the Chinese government. They are legal entities and subject to both the jurisdiction and the protection of Chinese law in respect to legitimate rights, interests, and earnings. Table 2.9 displays the three major forms of direct foreign investment or ownership in China in terms of number of contracts and money invested. 2.6.4.1
Equity Joint Ventures
An equity joint venture takes the form of a limited liability company. Each joint venture partner’s liability is limited to the capital subscribed by it. The Joint Venture Law specifies that the proportion of the foreign joint venture’s investment in an equity joint venture must be at least 25 percent of its registered capital. By the end of April 2002, there were 388,945
Economic Conditions and Policy
35
approved foreign invested enterprises in China. According to government policy, joint ventures must comply with at least one of the following requirements: •
• • •
Use advanced technical equipment and scientific managerial methods that help increase the variety, improve the quality, and raise the output of products, and save energy and materials Be open to technical innovation so as to bring about quicker returns and bigger profits with less investment Help expand exports and thereby increase foreign currency receipts Help train technical and managerial personnel Table 2.9: Foreign Direct Investment in China by Forms of Ownership69 Equity Joint Venture Year
1979-89 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Jan-Nov 2004
No. of Contracts
Cooperative Joint Venture
Amount No. of (US$M) Contracts
Amount (US$M)
Wholly Foreign-Owned Enterprises No. of Contracts
Amount (US$M)
12,198
12,530
7,994
13,558
1,525
3,144
4,091
2,704
1,317
1,254
1,860
2,444
8,395
6,080
1,778
2,138
2,795
3,670
34,354
29,128
5,711
13,255
8,692
15,696
54,003
55,174
10,445
25,500
18,975
30,457
27,890
40,194
6,634
20,301
13,007
21,949
20,455
39,741
4,787
17,825
11,761
33,658
12,628
31,876
2,849
14,297
9,062
26,810
9,046
21,406
2,371
12,165
9,604
17,658
8,146
19,227
2,010
9,758
9,674
21,739
7,065
13,289
1,654
6,814
8,370
20,936
8,378
19,648
1,757
8,117
12,196
34,309
8,894
17,550
1,589
8,300
15,643
42,999
10,380
18,502
1,595
6,217
22,173
57,255
12,521
25,506
1,547
7,479
26,943
81,609
10,289
24,150
1,216
6,886
27,746
103,300
Joint ventures are allowed in most industries, except those restricted due to strategic or economic reasons. An equity joint venture in China is subject to examination and approval by MOFCOM and must be registered with the State Administration for Industry and Commerce (SAIC) or any of its local and regional bureaus. The whole acceptance process, beginning with identifying a potential partner and ending with state approvals, takes one to two years or longer. 2.6.4.2
Cooperative Joint Ventures
Cooperative (contractual) joint ventures are more flexible and easier to establish than equity joint ventures. Chinese and foreign investors can mutually agree on such matters as conditions for cooperation, distribution of earnings, sharing of risks and costs, methods of operation and management, and ownership of assets at termination of the agreement. The cooperative parties are jointly liable for all debts of a cooperative joint venture; therefore, 69
Approved foreign investment projects (contracts) – MOFTEC, 2000-2002
China’s Electronics Industry
36
they must present guarantees from a bank or a parent company that they will fulfill their joint obligations. Most contractual joint ventures are registered as Chinese legal entities and thus only assume liability for debts within their properties. The proportion of investments contributed by the foreign partner must be at least 25 percent of the registered capital. In general, China encourages cooperative joint ventures in industries such as energy, transportation, electronics, raw materials, environmental protection, machine manufacturing, agriculture, forestry, animal husbandry, tourism, and service trades. Government restrictions and requirements for approval are similar to those for equity joint ventures. After receipt of an approval certificate, the partners must register with the SAIC, the tax authorities, and the labor bureau where the cooperative joint venture is located. 2.6.4.3
Wholly Foreign-Owned Investment Enterprises
Foreign investors in a wholly foreign-owned investment enterprise establish the enterprise in China with their own capital. Such an enterprise can be registered as a Chinese legal entity in the form of a limited liability company. The Law on Wholly Foreign-Owned Enterprises establishes principles and rules governing the legal status of the enterprise; conditions, scope, and founding procedures of the enterprise; and support, management, and operation of the enterprise. Achieving a balance in foreign exchange is by law a basic requirement for operation of a wholly foreign-owned enterprise in China. However, the law also has some flexibility. For example, if an enterprise uses advanced technology, machinery, and equipment to produce goods that were previously imported and is permitted to sell the products in China, but consequently experiences an imbalance in foreign exchange, the relevant authorities will help it to correct the imbalance. As in joint ventures, the level of governmental authority required to examine and approve a wholly foreign-owned enterprise depends on the total amount of investment and the industry concerned. The foreign investor must submit to MOFCOM and local authorities a feasibility study, the articles of association of the enterprise, a list of the legal representatives or the board candidates, financial documents, and an inventory of goods and materials for import. After the application is examined and passed and an approval certificate issued, the foreign investor must file an application for registration with the relevant administrative department for industry and commerce, and must obtain a business license. 2.6.4.4
Foreign-Invested Enterprises
Wholly foreign-owned investment enterprises have the advantage of being entirely controlled and managed by the foreign owners; nevertheless, many foreign investors prefer to have a domestic partner to help them understand the local market situation and deal with local problems that the Chinese partner is better able to handle. A foreign-invested company limited by shares is an enterprise with legal person status in which the foreign shareholder holds a minimum of 25 percent of the company’s total registered capital, which must be the same as the total registered (and actually paid in) share capital. The company’s registered share capital must be at least US$3.7M. Such a company may reorganize itself to seek a stock exchange listing and offer shares to the public, which must be B shares in China (as A shares are not open to foreign sale and purchase) or shares on stock exchanges outside mainland China, such as Hong Kong, New York, and London. 2.6.4.5
Foreign-Invested Holding Companies
An investment company (also called a holding company) is a limited liability company, either wholly-foreign-owned or an equity joint venture, established by foreign investors for the purpose of engaging in direct investment. The foreign investor must contribute at least
Economic Conditions and Policy
37
US$10M in actually paid-in capital, if the investor’s total assets exceed US$400M and has actually paid-in investment in China of at least US$10M. Otherwise, the investor should have already set up ten enterprises in China and the actually paid-in capital must be no less than US$30M before applying to set up a holding company. 2.6.4.6
Other Forms of Foreign Direct Investment
In the case of oil and gas exploration and of prospecting for other mineral resources, the form of a foreign investment project takes the form of joint exploitation contracts. In some infrastructure areas, including coal-fired and hydroelectric power stations, local railways, bridges, tunnels, water supplies, and sewage plants, build-operate-transfer (BOT) projects are allowed. Such projects are included in national and local 5-year plans and are carried out by limited liability companies in which the registered capital is at least 25 percent of total investment. The project company owns and manages the franchise of the project for up to 30 years before transferring ownership to the Chinese government without further claim. The foreign investor in a BOT company is selected by international competitive bidding. Transfer-operate-transfer (TOT) pilot projects are also being encouraged in hinterland areas as a method of improving the operation of existing infrastructure facilities. 2.6.4.7
A Model for Growth
In the consumer electronics and automotive industries, FDI has undoubtedly been good for China. Foreign companies have introduced production methods and technologies far superior to those being used by Chinese companies, with a resultant increase in output and productivity. The consumer electronics industry, however, enjoyed a second wave of benefits in the form of much lower prices and better product quality and selection for consumers. This in turn unleashed a third wave of benefits as domestic demand exploded and China cemented its position in the global supply chain. In the automotive sector, weak competition and the government’s heavy hand have delayed similar second and third waves.70 Analysts believe that the consumer electronics experience could be a model for how to liberalize sectors in order to promote growth in China and other emerging markets. Opening up industries to foreign investment is only the first step; governments must also ensure that competition flourishes. 2.6.5
U.S. Export Controls
U.S. policymakers employ export controls and economic sanctions not only to address trade and investment disputes, but also to achieve non-economic policy objectives. The level of controls on U.S. exports to China has fluctuated, depending on political circumstances in China. During the Cold War period, U.S. export controls on China were very strict. In November 1983, the United States imposed export controls on China for products that would make a direct and significant contribution to nuclear weapons and their delivery systems, electronic and submarine warfare, intelligence gathering, power projection, and air superiority. The Clinton Administration reduced licensing procedures applicable to a wide range of computer and telecommunications equipment to China. Although there has been steady liberalization of the number of semiconductor devices subject to individual licensing requirements, constraints remain on specific semiconductors and especially on the construction of fabrication facilities. Most advanced semiconductor manufacturing
70 Farrell, D., Gao, P., and Orr, G.R., “Making Foreign Investment Work for China,” The McKinsey Quarterly Online, 2004
China’s Electronics Industry
38
equipment cannot be exported to China without a license from the Commerce Department, which reviews applications on a case-by-case basis.71 Some believe that the U.S.’ Chinese export laws hurt only U.S. companies.72 They say that while the industry worries about China creating a capacity bubble, China still has a long road to travel to become a technological superpower, and is more worried about reducing its foreign trade deficit than dominating the world. The sale of advanced technology to China has been a concern of the U.S. government, and was one point of contention among others in China’s accession to the World Trade Organization. U.S. export laws make it difficult to export, and in some cases prohibit export, of advanced technology to China. Nevertheless, high technology items have already made their way to China via exemption granted to companies (e.g., Motorola) and by way of Japan, Europe, Taiwan, and Singapore.
2.7
Financial System
Controlling inflation and keeping exchange rates and currency values stable remain the ultimate objectives of Chinese monetary policy. Table 2.10 displays China’s major financial indicators since 1991. The three major indicators of money supply, newly printed yuan (M0), cash, demand deposits, and checks (M1), and time deposits plus M1 (M2), all grew between 13 and 20 percent in 1999. The official exchange rate between Chinese yuan and U.S. dollars has changed very little since 1994; domestic debt has increased significantly. Table 2.10: Financial Indicators (US$B)73
Year
71
M0 Supply (1)
M1 Supply (2)
M2 Supply (3)
Official Exchange Rate (Yuan/US$)
Domestic Debt (Treasury Bond Issues)
Foreign Debt
1991
60
162
364
5.3
3.7
3.4
1992
79
213
460
5.5
7.2
3.8
1993
102
283
606
5.8
5.5
6.2
1994
85
238
544
8.6
11.9
9.3
1995
100
287
697
8.3
18.1
10.6
1996
112
343
917
8.3
22.3
11.6
1997
123
421
1,100
8.3
29.1
13.1
1998
136
471
1,264
8.3
38.9
21.8
1999
163
554
1,439
8.3
44.6
18.3
2000
177
639
1,622
8.3
50.0
14.6
2001
190
724
1,914
8.3
54.2
17.0
2002
208
853
2,229
8.3
68.4
168.5
2003
220
970
2,591
8.3
N/A
193.6
2004
244
1,117
1,844
8.3
216.374
The Bureau of Export Administration of the U.S. Department of Commerce provides the latest information on export control to China. 72 Chappel, J., “U.S. Laws Self-Defeating,” 11 November 2002, http://www.e-insite.net/electronicnews/index.asp?layout=article&articleid=CA258065&pubdate=11/11/2002 73 SSB, 2000-2002; People’s Bank of China; State Administration of Foreign Exchange 74 Economist Intelligence Unit (www.economist.com) estimate. Note: Year-end estimation; (1) newly printed yuan; (2) cash, demand deposits, and checks; (3) time deposits plus M1
Economic Conditions and Policy
39
The People’s Bank of China, which is a ministry-level agency under the direction of the State Council, serves as China’s central bank. It helps to formulate and then implement China’s monetary policy and ensures the compliance of all financial institutions with state policy. Its duties include drawing up and implementing monetary and interest rate policies; directing and supervising banks, non-bank financial institutions, and insurance companies; and examining and approving the establishment, merger, and dissolution of financial institutions, insurance companies, and so forth. There are six regional PBOC branches. The PBOC utilizes a number of policy instruments to manage the monetary system: •
• •
•
•
Credit planning. The PBOC determines the credit ceiling, that is, total loans that can be extended within a year for each specialized bank and each of its local branches. The overall credit plan is determined by the PBOC (which formulates the total amount of the money supply) and its provincial branches (which formulate provincial plans for deposits, loans, and cash issuance). Credit planning has been the major monetary policy instrument, although its importance has gradually diminished. Setting reserve ratios. The specialized banks75 must submit a certain proportion of their deposits to the central bank in the form of required reserves. Adjusting interest rates. The PBOC controls interest rates for deposits and lending in all specialized banks. In general, government lending to agricultural, infrastructure, and energy sectors is subject to lower rates, in accordance with industrial policy. The effectiveness of this policy instrument is limited since official rates do not reflect market conditions, and SOEs are often insensitive to interest rates. Lending to commercial banks. The PBOC extends credit to banks that fall short of funds for meeting the reserve requirement or for local lending. The lending rate for such credit is often used as an instrument for controlling the money supply. Ensuring compliance with the Law of the People’s Bank of China (the PBOC Law). This law, passed by the People’s National Congress in 1996, gives authorization for policy instruments to conduct monetary policy, which may include rediscounting, open market operations, trading of foreign exchange, and other instruments prescribed by the State Council.
The PBOC is to gradually phase out the use of the mandatory credit plan and increase its use of more indirect means to control the money supply, such as open market operations, central bank lending, discount rates, reserve ratios, interest rate adjustments, and operations in the foreign exchange market. Financing through the sale of government bonds or through printing money is strictly prohibited. The maximum length of maturity for interbank loans has been shortened from 3 months to 3 days. Loans from central banks can be recalled if the PBOC considers banks’ liquidity too high, and vice versa. This policy instrument has gradually played an important role in liquidity management. Since the early 1990s, China’s banking system has been restructured to create a more modern and international system that is able to allocate financial resources more efficiently. The former state banks are now commercial retail banks, and non-bank financial institutions have begun to operate and compete with state banks for savings and loans. Many foreign banks, insurance companies, and other financial institutions have been allowed to operate in China with a limited scope. For example, on 31 December 1996, the PBOC officially licensed Hong Kong Bank, Citibank, Bank of Tokyo, Mitsubishi, and the Industrial Bank of Japan to conduct business in yuan in the Shanghai Pudong New Area on a trial basis. On 24 January 1997, the Standard Chartered Bank, Sanwa Bank, Daiichi Kangyo Bank, and the Shanghai-Paris International Bank were also granted licenses to offer yuan deposit and loan 75 China’s banking system comprises a wide variety of “specialized” banks under the PBOC, which were once integral elements of the socialist economic planning system, functioning as conduits for state investment: the Agriculture Bank of China, the Bank of China (not to be confused with the PBOC), the People’s Construction Bank of China, the Industrial and Commercial Bank of China, and the Bank of Communications.
China’s Electronics Industry
40
services to China-based foreign businesses in the Pudong area. With China’s entry into the WTO, the sector will be further opened to foreign players by 2007 (Figure 2.2). At present, foreign banks’ expansion is restricted, requiring 12 months between applications for new bank branches. Instead, banks are beginning to acquire stock in local banks. Citibank is buying an 8 to 10 percent stake in Pudong Development Bank. HSBC has invested US$270M in building its network, and US$65M in acquiring 8 percent of the Bank of Shanghai. It will be some time before foreign banks’ revenues grow to profitable levels. Overall, China’s monetary and banking reform is far from complete. The major state-owned banks are swamped with bad loans to near-bankrupt SOEs, reported officially at between 25 and 30 percent of loans. The central bank has ordered its largest banks to cut their bad credits to 15 percent of loans outstanding by 2005. Standard & Poors puts the cost of fixing the banking problems at US$518B, or 43 percent of China’s 2002 GDP. That compares to the US$160B cost for the bailout of the U.S. savings and loans. The banks have survived so far because Chinese people put a large percentage of their income in bank deposits (among the highest savings rates in the world). 100% 15
80%
2
10
12 7 21
60% 40%
73
12
FDI
14 21
Stocks Bonds
60
54
20%
Bank Loans
0% 1995
2003
2005 (Forecast)
Figure 2.2: Sources of Financing in China by Type76 On 1 December 1996, the PBOC introduced full convertibility of China’s currency for current account (trade) transactions. The move marked an important step forward in currency convertibility, though China still restricts convertibility on its capital account. In 2002, the governor of the PBOC, Dai Xianglong, said that the country will gradually relax its control on foreign exchange, but any move would be subservient to maintaining the stability of the yuan. In any case, the government controls currency value in China, so a catastrophic decline is unlikely. Also, most investments in China are in plants and equipment, not short-term bonds, so a shortage of hard currency to repay foreign debt is improbable.
2.8
Fiscal Structure
Over the last 20 years, China has replaced its traditional revenue remittance system with a Western-style tax system and reduced the scope of government involvement in the production sector. In addition, the government has decentralized the fiscal management system by granting localities more flexibility in collecting revenues and deciding expenditures. Declining government expenditures on economic construction reflect the declining importance of China’s SOEs in total output. Increases in social expenditures are consistent 76
China State Statistical Bureau, China Statistical Yearbok, China Statistical Publishing House, 2000
Economic Conditions and Policy
41
with government policy to shift away from direct involvement in private economic activities, as well as with concern over deteriorating terms of income distribution. Finally, debt financing has become a policy option and was written into the 1994 budget law. The government budget has been transformed from an instrument of central planning into an instrument of indirect macroeconomic management. 2.8.1
Turnover Taxes
China’s value-added tax (VAT) covers all manufacturing, wholesale, and retail enterprises, regardless of whether they are domestic, foreign-owned, or joint venture enterprises. Unlike the consumption-based VAT in many Western countries, the Chinese VAT is based on product origins. For most products the VAT rate is 17 percent. A business tax of 3 to 5 percent is applied to services other than retail and wholesale business, and to real estate sales. A new consumption tax applies to a small number of consumer goods. The product tax and industrial and commercial taxes assessed on foreign-invested enterprises have been abolished. 2.8.2
Enterprise Income Taxes
The income tax rates for large- and medium-sized SOEs have been cut from 55 percent to a uniform 33 percent. The same rate is applied to all other types of enterprises regardless of ownership, although there is a preferential rate of 15 to 24 percent in areas such as SEZs, ETDZs, and Open Coastal Cities. The income adjustment tax and mandatory contributions to various funds formerly levied on SOEs have been abolished. 2.8.3
Personal Income Taxes
A uniform personal income tax is applied to Chinese and foreigners. The monthly deductible allowance on the personal income tax is approximately US$96, but additional deductions are allowed for foreigners. A progressive rate from 5 to 45 percent is applied to income from wages and salaries, and a progressive rate from 5 to 35 percent is applied to income from business activities of private manufacturers and merchants and to subcontracting and rental income. A 20 percent flat rate is applied to income from publications, remuneration for services, patents and copyrights, interest and dividends, rental and transfer of assets, and other sources. China has made progress towards broadening the tax base, increasing social expenditures, and simplifying its tax system. However, many problems must still be addressed: tax avoidance is still a serious problem in the enterprise income tax, many loopholes exist in administration of the individual income tax, and the burden of the VAT is distributed inequitably among different trades. 2.8.4
Import Tariffs
China has steadily reduced its import tariffs. With its accession to the WTO, China is committed to reducing import tariffs on industrial goods to an average of 9.4 percent and 17.5 percent for agricultural commodities. After a 30 year hiatus, bilateral trade between the United States and China resumed following establishment of diplomatic relations between the two countries in 1979. Since then, U.S.-China trade and economic relations have experienced a period of rapid growth. China has become one of the United States’ top five trading partners. In 1998, the U.S. trade deficit with China reached US$68.7B. The U.S. had a US$83.8B trade deficit with China in 2000, surpassing the U.S. trade deficit with Japan. The U.S. continues as China’s second
China’s Electronics Industry
42
largest trading partner after Japan, and is China’s largest export market, taking 42 percent of China’s total worldwide exports in 2000. Table 2.11 shows big discrepancies between data from the United States and China on the trade deficit. One reason for the discrepancy is that much of China’s trade flows through Hong Kong. The U.S. counts everything that moves from China through Hong Kong as a Chinese export; until 1993, China counted it as an export to Hong Kong. Thus U.S. government data overstate the size of the trade deficit with China, and Chinese data understate it.77 2.8.5
Most Favored Nation Trade Status
The United States gave a Most Favored Nation (MFN) trade status, with lower tariffs and enhanced market access, to all of its major trading partners except China until 2000. For political reasons, the U.S. gave an annually renewable MFN status to China subject to the conditions of the Jackson-Vanik amendment to the U.S. Trade Act of 1974. Between 1980 and 1989, the U.S. process of renewing China’s MFN status was routine. However, after the Tiananmen Square incident in 1989, the U.S. Congress threatened to withdraw China’s MFN status as a major lever to encourage the Chinese government to improve its human rights record. Table 2.11: Sino-U.S. Trade Statistics (US$B)78,79 Year
Chinese Statistics Chinese Export
Chinese Import
U.S. Statistics
Balance
U.S. Export
U.S. Import
Balance
8.8
31.5
-22.8
1993
17.0
10.7
6.3
1994
21.5
14.0
7.5
9.3
38.8
-29.5
1995
24.7
16.1
8.6
11.8
45.6
-33.8
1996
26.7
16.2
10.5
12.0
51.5
-39.5
1997
32.7
16.3
16.4
12.8
62.5
-49.7
1998
38.0
17.0
21.0
14.3
71.2
-56.9
1999
41.9
19.5
22.4
13.1
81.8
-68.7
2000
52.1
22.4
29.7
16.3
100.1
-83.8
2001
54.3
26.2
28.1
19.2
102.3
-83.1
2002
70.0
27.2
42.8
22.1
125.2
-103.1
2003
92.5
33.9
58.6
28.4
152.4
-124.0
125
44.7
80.3
34.7
196.7
-161.93
147.6
44
103.6
37.6
222.9
-185.3
2004 Jan-Nov 2005
The Clinton Administration consistently supported MFN status for China and declared the de-linking of MFN and other bilateral trade issues with China from human rights considerations in June 1994. Every year between 1989 and 2000, however, bills were introduced but not enacted that would have either terminated or placed conditions on China’s MFN status. On 24 May 2000, the U.S. House of Representatives voted to permanently Wessel, D., “Big Discrepancy Exists Between Data from U.S. and China on Trade Deficit,” Wall Street Journal, 22 January 1998 78 Ministry of Commerce of the People’s Republic of China Department of Planning and Finance, 2006, http://www.gcs.mofcom.gov.cn/aarticle/Nocategory/200601/20060101353756.html 79 http://www.sts.org.cn (in Chinese) 77
Economic Conditions and Policy
43
normalize U.S. trade with China.80 In response to the U.S. granting of MFN status to China, China now allows U.S. goods to enter China under low-tariff and high-access conditions.
2.9
Chinese Government Policy towards Cross-Border Mergers and Acquisitions
Cross-border mergers and acquisitions (M&As) have become the prevalent form of foreign direct investment (FDI) in the world as a whole over the past two decades. By 2000 M&As had risen to over 80 percent of global FDI at the height of the high-tech boom; following the bursting of the bubble, M&A deals subsided, but still constituted over half of FDI worldwide in 2003. In China, domestic M&A activity has mushroomed as a result of the restructuring of SOEs and the rapid growth of the private sector. However, China’s involvement in cross-border M&A, though now developing rapidly, has been relatively small. Cross-border M&A sales in China, which usually take the form of a foreign corporation acquiring a Chinese SOE, only began at the end of the 1990s and still form a small minority of the country’s FDI inflows. While China became the world’s largest recipient of FDI in 2003, absorbing nearly a tenth of the global total, it accounted for little over 1 percent of worldwide cross-border M&A. Caution should be exercised when interpreting such figures, however, as cross-border M&A is not yet regularly measured as part of FDI inflows by the Chinese government. Recent surveys and major takeover stories in the news—such as that of the takeover of Harbin Breweries by Anheuser-Busch in 2004—suggest that the situation is now changing, with foreign companies making significant purchases of Chinese companies in 2003-2004, and that the rate of increase of such purchases is accelerating. Heightened cross-border M&A activity is partly the result of the continuing rapid economic growth, and in particular the creation and expansion of a class of affluent consumers in recent years. Foreign companies wishing to gain market share in China may now do so more quickly by acquiring an existing successful domestic company than by establishing a greenfield investment which will take time to be set up, go into operation, and expand market share in competition with dominant local companies. Cross-border M&As are also growing because of the need of the Chinese government and of local authorities to accelerate SOE restructuring. Selling off inefficient SOEs not only generates revenue to national and local governments that suffer chronic deficits, it also provides a way of reforming management and improving technology in such enterprises. The general improvement in the investment environment in China, with greatly improved physical infrastructure and a gradually developing body of investment laws and regulations in which to operate, has also encouraged more foreign companies to seek acquisitions in China. The process is also assisted by the establishment in recent years of legal and other consultants, including many foreign firms, with experience in advising on and handling cross-border M&A deals. The main change in recent years favoring cross-border M&A, however, has been the promulgation of a series of laws directly governing such transactions and related areas, such as the role of foreign investors in SOE restructuring, mergers between foreign-invested enterprises (FIEs) in China, and bankruptcy procedures for SOEs. In 1998 the government issued Provisional Regulations on the Use of Foreign Investment for the Asset Restructuring of SOEs. This was followed in 1999 by Regulations on the Merger and Division of Foreign-Invested Enterprises, which were amended in 2001. In 2002, a notice was issued on the Transfer to Foreign Investors of State-Owned Shares of Limited Companies. Institutional investors, who had been waiting in the wings to enter China’s stock markets following the country’s accession to the WTO at end-2001, were brought into the picture by new rules on the Administration of Investment in Domestic Securities by Qualified Foreign 80 Raum, T., “US Congress Passes China Trade Status,” The Bruns International, 27 May 2000, http://www.unb.ca/web/bruns/0001/summer/intnews/06china.html
44
China’s Electronics Industry
Institutional Investors (QFIIs). QFIIs include fund management institutions, insurance companies, securities firms, and commercial banks that comply with requirements such as size of assets under management and years of experience. By mid-2002, this developing body of law relating to various aspects of cross-border M&A provided a fragmentary regulatory regime that was considered by both the Chinese government and foreign investors as being incomplete. While this was seen as an advantage by some foreign investors, as it left a partial vacuum that allowed for flexibility in acquiring Chinese companies, others undoubtedly were deterred by the resulting high level of risk. The Chinese government attempted to solve this problem by enacting two further major pieces of legislation. The first of these, promulgated in November 2002, was a set of Tentative Regulations on Using Foreign Investment to Restructure SOEs. These regulations are more explicit and precise than those of 1998 on the same subject, establishing procedures for the transfer of state assets, including whole firms, to foreign ownership by open competitive bidding, and setting out acceptable methods of payment. The regulations also limit such transactions to foreign investors possessing requisite qualifications in terms of business reputation, management capability, financial position, technology, and corporate governance capacity. In March 2003, the government established a broad framework for the whole range of cross-border M&A transactions in the Provisional Rules on Acquisitions of Domestic Enterprises by Foreign Investors. These covered the acquisition of all domestic enterprises, private companies as well as SOEs, specifying that the capital contribution of the foreign investor to the FIE formed by the acquisition must be at least 25 percent, unless otherwise approved by MOFCOM. The rules also set out requirements for notifying mergers or acquisitions above set thresholds to MOFCOM. Despite the enactment of this legislation, the procedures by which foreign investors may acquire Chinese companies remain far from transparent. The approvals process for new FIEs formed by merger or acquisition is the same as that for any other FIE and is therefore subject to the restriction of the catalogs for guiding foreign investment. The notification requirement in the 2003 rules is based on thresholds which may be subject to varying interpretations as a result of inadequate definition of basic concepts such as market share. The 2003 rules also contain an anti-trust provision that allows competitors to obtain a time-consuming review that may be open to abuse by local firms wishing to delay the formation of new FIEs that will introduce competition into the markets they dominate. Acquisitions of Chinese companies are also rendered difficult by the poor corporate governance commonly encountered in Chinese companies, which are accustomed to secrecy and have been slow to adopt international accounting and ownership disclosure standards. This makes companies difficult or impossible to value. Arrangements to provide indemnification to compensate for lack of disclosure are not common—and not generally understood—in China’s current business environment.
2.10 Evolution of Foreign Investment Project Catalogs Foreign investors and FIEs enjoy only limited access to China’s capital markets. The stock exchanges were set up to enable domestic enterprises to raise capital and it is difficult for FIEs to obtain listings, although they are now, following China’s accession to the WTO at end-2001, theoretically allowed to do so. A small number of FIEs established by multinational corporations in China are now restructuring themselves to do so. Bonds have hitherto been the preserve of the government and of Chinese corporations; FIEs have not been permitted to raise money via corporate bond issues. Access to venture capital is limited, and investment by venture capital funds is discouraged by the lack of a sufficiently liquid stock market in which to effect an exit strategy. Another limitation on the use of capital markets (for example, for the acquisition of companies by purchasing tradable shares) is the closure of the A share market, on which the majority of shares are traded, to foreign participation. The opening of China’s capital markets
Economic Conditions and Policy
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to foreign investors has begun, for example, by the creation of QFIIs (see section 2.7), but these markets remain far less open than those in some other major economies at a similar level of development. All foreign investment projects must comply with the Catalog for Guidance for Foreign Investment Industries. There are in fact four catalogs, one of which does not even exist: prohibited industries, restricted industries, permitted industries, and encouraged industries. Projects in the prohibited category may not be approved. These include projects that are dangerous or polluting, or take up large amounts of farmland, or harm military facilities. Also prohibited are projects that use China’s unique craftsmanship or technology, such as those involving Chinese herbal medicine. While this category may be rather wider than necessary, it is similar to the closed lists published by most other governments. The restricted category covers a range of industries that the government wishes to control for various reasons, including those using out-of-date technologies but also including some of the services sectors that China was compelled to open up during the negotiations for WTO accession. The encouraged category is a wish list of the investment projects that the Chinese government would like to attract. Not surprisingly, it includes the latest high-tech industries, both in terms of products and production processes. The form of encouragement is not always clear, but may include fiscal incentives (largely depending on location) and speeded-up approval. One problem with this category is that its contents, by their very nature, are subject to constant change, so the list is inevitably always out-of-date and incomplete. By far the longest list is that of investment projects in the permitted category. The list is so long that it is the only one of the four that is not published. Any project that is not described in the other three sections of the catalog (prohibited, restricted, and encouraged) is deemed to be permitted. While the Chinese government is keen to streamline the foreign investment approval process, it has not so far indicated a willingness to replace the catalog regime by a simple closed list. Doing so would undoubtedly be opposed by powerful champions of domestic industry who seek to keep their sectors closed to competition from foreign investors for as long as possible.
Chapter 3 China’s Science and Technology
Science and technology (S&T) have played an important role in China’s effort to improve its industrial business, industrial production, and labor productivity, and sustain its economic development. Since the late 1970s, Chinese leaders have arrived at a reasonable consensus on how S&T can best serve the nation and how government might best support S&T development in the 21st century. China is now committed to supporting scientific research and developing new technologies and innovations. This chapter outlines China’s S&T development policy and infrastructure as well as its latest S&T efforts and achievements, with a focus on microelectronics, and nanotechnologies.
3.1
History of China’s S&T Development
China has had a long history of scientific discovery and technological progress. Well known are its ancient inventions of gunpowder, pyrotechnics, seismic sensors, the magnetic compass, papermaking, movable type, fine porcelain, and silk processing and weaving.1,2 However, China has gradually lagged behind the West in science and technology since the beginning of the 17th century. Many years later, a handful of reform-minded Chinese recognized that the country would have to modernize and adopt Western scientific and technological practices and skills if it were to maintain its viability. Peking University, established in 1898, was the first institute of higher education created on a Western model. During the 19th century, a few Chinese students began to go to the United States and Europe to study, encouraged mainly by foreign missionaries. Japan, which at that time appeared to be modernizing, also became a magnet for Chinese students. The numbers of those students going abroad for study increased significantly in the late 19th century and early 20th century as the Qing dynasty, under pressure from foreign powers, began to sponsor selected students for foreign study. According to the terms of the so-called Boxer Remission, agreed on during the last year of the presidency of Theodore Roosevelt (1908), the United States remitted US$12M of the US$33M annual indemnity resulting from the Boxer Rebellion of 1900 to enable Chinese students to study in the United States. A portion of this remission was used to establish an elite secondary school in Peking to prepare students for university life in the United States. This institution, created as Tsinghua School in 1911, became the National Tsinghua University in 1928. Following the collapse of the Qing dynasty in 1911 and the establishment of the Republic of China, several other Western-style universities were created. By 1922 almost 35,000 students were enrolled in the country’s 37 national universities, provincial colleges, private Christian universities, and medical colleges.3 These included prominent institutions 1
Needham, J., Science and Civilization in China, v. 1, Cambridge University Press, 1954 Yu, Q.Y., The Implementation of China’s S&T Policy, Quorum Books, Westport, CT, 1999 3 Spence, J. D., The Search for Modern China, W.W. Norton and Co., New York, 1990 2
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such as Peking University, Peking Medical Union College, Tsinghua University, Nanjing University, the Harbin University of Technology, and Northeastern University in Mukden (Shenyang). However, the development of higher education in China was largely arrested following the outbreak of the war with Japan in 1937. A decade after the war had passed, after the foundation of the People’s Republic, the Chinese leaders hoped to achieve swift improvement in China’s S&T research and economic development using the Soviet-style, highly centralized planning system. Although this kind of planning system had some positive effects on China’s development of its defense technologies, it was a failure in terms of the country’s economic development. In addition, during the 10 years of the Cultural Revolution (1966-1976), nation-wide political upheaval, caused by power struggles and ideological confrontations among the top Chinese leadership, significantly impeded the evolution of S&T in the country.4 From 1949 to 1978, China’s S&T development and policies were directed by ideologies, the Cold War environment, and political conditions. With a highly centralized planned economy, China focused its S&T during this period primarily in the military, defense, and national security areas, such as atomic energy, jet and rocket engines, electronics, and computers. In 1952, the newly established People’s Republic of China reorganized its universities according to the Soviet system, assigning a specialty to each institution and limiting them primarily to instructional rather than research responsibilities, the latter being assigned to the newly created Chinese Academy of Sciences. After almost three decades of economic experiments and occasional political upheaval, China eventually realized that it needs a market-oriented S&T system for its S&T research to support and promote its economic development. Chinese leaders have understood that “raising skills and productivity of peasants and workers is far different from developing several sophisticated technologies”.5 It was not until the late 1970s that China once again began to make a concerted effort to become active in S&T development linked to the reconstruction of its economy. One of the reforms initiated during these years was to encourage the development of comprehensive universities that would engage in research as well as instruction. China’s development effort in electronics and computers started in 1955 during the First Five-Year National Development Plan (FYP) (1953-1957). The first Chinese-made computer, a vacuum-tube computer named 901, was manufactured at the Institute of Military Engineering at the Harbin University of Technology in 1958. In the 1960s and 1970s, several computer systems were developed and installed in universities, military laboratories, and industrial conglomerates, primarily to address national security issues such as navy command, missile launching, satellite control, geological data analysis, and production systems for oil fields.6 Although its technology was outdated by the standards of the West, China was at that time one of the world’s largest electronic producers of vacuum-tube devices, and in 1976, China was the world’s second largest maker of radios.7 The ascendancy of Deng Xiaoping in 1978 ushered in a period of reform of China’s domestic policies and institutions and international relations that, with occasional lapses, has largely persisted. In particular, 1978 marked the starting point for China’s transition from a Soviet-style planned economy to a market economy, with S&T assigned key roles in that transition. In March 1978 at the National Science Conference held in Beijing, priority areas for scientific development were announced, namely energy sources, computers, lasers and space technology, high-energy physics, and genetics. At that same meeting a crash program 4
Wang, Y.F., China’s Science and Technology Policy: 1949-1989, Avebury, Aldershot, USA, 1993 Song, J., Vice Chairman of the Chinese People’s Political Consultative Conference and President of the Chinese Academy of Engineering, “Retrospect and Prospects for China’s Science and Technology Policy,” the AAAS/AU Distinguished Scientist Dinner Lecture Series, Washington D.C., 20 April 1999, http://www.aaas.org/international/caip/lecture/jian.html 6 Zhang, J.X., and Wang, Y., The Emerging Market of China's Computer Industry, Greenwood Publishing Group, Westport, CT 1995 7 Tang, T.B., Science and Technology in China, Longman, London, 1984 5
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to train 800,000 additional science workers was initiated, and the development of 88 key universities announced.8 In December of that year the Third Plenum of the Eleventh Congress of the Communist Party of China (CPC), under the leadership of Deng Xiaoping, formally announced an historical shift in the Party’s priorities from political revolution to economic development, and committed itself to upgrading agriculture, industry, military, and S&T, known as the “four modernizations.” In 1978, China also formally adopted an open-door policy that permitted limited amounts of foreign direct investment and the entry of multinational corporations into the country. It also encouraged students to go abroad for advanced education. Following reestablishment of diplomatic relations with the United States in 1979, the two governments adopted formal agreements that initiated cooperative research programs and paved the way for significant numbers of Chinese graduate students to study in the United States. Nevertheless, in 1983, the country awarded its first Ph.D. degrees to students educated entirely at Chinese universities. In the early 1980s, the government issued a guideline for China’s S&T policy, establishing that economic development must rely on S&T and that S&T must be enhanced to serve economic development.9,10 A pivotal 1985 document issued by the Central Committee of the CPC, entitled “Decision on Reform of the S&T Management System,” was intended to break down the barriers that separated the country’s research and production sectors. Key provisions included sharp reductions in the budgets of the R&D institutes of the Chinese Academy of Sciences (CAS) with the objective of forcing them to supplement their funds by means of contracts with various enterprises. Subsequently, many inefficient research and development (R&D) institutes attached to ministries were either reformed or abolished, and several CAS institutes that focused primarily on development activities were converted into enterprises, obliging them either to become primarily self sufficient, or to be shut down.11,12 China’s electronic research, development, and manufacturing relied on foreign technologies for high-performance electronics. National programs of economic reform in China that sought to upgrade the technology sectors had little success initially. China’s promotional policies were pervasive and heavy-handed with respect to research, investment, and enterprise decision-making, and the measures taken were duplicative and poorly coordinated.13,14 To make China’s S&T community more innovative, the government aimed to make competition for research funds more explicit and intense. In 1992, Deng put pressure on the S&T community and the government to accelerate market reform during his landmark “southern tour” to the south China cities of Shenzhen and Zhuhai to examine the results of more than a decade of economic reform. However, it was not until 1995 that a formal decision was made by the central committee of the CPC and the State Council concerning the acceleration of S&T development. One year later, reform of the S&T system was specified in the Ninth FYP (1996-2000).15 Although self-reliance was one of the fundamental principles underlying China’s S&T and economic development policy and 8
Spence, J. D., The Search for Modern China, W.W. Norton and Co., New York, 1990. Yu, Q.Y., The Implementation of China’s S&T Policy, Quorum Books, Westport, CT, 1999. Wang, Y.F., China’s Science and Technology Policy: 1949-1989, Avebury, Aldershot, USA, 1993. 11 Suttmeier, R. and Cao, C., “China Faces the New Industrial Revolution: Achievement and Uncertainty in the Search for Research and Innovation Strategies,” Asian Perspective, v. 23, #3, 1999. 12 Gu, S, “China’s National System of Innovation,” China’s S&T Trajectory, Rensellaer Polytechnic Institute, Workshop, September 2003. 13 Howell, T.R., Bartett, B.L., Noellert, W.A., and Howe, R., China’s Emerging Semiconductor Industry – the Impact of China’s Preferential Value-Added Tax on Current Investment Trends, Semiconductor Industry Association, Dewey Ballantine LLP, October 2003. 14 “Science and Technology Policy,” Embassy of the People’s Republic of China in Finland, 2004, http://www.chinaembassy-fi.org. 15 Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community,” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, http://www.usembassy-china.org.cn/sandt/ST-Report.doc. 9
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remained China’s official slogan for quite some time, China began to step up technology acquisitions through imports from Japan and Western countries.16,17
3.2
Overview of China’s S&T Policies
In May 1995, the Central Committee of the CPC and the State Council issued the “Decision on Accelerating Scientific and Technological Development,” developed to establish China’s S&T development policy and strategy for the next several decades. The offical strategy, “Revitalising the Nation through Science and Education,” reiterated the decision that S&T research should be closely tied to the market and that institutions of higher education should seek to form joint ventures (JVs) with domestic and foreign capitalists to accelerate S&T transfer to China. The policy emphasized the need for China to use market forces to propel indigenous technologies. Realizing that China cannot compete with its foreign competitors in all areas, the State Council required concentration of limited resources in a few high-technology industries, such as electronics and information networks, which were considered key for delivering competitive products. In addition, the State Council called for management changes to consolidate research institutions, increase the mobility of personnel between organizations, improve the flow of information, encourage competition and open bidding on projects, protect intellectual property, and allow talent to flourish through academic democracy. The 1995 Decision document focused on the need for the market to support applied research and discussed for the first time the role of venture capital in funding S&T research and development.18 The Ninth FYP (1996-2000) and Tenth FYP (2001-2005), which were jointly prepared by the State Development Planning Commission (SDPC) and the Ministry of Science and Technology (MOST), reflected China’s interests in a long-term S&T development policy, with the development of electronics, microelectronics, and nanotechnologies at the core. Some major development goals set forth in the Ninth and Tenth FYPs on electronics, microelectronics, and nanotechnologies include the following:19,20 •
• • • • • •
Focusing on the development of integrated circuits (ICs), new devices, new computers, and telecommunication equipment to provide economic and social development with up-to-date information systems, and making preferential policies to support IC development Developing microchip devices, new displays, and photoelectric devices, and establishing production and export bases for computer and accessory devices Developing and producing digital programmed exchanges, mobile communications and optical communications equipment Improving the electronics industry’s technical level and international competitiveness Achieving breakthroughs in basic and strategic high-tech studies Obtaining S&T personnel to meet development needs Improving the nation’s S&T infrastructure
China’s medium and long-range Science and Technology Plan for 2006-2020 was developed under the auspices of the Leading Group on Science and Technology and the 16
Barnett, A.D., China’s Economy in Global Perspective, The Brookings Institution, Washington D.C., 1981. Naughton, B., Ed., The China Circle – Economics and Electronics in the PRC, Taiwan, and Hong Kong, Brookings Institute Press, Washington, D.C., 1997. 18 Ibid. 19 Yu, Q.Y., The Implementation of China’s S&T Policy, Quorum Books, Westport, CT, 1999. 20 “China’s Tenth Five Year Plan for Science and Technology,” the Ministry of Science and Technology of China (MOST), China S&T Newsletter, June 2001, http://www.most.gov.cn. 17
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Ministry of Science and Technology, and with the overall guidance of Prime Minister Wen Jiabao. The plan consists of 20 elements, each drafted by a committee composed of both government and non-government scientists, engineers, officials, and policy analysts. In February 2004, the U.S. National Science Foundation was invited by the National Natural Science Foundation of China (NSFC) to cooperate in organizing a forum in Beijing at which a group of Chinese scientists discussed features of the draft basic research element of the plan for discussion by a group of prominent, experienced U.S. policy makers.21 According to State Councilor Chen Zhili, China hopes to quadruple its GDP over its 2000 level by 2020. Clearly, S&T will be critical if that goal is to be achieved while maintaining sustainable, environmentally friendly growth. At a November 2003 International Conference on China’s medium and long-range Science and Technology Development Plan, MOST Minister Xu Guanhua described the concepts that will underlie the plan as follows: • • • • • • •
3.3
Build an all-around well-off society, consistent with sustainable development – the highest priority Highlight strategic development, with priorities set accordingly Understand the links between scientific development and economic and social development; the plan must be consistent and integrated Reinforce a national system of innovation within the socialist market economy; stress the industrialization of science and technology achievement Target imbalances among the country’s regions so that the plan will be regionally specific Develop and implement the plan in an open atmosphere and with a global vision Involve the general public in developing and implementing the plan
China’s R&D Expenditures
China regards basic research as the foundation of the development of future technologies, as well as a driving force for sustainable long-term development of its economy.22,23,24 Strengthening basic research has been a goal during the Ninth and now the Tenth FYP periods. Both FYPs called for efforts to make breakthroughs in selected areas.25 In 2002, CAS increased its spending on basic research to 40 percent of its total outlay, aiming at Nobel-level fundamental research. It has also taken measures to increase its scientists’ creativity.26 One of China’s national-level efforts to strengthen basic research was the launch of the NSFC in 1986. NSFC’s research budget increased over 30 times from US$9.7M in 1986 to US$308.8M in 2002, much higher than China’s GDP growth.27 Despite these impressive gains, many Chinese scientists argue that basic research is seriously underfunded. In 2004, China’s basic research funding in the country was 5.2 percent of 21
Blanpied, W. (ed.), “Proceedings of the Sino-US Forum on Basic Research for the Next Fifteen Years,” Beijing, 2004, http://techcenter.gmu.edu/programs/science_trade_policy/us_china.html 22 Jiang, Z., “Hold High the Great Banner of Deng Xiaoping Theory for An All-round Advancement of the Cause of Building Socialism with Chinese Characteristics into the 21st Century,” Report Delivered at the 15th National Congress of the Communist Party of China, 12 September 1997 23 “Chinese President on Development of Science and Technology,” People’s Daily Online, 18 June 2000, http://english.peopledaily.com.cn/ 24 “Science and Technology Policy,” Embassy of the People’s Republic of China in Finland, 2004, http://www.chinaembassy-fi.org 25 “China’s Tenth Five Year Plan for Science and Technology,” the Ministry of Science and Technology of China (MOST), China S&T Newsletter, June 2001, http://www.most.gov.cn 26 Huang Y., “CAS Aiming at Nobel Level on Basic Researches,” People’s Daily Online, 12 June 2002, http://english.peopledaily.com.cn/ 27 Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community,” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, http://www.usembassy-china.org.cn/sandt/ST-Report.doc
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total R&D expenditures, compared with a ratio of 16 to 20 percent in the United States, Western Europe, and Japan.28 China remains a developing country and has limited resources available for S&T development. In 1999, for example, the total revenue of China’s central government was US$70B, which was less than the budget for S&T technology development allocated by the U.S. government.29 The current S&T development policy requires that limited resources be concentrated on the development of selected high technologies that are key to the nation’s economic development. In fact, this kind of policy and strategy has been applied to many other government-funded development programs, such as China’s military modernization programs.30 China currently has about 0.74 million people involved in R&D activities, compared with 1.3 million in the U.S. and about 0.65 million in Japan. Since the beginning of the Ninth FYP (1996-2000), China has been stepping up its efforts to increase its overall R&D spending in key economic sectors. The ratio of its Gross Expenditure in Research and Development (GERD) to the GDP was merely 0.6 percent in 1996.31 The goal in the Ninth FYP was to raise this GERD-GDP ratio to 1.5 percent by the end of 2000. Although the goal was not achieved in the Ninth FYP and was again written into the Tenth FYP (2001-2005), China’s R&D spending first reached 1 percent in 2000 and in 2003 this ratio was 1.27 percent. In 2001, for example, R&D spending, in terms of the total expenditure based on purchasing power parity exchange, climbed to third place in the world behind the U.S. and Japan. R&D spending accounted for 1.1 percent of the GDP, according to the Organization for Economic Cooperation and Development (OECD), a Paris-headquartered economic analysis and policy-making organization with membership from virtually all the world’s developed countries.32 Assuming this ratio is based on internationally agreed-on definitions, the country’s GERD-GDP ratio would be comparable to that of Italy. As shown in Figure 3.1, since 1997-1998, China’s GERD growth has been slightly higher than the GDP growth, reflecting the government’s accelerated effort in S&T development. At this rate, China’s GERD is likely to reach US$21B by the end of 2004. However, China’s R&D spending remains at a low level in terms of the GERD-GDP ratio compared with several scientifically-important developed countries, and this situation is unlikely to change significantly in the near future. Compared to China’s goal of 1.5 percent of GDP spending on R&D by 2005, Germany and France both have GERD-GDP ratios between 2.0 and 2.5 percent. The ratio for the United States is somewhat greater than 2.8 percent, with Japan’s slightly less than 3.0 percent.33 Based on the limited amount of S&T expenditures, China has been encouraging product-development R&D activities to make S&T contribute to its economic development. For example, in 2002, 75.1 percent of the nation’s R&D spending went to product development and another 19.2 percent to applied research and only 5.7 percent for basic research.34 At the end of the Ninth FYP (1996-2000), enterprises accounted for 60.4 percent of the total R&D performed in the country, R&D institutes 27.7 percent, and universities 9.8 28 Blanpied, W. (ed.), “Proceedings of the Sino-US Forum on Basic Research for the Next Fifteen Years ” Beijing, 2004, http://techcenter.gmu.edu/programs/science_trade_policy/us_china.html 29 Song, J. “Retrospect and Prospects for China’s Science and Technology Policy,” 20 April 1999 30 Cox Report, House Report 105-851, “Report of the Select Committee on U.S. National Security and Military/Commercial Concerns with the People’s Republic of China,” Rep. Christopher Cox of California, United States Congress, 14 June 1999, http://www.access.gpo.gov/congress/house/hr105851 31 Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community, ” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, http://www.usembassy-china.org.cn/sandt/ST-Report.doc 32 “China Rises to Third in Research, Development Spending,” China Daily, 3 November 2003, http://www1.chinadaily.com.cn/en/doc/2003-11/03/content_277967.htm 33 National Science Board, Science and Engineering Indicators 2004, National Science Foundation, Arlington, VA, 2004 (NSB04-1) 34 China Science and Technology Statistics Data Book 2003, MOST http://www.most.gov.cn/eng/statistics/2003/index.htm
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percent.35 China (like most developed scientific countries, including the United States and Japan) also encourages non-government sectors to support R&D from their own funds. Funding by enterprises has begun playing a significant role in China’s S&T development. In 2000, governments (central and provincial) were estimated to have contributed 33.3 percent of total R&D support in China, enterprises 57.6 percent, foreign sources 2.7 percent, and the balance accounted for by unspecified “other” sources.36 However, among the enterprises expenditures, it was estimated that approximately half of the amount for R&D came from state-owned enterprises (SOEs), and thus indirectly from the central government. If so, then 62.7 percent of China’s R&D expenditures in 2000 came either directly or indirectly from government and only 28.8 percent purely from private enterprises. In the United States, private industry accounts for over 65 percent of all R&D support, with government accounting for somewhat less than 30 percent. In Japan, private industry accounts for a slightly higher percentage of total R&D support than in the United States, and government for slightly less.37
1.5
GDP GERD
25 20 15
1 10 0.5
5
0
0
GERD (US$ billion)
GDP (US$ trillion)
2
95 96 97 98 99 00 01 02 03 04 Year
Figure 3.1: China’s GDP and GERD (GDP ‘04, GERD ‘02-‘04 estimated)38,39,40,41
3.4 China’s S&T Organizational Structure The State Council of the central government is the highest administrative body of China. There are six major ministry-level administrative organizations directly under the State Council that handle the nation’s S&T development activities. A Leading Group on Science and Technology, chaired by the prime minister, is located organizationally between the State Council and these administrative organizations. However, most observers agree that it is relatively ineffective in setting R&D priorities, primarily because it is composed of representatives of those administrative organizations who devote the bulk of their attention to guarding their own turf and budgets. These organizations include the Ministry of Science and Technology, the Ministry of Education (MOE), the Commission of Science, 35
Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community,” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, http://www.usembassy-china.org.cn/sandt/ST-Report.doc 36 MOST, Science and Technology Indicators, Scientific and Technical Documents Publishing House, Beijing, 2002 37 National Science Board, Science and Engineering Indicators 2004, National Science Foundation, Arlington, VA, 2004 (NSB04-1) 38 Science and Technology Indicators, MOST, Scientific and Technical Documents Publishing House, Beijing, 2002 39 MOST, China Science and Technology Statistics Data Books 2000-2001, Ministry of Science and Technology, 2000-2001, http://www.most.gov.cn/eng/statistics/2001/index.htm 40 Organisation for Economic Co-operation and Development (OECD), 2003, http://www.oecd.org/home/ 41 Ministry of Science and Technology (MOST), 2004, http://www.most.gov.cn/eng/index.htm
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Technology and Industry for National Defense (COSTIND), the Chinese Academy of Sciences, the Chinese Academy of Engineering (CAE), and the National Natural Science Foundation of China42 (Figure 3.2). Among those organizations, MOST, COSTIND, and MOE have policy-making authority, in addition to varying degrees of funding authority; CAS (which receives substantial funds from the government as a budget line item to support its research activities) and CAE have advisory power; and NSFC provides research funds. Following is a brief introduction to each organization.
State Council
MOST
COSTIND
Research Institutes
MOE
Research Institutes
Other Ministries
Research Institutes
CAS
CAE
NSFC
Research Institutes
Figure 3.2: Organization of China’s S&T Management System43
3.4.1
Ministry of Science and Technology
The predecessor of the Ministry of Science and Technology was the State Science and Technology Commission (SSTC), which was responsible for managing and organizing China’s S&T activities within a centralized planning economy. After losing its original centralized authority, SSTC’s name was changed to MOST in March 1998.44 With its basic functional shift from research activity control to policy-making and administrative management, its employees were also reduced by about half during the transition. Some key functions of MOST include: • • • • •
Formulating strategies and policies for S&T development Conducting research on major S&T issues related to economic and social development Administering national technological industry development zones Promoting international S&T cooperation and exchanges Managing and publishing S&T information
MOST also provides substantial support for research, primarily through special largescale programs such as 863, 973, and Torch.45 42
“China in Brief, Political System and State Structure,” 2004, http://www.china.org.cn/e-china/politicalsystem/ stateCouncil.htm Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community,” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, http://www.usembassy-china.org.cn/sandt/ST-Report.doc 44 Ibid 45 MOST, Science and Technology Indicators, Scientific and Technical Documents Publishing House, Beijing, 2002 43
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3.4.2
55
Ministry of Education
The Ministry of Education, founded in 1949, is the highest administrative organization in China responsible for education policymaking, education-related laws and regulations, educational development strategies, management of higher education institutions, and vocational and adult education and occupational training. Its major functions in S&T development include:46 • • •
Promoting commercialization and application of scientific research achievements, especially on high and new technologies Providing guidelines to universities undertaking major national scientific research projects Overseeing key state laboratories and research centers at higher education institutions
MOE provides indirect research support by virtue of its role as the principal government supporter of the national universities. 3.4.3
Commission of Science, Technology and Industry for National Defense
The Commission of Science, Technology and Industry for National Defense, formed in August 1982 by merging the National Defense Science and Technology Commission, the National Defense Industries Office of the State Council, and the Office of the Science, Technology, and Armaments Commission of the CPC Central Military Commission, is China’s top national defense administrative organization. It incorporates some administrative functions of the Department of National Defense and various militaryindustrial corporations. Its functions in S&T include military research and development and military application of commercial technologies.47,48 China National Space Administration (CNSA) was established as an internal structure of COSTIND, which is responsible for enforcement and management of China’s national space science policies. 3.4.4
Chinese Academy of Sciences
The Chinese Academy of Sciences, founded in November 1949 on the model of the Soviet Union, is China’s premier natural science and technology research organization (see Figure 3.3 for its organizational structure). CAS operates over a hundred research institutes nation-wide and has over 500 private S&T enterprises spun off from its institutes. Baseline support for these activities is provided by a line item in the central government’s budget. However, CAS institutes are also obliged to seek additional support through contracts with enterprises, and frequently obtain revenue from their own spin-off enterprises as well. CAS has over 600 academicians elected as the foremost experts in their fields from over 1 million scientists and engineers in China. In addition to its primary role in scientific research and technological development, CAS offers graduate programs in natural sciences and applied research. CAS is headquartered in Beijing, with a number of administrative offices throughout China. There are five divisions in CAS, forming China’s highest advisory bodies on S&T development. They are mathematics and physics, chemistry, biological sciences, earth
46
“About MOE,” China Online, 22 June 2000, http://www.chinaonline.com/refer/ministry_profiles/MOE.asp “About COSTIND,” Federation of American Societies, 17 October 2000, http://www.fas.org/nuke/guide/china/agency/costind.htm 48 Mulvenon, J.C. and Yang, R.H. (ed.), “The People's Liberation Army in the Information Age,” Rand Corporation, Santa Monica, California, 1999, http://www.rand.org/publications/CF/CF145/#contents 47
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sciences, and technological sciences. CAS members and institutes serve as consultants to the government, providing S&T policy advice.49
President Presidium Vice Presidents Secretary-General Vice Secretaries-General
Academic Management System Bureau of Basic Science
Educational Institutions
Bureau of Life Sciences and Biotechnology Bureau of Science and Technology for Resources and the Environment
High-Tech Enterprises
Bureau of High-tech Industry Development
Comprehensive Management Departments
General Office
Supporting Departments
Bureau of High-tech Research and Development
Bureau of Comprehensive Planning Bureau of S&T Policies Bureau of International Cooperation
Bureau of Personnel and Education
General Office of Academic Divisions
Research Institutions
Executive Committee of the Presidium
Bureau of Supervision and Auditing Bureau of Capital Construction
Special Committees
Division of Mathematics & Physics Division of Chemistry Division of Biology Division of Earth Sciences Division of Technological Sciences
Bureau of Veteran Cadres
Figure 3.3: Organization Chart of CAS 50 3.4.5
Chinese Academy of Engineering
The Chinese Academy of Engineering, founded in 1994, is China’s premier advisory institute of engineering. It consists of seven divisions, including: • • • • 49
Mechanical and vehicle engineering Information and electronic engineering Chemical, metallurgical, and materials engineering Energy and mining engineering
Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community,” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, http://www.usembassy-china.org.cn/sandt/ST-Report.doc 50 CAS Fact Sheet, Chinese Academy of Science, 2003, http://english.cas.ac.cn/eng2003/page/about_03.htm
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• • •
57
Civil engineering, hydraulic engineering, and architecture Agriculture, light industries, and environmental engineering Medicine and health engineering
It also has over 600 academicians to provide advice and guidelines on China’s engineering development.51,52 However, unlike CAS, CAE does not have its own research institutes. Instead, research is carried out in engineering departments at universities throughout China. 3.4.6
National Natural Science Foundation of China
The National Natural Science Foundation of China, headquartered in Beijing, was founded in 1986 to promote and finance S&T research. Unlike the National Science Foundation of the U.S., NSFC only funds the natural sciences, leaving the funding of social science and education to other organizations.53,54 It consists of seven major departments: mathematical and physical science, chemical science, life science, earth science, engineering and materials science, information sciences, and management science.
3.5 China’s S&T Infrastructure China’s national network of S&T research consists of about 5,400 R&D institutions under the supervision of the central-or lower-level governments, about 3,400 research institutions affiliated with universities and colleges, about 13,000 research institutions operated by major state enterprises, and about 41,000 non-government research-oriented enterprises. In addition, there are more than 160 national academic societies under the jurisdiction of the Chinese Science and Technology Association, with branches across the country. In general, six major R&D resources can be identified in China: • • • • • •
3.5.1
CAS-operated institutes and laboratories R&D institutions under the various ministries and administrative agencies Institutes and research centers of industrial enterprises Universities and colleges Local R&D institutions R&D institutions affiliated with defense CAS-operated Institutes and Laboratories
As the premier research organization in China, CAS operates 123 research institutes and employs about 60,000 scientists and engineers. Among these institutions, those related to electronics and microelectronics include the following: • •
51
Institute of Computing Technology (location: Beijing; founded: 1956; technical personnel: 123) Institute of Semiconductors (location: Beijing; founded: 1960; technical personnel: 430)
Xinhua, “58 Engineers Elected to Chinese Academy of Engineering,” People’s Daily Online, 6 January 2004, http://english.peopledaily.com.cn/ 52 Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community,” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, http://www.usembassy-china.org.cn/sandt/ST-Report.doc 53 About NSFC, The National Natural Science Foundation of China, 2004, http://www.nsfc.gov.cn/ (in Chinese) 54 Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community,” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, http://www.usembassy-china.org.cn/sandt/ST-Report.doc
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• • • • • • • •
Institute of Electronics (location: Beijing; founded: 1956; technical personnel: 434) Microelectronics R&D Center (location: Beijing; founded: 1986; technical personnel: 310) Changchun Institute of Optics, Fine Mechanics and Physics (location: Changchun; founded: 1999; technical personnel: 1,615) Shanghai Institute of Microsystem and Information Technology (location: Shanghai; founded: 1999; technical personnel: N/A) Shanghai Institute of Optics and Fine Mechanics (location: Shanghai; founded: 1964; technical personnel: N/A) Institute of Optics and Electronics (location: Chengdu; founded: 1970; technical personnel: N/A) Xi’an Institute of Optics and Fine Mechanics (location: Xi’an; founded: 1962; technical personnel: 414) Hefei Institute of Intelligent Machines (location: Hefei; founded: 1979; technical personnel: N/A)
In addition to its own institutions, CAS also jointly builds research facilities with domestic and foreign enterprises and universities. In 1998, for example, CAS and its most successful spin-off, the Legend Group (now also called Leveno), established the Legend Central Institute for the development of computing technologies. In March 2003, CAS and China’s two top universities, Peking University and Tsinghua University, announced the setup of a national nanoscience research center in Beijing, with a first-stage investment of US$30.2M from the central government.55 3.5.2
Universities and Colleges
In 1959 China had only 200 universities; it now has over 2,200 institutions of higher education. Most of the top-level or first-tier universities are operated by either MOE or other ministries and/or agencies of the central government. Control of most universities formerly supported by other ministries has now been removed from those jurisdictions and in most cases transferred to MOE. Regional colleges and universities are under the management of local governments. Among all the universities and colleges, the most prestigious are Peking University (PKU) and Tsinghua University. PKU was founded in 1898. It has 12 key national laboratories, with information technology, nanoscience, and nanotechnologies among its most popular research areas. It also has a nanotechnology research center jointly established by its biology, physics, and microelectronics departments. Tsinghua University, founded in 1911, is home to 15 key national laboratories, with the nation’s strongest programs in engineering research. In addition to its main campus in Beijing, it also recently opened a campus in Shenzhen, the most developed city in southern China (adjacent to Hong Kong), to enhance its technology transfer and professional training to meet the increasing demand for new technology and technical professionals in the region. Other important research universities include Fudan University in Shanghai, Nanjing University in Nanjing, and the Harbin University of Technology in the Ice City of Harbin in northeast China. In 1998, the central government initiated the World Class University Program (985 Program), providing special funds to selected national universities in order to bring them up to international standards.56 Table 3.1 provides some statistics on these universities. SCI Papers refers to peer-reviewed papers published in journals included in the Philadelphiabased Science Citation Index, considered to be the world’s premier scientific journals. Engineering journals are not included in the SCI. 55 “China to Set Up Nano Science Center,” People’s Daily Online, 25 March 2003, http://english.peopledaily.com.cn/ 56 Cao, C, “China’s Basic Research System in Transition,” U.S. Department of Commerce Seminar on Research and Higher Education in China, 2 May 2007 [unpublished]
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Table 3.1: Statistics on Funding by the World Class University Program 57
Beijing Tsinghua Harbin Univ of Tech Shanghai Jiaotong Fudan (Shanghai) Nanjing Zhejiang Univ. of S&T (Heifei) Xi’an Jiaotong
Graduate Students (2002) 12,075 9,063 7,777 8,193 7,437 7,463 13,900 3,211 5,504
Undergraduate Students (2002) 14,212 12,625 24,692 13,421 14,397 12,880 27,000 8,854 19,375
SCI Papers (2001) 1,427 1,209 307 648 589 937 868 880 229
R&D Funding from Government (%) (1999-2001) 80.31 61.32 54.93 53.83 31.05 64.92 22.76 92.23 35.68
China is no different than the United States when it comes to the complexity of its higher education system. Both systems exhibit a tension between the needs of industry and all the other needs each society demands of its universities. Both design undergraduate programs that attempt to balance industry’s specific need for a trained pool of talent that can become immediately productive on the job, with the university’s broader goal of imparting underlying principles of knowledge that will support lifelong learning in order to drive rather than simply adapt to industry change. Graduate schools in both systems vary in the degree to which they support industry’s short-term product development needs and invest in the long-term benefits of fundamental research. An entirely new graduate School of Software and Microelectronics was established at Peking University in Beijing 3 years ago to prepare students to work in the multinational software and electronics companies operating in China; that is a fundamental need. Professor Zhong Chen, dean of the school, said the number of college students in China has doubled in the last 3 years. But of the 3 million college students who will graduate this year, only 15,000 will be qualified to work for these companies. This graduate school, developed with an international board and with advice from companies such as Microsoft, Lucent, and Motorola, is designed to dramatically increase those numbers. With the support of EC’s Asia Link program, two RIT professors are now in China working to adapt the RIT Master’s Program in System-on-a-Chip (SOC) Design with Fudan University, as well as develop a BS in microelectronics. The effort is specifically designed to satisfy China’s goal of producing 50,000 new IC designers within 10 years.58 China now ranks ninth as a host destination for American students, advancing from the twelfth spot a year earlier. Britain continues to be the leading destination, attracting 16.8 percent of all American students who study abroad, the study found. A total of 4,737 American students enrolled in Chinese universities in the 2003-2004 academic year, up from 2,493 students the previous year. In the 2004-2005 academic year, China sent more than 62,000 students to the United States, nearly 60 percent more than a decade earlier, the study showed. The Chinese now represent 11 percent of foreign students in the United States, the second largest group behind students from India. Nationwide in China, the number of students enrolled in higher education has more than doubled in less than 5 years. In 2000, the country counted 5.8 million university students; by 2004, that number had rocketed to 13.3 million.59 57
Ibid “Special Report: Education in China, Denise Penrose,” Elsevier Science and Technology Books, Electronic News, 7 November 2005 58
59
Buchanan, M., “China grows as Study Hotspot for U.S. Students,” New York Times, 8 December 2005
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A 2005 report from Duke University claims that China’s number of science and engineering bachelor degrees was 351,000 in 2004. Coupling this with an upward adjustment for American graduates leaves China producing 214,000 more such degrees than the United States. China’s production of doctorates has also increased rapidly. By 2003, China’s homegrown science and engineering doctorates numbered almost half of the U.S. total. Chinese were also earning large numbers of doctorates abroad. In 2001, the number of Chinese science and engineering doctorates earned in Japan, the United Kingdom, and the United States were 72 percent of the total of science and engineering doctorates earned by American citizens and permanent residents.60 3.5.3
National Engineering Research Centers
Since the beginning of the Eighth FYP (1991-1995), MOST has started to establish a series of National Engineering Research Centers (NERCs) to accelerate China’s S&T development in electronics and microelectronics, computers, communications, automation, electronics product and process development, and other high-technology areas. Many of the centers also operate companies for quick commercialization and transfer of new technologies. The objectives of establishing those engineering centers include the following: • • •
Converting significant scientific research results into useful, economically viable products Solving engineering problems related to key areas of industrial development Exploring ways to integrate science and technology into the economy
Through 2001, more than US$2B has been invested and over 100 national engineering research centers have been established in China, with over one-third dedicated to the development of electronics and information technology. The major NERCs related to electronics, microelectronics, and nanotechnologies in China are the NERCs for: • • • • • • • • • • • • • • •
Application Specific Integrated Circuit Systems (Southeast University) Application Specific Integrated Circuit Design (The Institute of Automation, CAS) Data Communications (the Research Institute of Data Communications of the Ministry of Posts and Telecommunications) Flat Panel Displays (the Nanjing Electronic Devices Institute) Parallel Computers (the Institute of Computing Technology, CAS, and the Jingnan Institute of Computing Technology) Mobile Satellite Communication (the Panda Electronics Group Company) Digital Switching Systems (the Information Technology Institute of the People's Liberation Army) Computer Integrated Manufacturing Systems (Tsinghua University) Solid State Lasers (the North China Research Institute of Electro-Optics) Power Automation (the Nanjing Automation Research Institute of the Ministry of Electric Power) Specific Pumps and Valves (the 11th Research Institute of the China Aerospace Corporation) Industrial Control Devices and Systems (the No. 502 Institute of China Aerospace Corporation) Optical Instrumentation (Zhejiang University) Polymer Matrix Composites (the Harbin Fiber Reinforced Plastics Research Institute) Fiber Reinforced Moulding Compounds (the Fiber Reinforced Plastics Research and Design Institute, the State Administration of Building Material Industry)
60 Fuller, D. B., “The Fact Remains, U.S. Tech Leadership Must Be Reinforced,” 7 April 2006, http://www.mercurynews.com/mld/mercurynews/news/opinion/14286352.htm
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Science Parks
Science parks have played a significant role in China’s S&T development. These allow enterprises and R&D institutes to cooperate and interact in close proximity. Among all the science parks across the country, Zhongguancun Science Park (ZSP), located in Beijing close to both Peking and Tsinghua Universities, is the largest, with the highest concentration of scientific, educational, and research institutes in China. The GDP output of ZSP was about US$5.5B in 2003 and is expected to reach US$7.2B in 2005. In addition to Beijing, other metropolitan cities, such as Shanghai and Xi’an, have also begun building science parks funded by the Torch Program.
3.6 China’s Major S&T Development Programs Setting up and funding a set of national research programs is a major feature of China’s efforts to promote its S&T development and raise its overall technological level. It affects mid- to long-term S&T as well as economic development goals aimed at achieving advances in consecutive FYPs. Each program may support thousands of projects in a variety of areas. MOST is the top administrative organization responsible for the management and coordination of these programs.61,62 China’s S&T development programs are implemented in three different tiers. In the first tier are those aimed at tackling major S&T snags in the nation’s economic development, such as the Spark Program and the National Program for S&T for Sustainable Development, which are designed to renovate China’s traditional industries and agriculture and to improve labor performance. In the second tier are programs for developing emerging technologies and high-tech industries. Typical programs in this tier are the National HighTechnology Research and Development Program (the 863 Program) and the Torch Program. In the third tier are those programs for basic and applied research, such as the National Basic Research Priorities Program.63 In the areas of electronics, microelectronics, and nanotechnologies, China plans dozens of high-tech projects, ranging from high-speed broadband information systems to new materials development, to boost industrial sectors in the Tenth FYP period (2000-2005). The projects focus on new technologies and products such as the third generation of mobile telecommunications, high-definition color television, satellites for live broadcasting, and digital products. The following sections provide an overview of the high-technology development programs with a focus on the development of electronics, microelectronics, and nanotechnologies. 3.6.1
National High-Technology Research and Development (863) Program
The National High-Technology Research and Development Program, also referred as the “863” Program, was initiated in March 1986 at the beginning of the Seventh FYP period (1986-1990). The program focused on cultivating the younger generation of S&T researchers and finding a niche in the world’s high-tech industries for China. By the end of the Ninth FYP (1996-2000), about US$1.9B had been invested to fund over 5,000 projects in the program, with about one-third of this from direct government funding and the rest from enterprises and other sources. The projects funded by the program cover six major 61
S&T Programs, The Ministry of Science & Technology of China (MOST), March 1998, http://www.most.gov.cn 62 Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community,” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, http://www.usembassy-china.org.cn/sandt/ST-Report.doc 63 “Science and Technology Policy, ” Embassy of People’s Republic of China in Finland, 2004
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fields: information technology, biology, modern agriculture, new materials, advanced manufacturing technologies, and energy and environment. The development of a superlarge-scale IC, a large-scale parallel processing computer, key optoelectronic components, and modern communication technology is included in the projects. 3.6.2
National Basic Research Priorities Program
The National Basic Research Priorities Program, also known as the “Climbing Program” or the “973” Program, was initiated in March 1997 (MOST website Climbing Program started in 1991) during the Ninth FYP (1996-2000). This program focuses on basic research that is relatively mature but still plays an important role in S&T development. There are two types of Climbing Programs: Climbing A programs are basic research programs, and Climbing B programs are application research programs. During the first 5 years after it was initiated, this program funded about 60 projects, at a cost of US$14.5M, in mathematics, life sciences, information science, materials science, energy, and the environment. Due to the fundamental research nature of this program, MOST also coordinates with other top administrative bodies, such as MOE, CAS, and NSFC, on project selection and management. Major projects in electronics, microelectronics, and nanotechnologies include the following: • • • •
Research on high-temperature superconductivity Physics of new semiconductor materials and devices Nano-size materials science Research on structure, property, molecular design, and manufacturing process of photoelectrical materials Research on femtosecond ultra-fast lasers Micro-electromechanical systems (MEMS) High-performance computing
• • •
3.6.3
Torch Program
The Torch Program, launched in 1988, seeks to: • • • •
Develop new high-tech industries by establishing high-technology development zones (HTDZs) Help to market high-tech products Promote international cooperation with China’s high-tech industries Train and attract a talented workforce
By the end of the Ninth FYP (1996-2000), the Torch Program had supported over 2,700 projects with US$3.5B. Among those, the greatest number were information technology and electronics projects, with over 1,000 projects totaling over US$1.8B. The setup of HTDZs is the primary approach used by the Torch Program to accelerate the development of China’s high-tech industries. In August 2002, an agreement was reached for a U.S.-China Science and Technology Innovation Park, to be established on the University of Maryland’s College Park campus, and officially signed by Ministry of Science and Technology and the Technology Administration of the U.S. Department of Commerce. This will be the first overseas research park initiative to be undertaken by China. China’s principal partners in the initiative are the Torch High Technology Industry Development Center of MOST and the Administrative Committee of Zhongguancun Science Park, the largest research park in China.64 According to Professor C. D. Mote, the President of the University of Maryland, “the purpose of establishing the U.S.-China Overseas Science and 64 Technology Administration, “Agreement Reached for U.S.-China Science and Technology Innovation Park,” 22 December 2003, http://www.technology.gov/PhotoEssays/p_Pht020813.htm
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Technology Innovation Park is to attract more Chinese enterprises coming to the U.S., accelerating their R&D and business expansions, promoting their innovations mutually with American enterprises.”65 As of 2004, six companies have been assisted in setting up their operations in Maryland by the U.S. Science Park Management Company.
3.7 China’s Major S&T Development Efforts and Achievements After almost another decade of development since 1995, when China formally adopted the policy to accelerate its S&T development process and launched several national programs to support high-tech research and development, the country has now begun to enjoy unprecedented, although uneven, prosperity in S&T. In 2003, China’s patent applications grew 22 percent and domestic patent applications for the first time surpassed foreign ones.66 In 2004, the State Intellectual Property Office of China handled 354,000 applications of which 79 percent were domestic applications while 21 percent were foreign applications.67 Further, in a 2005 report by a leading U.S. scientists, corporate executives and educators, “Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future,” it was noted that China may be poised to usurp America’s leadership in innovation and job growth. In particular, it was noted that the number of patents filed in the U.S. by China has been rapidly increasing.68 China has made noticeable achievements in high-tech areas that are keys to economic development, and has begun to gain ground in the world’s S&T community. On the other hand, in the opinion of many Chinese scientists, basic research remains significantly, perhaps even dangerously, underfunded, and with the exception of less than a dozen universities, research facilities are unimpressive.69 In 2001 China’s ranking in the number of scientific papers in journals listed in the Science Citation Index had risen to sixth place, behind the United States, the UK, Japan, Germany, and France.70 However, the number of highly cited papers remained disappointingly small. Despite these caveats, the country’s progress in several high-tech areas has been impressive. The sections below highlight the country’s major development efforts and achievements in electronics, microelectronics, and nanotechnologies. 3.7.1
China’s Indigenous IC Development
Complete dependence on foreign imports for core technologies has been a long-term bottleneck in China’s electronic development. At the top of the list are the design and manufacturing technologies of high-performance ICs, particularly microprocessors and digital signal processing (DSP) units. Therefore, development of indigenous ICs has been a top priority in the national development plan and national S&T development programs since the beginning of the Seventh FYP (1986-1990). In recent years, China has made noticeable progress in the area. In December 2003, China’s BLX IC Design Corp., a CAS spin-off, started marketing its 32-bit 266-MHz central processing unit (CPU) for China’s domestic manufacturers of set-top boxes, smart televisions, digital video recorders, and thin-client personal computers.71,72 The development 65
“Accelerating Innovations for Both US and China Enterprises – Interview with President Dan Mote, University of Maryland,” Jiefang Daily, 5 November 2003, http://www.inform.umd.edu/igca/news/Mote-shanghai.htm 66 “China’s Patent Applications Surpassed the Foreign Ones for the First Time in Eight Years,” China News, 26 January 2004, http://www.chinanews.com.cn (in Chinese) 67 Government White Paper on “New Progress in China’s Protection of Intellectual Property Rights,” www.china.org.cn 68 United Press International, “US May Begin to Lag Behind in Patents,” http://www.physorg.com/printnews.php?newsid=8141, accessed 19 November 2005 69 Blanpied, W. (ed.), “Proceedings of the Sino-US Forum on Basic Research for the Next Fifteen Years.” 70 MOST, Science and Technology Indicators, Scientific and Technical Documents Publishing House, Beijing, 2002 71 “China IT Weekly Briefing,” United States Information Technology Office (USITO), No. 12, 29 November-5
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kicked off in 1999. After 3 years of work, BLX first introduced the 266-MHz standard cell CPU in 2002. A next generation of the CPU is also under the development. Also in December 2003, China officially announced the market launch of the United863 chip, a CPU touted as the first China-developed SOC and designed to be used with the Linux operating system. This CPU was distinguished from its predecessors by being developed from scratch using Chinese intellectual property. It was also the largest CPU China had produced to date, with each processor holding at least 8M transistors.73,74 The United-863, also known as the MPRC-863 processor, was developed by the Micro Processor Research and Development Center (MPRC) of Peking University with support from the 863 Program, with the aim of making China the world’s second largest designer of integrated circuit products by 2020. About the same time, a group of Chinese scientists announced the launch of two chips for 3G handsets based on Chinese-owned technology. Growing out of 7 years of research conducted at the Institute of Super-large-scale Integrated Circuits in Tongji University, a Shanghai-based University, these two microchips, named the Shenxin I and Shenxin II, enabled a variety of services including digital video recording, transmission, and playback. According to the Institute, the chips, which can be used in conjunction with W-CDMA, CDMA2000, or TD-SCDMA networks, constitute a core mobile technology that will boost the domestic handset industry and reduce reliance on foreign imports. The Institute was seeking a manufacturing partner to commercialize the technology, which had been awarded 17 patents in the U.S. and 13 in China.75 3.7.2
China’s Avionics and Space
China’s history of aviation development dates back to the 1950s, during the Cold War. A well-known example is the significant contribution of Qian Xuesen to the development of China’s missile and space technology. Qian, also known as Tsien Hsue-Shen, is the father of China’s missile and space program and a co-founder of the Jet Propulsion Laboratories. He was recognized as the world’s foremost expert on jet propulsion in the U.S. before being allowed to return to China in 1955.76 Ever since China succeeded in developing and launching its first man-made satellite in 1970, it has put significant efforts into developing space activities, and now ranks among the world's most advanced countries in many important fields of space technology, including man-made satellites, launching vehicles, and manned spaceflight. By October 2000, China had developed and launched 47 satellites of various types, with a flight success rate of over 90 percent.77 On 15 October 2003, China’s first astronaut, Yang Liwei, successfully accomplished his 21-hour space mission by orbiting the planet 14 times to go where no Chinese man had gone before.78 China launched two more astronauts into space on 11 October 2005 and also plans to launch two meterological satellites into orbit before 2008 to provide better weather forecasting for the Olympics in Beijing. December 2003, ttp://www.usito.org/uploads/41/weekly_dec5.html 72 Clendenin, M., “China's BLX Making Headway with Godson CPU,” EE Times, 24 November 2003, http://www.eetimes.com/semi/news/OEG20031124S0059 73 “China IT Weekly Briefing,” United States Information Technology Office (USITO), No. 13, 15-21 December 2003, http://www.usito.org/uploads/39/weekly_dec19.htm 74 “Advanced China-made CPU Commercialized,” China View, 8 December 2003, http://news.xinhuanet.com/english/2003-12/08/content_1219966.htm 75 “China IT Weekly Briefing,” United States Information Technology Office (USITO), 26 December 2003, http://www.usito.org/uploads/49/weekly_dec26.html 76 Cox Report, House Report 105-851, “Report of the Select Committee on U.S. National Security and Military/Commercial Concerns with the People’s Republic of China,” Rep. Christopher Cox of California, United States Congress, 14 June 1999, http://www.access.gpo.gov/congress/house/hr105851 77 “China's Space Activities”, The State Council Information Office, P.R.C., November 2000, http://www.cnsa.gov.cn/fg_e.htm 78 Havely, J., “Orbit first step on China's way to moon,” CNN News, 10 October 2003, http://www.cnn.com/2003/TECH/space/10/09/china.space.plans/
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On the other hand, China’s aviation industry has so far not been as successful as its space programs, although China developed several fighter and passenger jets from the 1950s through the 1980s, mostly based on old Soviet designs. In recent years, however, with an accelerated process for acquiring foreign technologies, China has developed and launched several fighter jets, all using the state-of-the-art, so-called flight-by-wire technologies. With a gradual technological buildup, China launched its first passenger jet program aimed at the commercial market, ARJ-21 (Advanced Regional Jet in the 21st Century), in February 2000. After only 3 years of work, China completed the design and started manufacturing on 20 December 2003. This 78- to 98-passenger jet was fully developed under the international standard and is expected to get off the ground in 2008.79 To meet the stringent standards on commercial airplanes, ARJ-21’s key systems will still be provided by top international companies. For example, Rockwell Collins, the U.S.based company, has been selected as the avionics provider for ARJ-21.80,81 However, China has formed multiple task forces and companies to design and manufacture advanced avionic systems. With the help of China’s preferential policy for technology transfer and the world’s tough market environment for the aviation industry, China is likely to see noticeable progress in avionics development in the near future. 3.7.3
China’s Development of the Global Positioning System
The global positioning system (GPS) is a satellite navigation system that uses multiple geosynchronic satellites to determine the location of a target on the ground. Currently, the U.S. is the only country in the world that owns the system and is able to locate an object at any time on the globe. Because of the significant value of the GPS system in both civilian and military applications, China has been actively studying and developing GPS technologies since the 1990s. To break up the U.S. monopoly of the GPS system, the European Union (EU) and the European Space Agency first kicked off development of the Galileo satellite navigation system in 2002, despite opposition from the U.S. In September 2003, it won China’s backing for the program, just several months after China successfully shot a man into orbit.82,83 In addition to cooperating with the EU, China has been actively developing its own GPS system independently. On 31 October 2000, it successfully put its first GPS satellite, BNTS-1 or Beidou Navigation Test Satellite-1, into orbit.84 The second one, BNTS-1B, was launched on 21 December 2000,85 and the third on 25 May 2003.86 With three GPS satellites in orbit, China has gained some preliminary GPS positioning capability for objects within Chinese territory and some peripheral areas.
79
“Flying into a Storm,” Shanghai Star, 9 January 2003, http://app1.chinadaily.com.cn/star/2003/0109/sp8-1.html Rapids, C., “Rockwell Collins Wins ARJ21 Regional Jet Program; - New airliner to be Equipped with Collins Pro Line 21 Avionics,” Rockwell Collins, 28 April 2003, http://www.rockwellcollins.com/news/page1652.html 81 Dolven, B. and Neuman, S., “China’s Aviation Dream,” Far Eastern Economic Review, 25 December 2003-1 January 2004, pp. 88-91 82 “China Backs European Rival to GPS Satellite Navigation System,” EU Business, 18 September 2003, http://www.eubusiness.com/afp/030918115229.l20gpw46 83 “China Joins EU Space Program To Break US GPS Monopoly,” SpaceDaily, 27 September 2003, http://www.spacedaily.com/news/gps-03zc.html 84 Wei, L., “China Launches First Navigation Satellite,” SpaceDaily, 31 October 2000, http://www.spacedaily.com/news/gps-00k.html 85 Wei, L., “China Completes First Satellite Navigation System,” SpaceDaily, 8 January 2001, http://www.spacedaily.com/news/china-01b.htmlXinhua 86 Ang, A., “China Launches Third Navigation Satellite,” Space.com, 25 May 2003, http://www.space.com/missionlaunches/china_launch_030525.html 80
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3.7.4
China’s Supercomputers
Since the 1980s, China has developed several series of high-performance computer and server systems to meet its needs in scientific research, space programs, weapons development, weather forecasting, and many other areas. Since the development of China’s first supercomputer, “Yinhe-1” or “Galaxy-1,” with a peak computing speed of 100 million Floating Point Operations per Second (MFLOPS) in 1983, several models with reduced size but enhanced performance have been developed. Yinhe-2, released in the early 1990s, was capable of 1,000 MFLOPS, and Yinhe-3 reached a computing capability of 13,000 MFLOPS in 1996 and 30,000 MFLOPS in 1998. During the nation’s Eighth Five-Year Development Plan (1991-1995), China began a major effort to advance its supercomputer technology. In 1995, the National Research Center for Intelligent Computing Systems (NCIC) and CAS’ Institute of Computing Technology (CAS-ICT) announced success in the development of a super-server system, Dawning 1000, which reached 2,500 MFLOPS. In 1998, an enhanced model, Dawning 2000-I, became capable of operations at a speed of 20,000 MFLOPS. In 2000, its successor model, Dawning 2000-II, reached 110,000 MFLOPS or 110B FLOPS (Giga-FLOPS or GFLOPS) in peak computing speed. The latest model of the Dawning-series computer, Dawning 3000, was released in February 2001, with a peak operational speed of 402 GFLOPS. In 2003, China’s Dawning Information Industry Corp., a joint venture of CAS-ICT, NCIC, and the National Research Center for High Performance Computers (NCHPC), funded by the 863 Program, released Dawning 4000A, a supercomputer capable of operations at 10,000-GFLOPS or 10-Tera-FLOPS (TFLOPS). This computer was built with over 2,000 AMD and Intel processors. On the other hand, the National Institute of Advanced Industrial Science and Technology will combine 1,058 IBM OpteronTM servers with about 520 Intel Itanium® 2 boxes to create a Linux computing cluster that will be capable of more than 11 TFLOPS. Chip giant Intel has teamed with China’s MOE to build a national computing grid – a network of computers harnessed to work together. When the grid is completed, MOE expects it to operate at more than 15 teraflops, making it one of the world’s most powerful high-performance computing grids.87,88 Currently the Shanghai supercomputer center in China with the Dawning 4000A computer is ranked 31st in the top 500 list. When completed, China’s national computing grid would be ranked 21st on this list. 3.7.5
China’s Telecommunications Effort
Driven by huge domestic market demand, China’s development in telecommunications technologies has been moving rapidly and has begun to lead the world’s development efforts in some areas. China is the only country in the world that is constructing both the next generation, also known as third-generation (3G), mobile networks, and one-moregeneration-ahead 4G mobile networks. In November 2003, China announced plans to build the world’s largest IPv6 (Internet Protocol Version 6) network. Backed by eight major ministries and commissions, the “China Next Generation Internet Project” is estimated to cost US$170M and was scheduled to be completed by the end of 2005.89,90 87 “China to Make Computer with Peak Speed of 10,000Gflops,” People’s Daily, 24 July 2003, http://english.peopledaily.com.cn/200307/24/eng20030724_120904.shtml 88 Wang, Y., “New Supercomputer No 'Flop',” China Daily, 6 January 2004, http://www.chinadaily.com.cn/en/doc/2004-01/06/content_297081.htm 89 “China IT Weekly Briefing,” USITO, 29 November-5 December 2003, http://www.usito.org/uploads/41/weekly_dec5.html 90 Xu, Y., “China to Build the World’s Largest IPv6 Network by 2005,” 27 November 2003, http://tech.sina.com.cn/it/t/2003-11-27/1017261132.shtml
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In December 2003, Japan’s Ministry of Posts and Communications disclosed plans to cooperate with China in testing 4G mobile phone technologies. Employing Internet Protocol Version 6 technology, the advanced networks will be capable of transmitting data at speeds of up to 100 Mb per second, instead of 2.4 Mb per second with the 3G technology. China has invested over US$12M in 4G research, most of which is being conducted at Mobile Communication Research (MCR), a Shanghai branch of CAS-ICT.91 On the other hand, China’s deployment and development of 3G mobile networks has quickened. In December 2003, Datang Telecommunications, the owner of the core technology of the Chinese-backed TD-SCDMA, a 3G wireless network standard, signed a landmark agreement with Putian and Zhongxing to cooperate on the development of TDSCDMA network equipment. The TD-SCDMA standard was initially developed by CAS and backed heavily by the Ministry of Information Industry (MII). This agreement is not the first to promote TD-SCDMA. In October 2002, Datang joined hands with seven local vendors, including Putian and ZTE, to establish an industry alliance around the fledgling standard. What distinguishes this new agreement from its predecessor is the extent of the promised information sharing. One reason the aforementioned TDSCDMA industry alliance has stalled over the past year has been Datang’s refusal to disclose details of its TD-SCDMA IPR to other members of the alliance. In contrast, this new agreement commits Datang to IPR sharing.92 Government and market pressure combined to effect this about-face. MII has been asking companies to speed up their production of TD-SCDMA equipment, and has even explicitly directed that local alliances and patent exchanges should be used to promote 3G businesses. A second reason is the spectra of increased competition in the TD-SCDMA market. In August 2003, Siemens and Huawei formed a joint venture with the intention of engaging in TD-SCDMA business. Foreign vendors in the CDMA2000 and WCDMA markets have also recently made movement toward the new standard. Ericsson and Motorola have expressed interest in investing in TD-SCDMA, while Samsung currently plans to introduce its first TD-SCDMA handset in mid-2004.93,94 3.7.6
China’s Development on Wi-Fi
In 2003, China developed its own wireless fidelity or Wi-Fi encryption technology, a wireless communications standard first developed by the Wireless Ethernet Compatibility Alliance (WECA) to make products from different manufacturers interoperable. The Chinese government began prohibiting the import, manufacture, and sale of Wi-Fi gear that does not use this new security specification, which is unfortunately incompatible with other standards and technologies.95 China made this technology available to only 11 Chinese firms, including Legend, Huawei, and Zhongxing.96,97
91 “China IT Weekly Briefing,” USITO, 29 November-5 December 2003, http://www.usito.org/uploads/41/weekly_dec5.html 92 “China IT Weekly Briefing,” United States Information Technology Office (USITO), No. 12, 6-12 December 2003, http://www.usito.org/uploads/40/weekly_dec11.html 93 Ibid 94 “Huawei Wins $115M Sunday W-CDMA Contract,” Telecomasia.net, 19 December 2003, http://www.telecomasia.net/telecomasia/article/articleDetail.jsp?id=79620 95 Shim, R., “China Implements New Wi-Fi Security Standard,” CNET News.com, 2 December 2003, http://news.com.com/2100-7351-5112832.html 96 “China IT Weekly Briefing,” United States Information Technology Office (USITO), No. 12, 6-12 December 2003, http://www.usito.org/uploads/40/weekly_dec11.html 97 Shim, R., “China Wi-Fi Codes to be Controlled by 11 Firms,” CNET Asia, 11 December 2003, http://asia.cnet.com/newstech/systems/0,39001153,39161285,00.htm
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3.7.7
China’s Effort in Audio-Visual and DVD Development
Due to royalty disputes between Chinese DVD manufacturers and international patent consortia, including the groups called 6C (Toshiba, Mitsubishi, Hitachi, Panasonic, JVC, and AOL Time Warner), 3C (Phillips, Sony, and Pioneer), 1C (Thomson), and the Motion Picture Experts Group (MPEG), which administer patent licensing for data-compression standards, China has accelerated the development process of its own audio-visual and DVD encryption technology and standards. In December 2003, a technical working group charged with developing new standards for audio-visual data compression submitted to MII for review a new Chinese Audio Video Coding Standard (AVS 1.0), which will likely be approved in 2004. Earlier in November 2003, the Enhanced Versatile Disc (EVD) standard with Chinese IPR was already announced and adopted by a consortium of Chinese DVD manufacturers. As a result, Chinese DVD manufacturers can cut their royalty payments from roughly US$12 per unit down to 12 cents.98 With the arrival of the AVS Standard the Chinese people stand to save US$300M in the next 10 years.99 3.7.8
China’s Efforts in Nanotechnologies
In both the Ninth and Tenth FYP, electronics and microelectronics were among the key government-promoted development areas. Although nanotechnology did not appear in the Tenth FYP, China’s think tanks and the S&T community have called for putting together a unified plan for their strategic development.100 China has now accelerated the pace of building the infrastructure for its nanotechnology development101,102,103,104 and nanotechnology is expected to become a focus in the next FYP for 2006 to 2010. In 2003, China had over 2,400 patent applications for nanotechnologies, which accounted for 12 percent of the world’s total, and ranked the country third in the world behind the U.S. and Japan.105 In addition, China has stepped up the pace of building nanoresearch infrastructures, with several nanoresearch centers newly launched. In July 2001, CAS established a nanotechnology research center in Shenyang, Liaoning province, with a couple of other research organizations.106 In March 2003, CAS, Peking University and Tsinghua University announced the setup of a national nanoscience center in Beijing, with a first-stage state investment of over US$30M. At about the same time, China’s first nanoscience and nanotechnology park broke ground in Xi’an, Shaanxi province with an investment of US$145M.107 China’s nanotechnology research has been focused on nanomaterials. China has so far not seen noticeable progress in electronics- and MEMSrelated nanotechnologies such as discrete and integrated nanosensing.
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“China IT Weekly Briefing,” USITO, 29 November-5 December 2003, http://www.usito.org/uploads/41/weekly_dec5.html 99 “AVS Standard Developing,” 31 July 2003, http://www.china.org.cn/english/2003/Jul/71266.htm 100 “Importance of Nanometer Technology to be Addressed in China,” People’s Daily Online, 30 August 2000, http://english.peopledaily.com.cn/ 101 “China to Set Up Nano Science Center,” People’s Daily Online, 25 March 2003, http://english.peopledaily.com.cn/ 102 “China-US Nanotech Center Launched in Beijing,” People’s Daily Online, 21 November 2002, http://english.peopledaily.com.cn/ 103 “China Sets Up Nanotechnology Research Center,” People’s Daily Online, 1 July 2001, http://english.peopledaily.com.cn/ 104 “China’s Bid to Establish Nanotech Research Center,” People’s Daily Online, 29 June 2001, http://english.peopledaily.com.cn/ 105 “China’s Nanotech Patent Applications Rank World’s Third,” People’s Daily Online, 3 October 2003, http://english.peopledaily.com.cn/ 106 “China Sets Up Nanotechnology Research Center, ” People’s Daily Online, 1 July 2001, http://english.peopledaily.com.cn/ 107 “China to Set Up Nano Science Center, ” People’s Daily Online, 25 March 2003, http://english.peopledaily.com.cn/
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3.8 Promoting Innovation and Creativity Innovation has been an issue in China’s S&T development, particularly in the area of applied research, which some leading Chinese scientists regard as mediocre, at best.108 To make China’s S&T community more innovative, the government has made competition for research funds more explicit and intense, particularly in the case of basic research. Indeed, improvements in the country’s basic research capabilities are regarded as an essential precursor to a viable applied research enterprise that can lead to greater innovation. NSFC still awards a relatively small number of grants but has increased their average size. For about 20,000 proposals annually in recent years, they had only a success rate of 16 percent. However, the average amount of a grant increased more than six times, from US$3,400 in 1986 to US$20,800 in 2000.109 China’s research and development spending as a percentage of gross domestic product has tripled to 1.3 percent in the last decade; few emerging economies spend even 1 percent of their GDP on research. U.S. patents invented in China are also on the rise. Informationtechnology patents from corporations’ Chinese technologists have risen from 134 in 19972001 to 482 during 2002-2004. U.S. R&D spending has been flat at 2.6 percent of GDP for four decades, but the share of U.S. federal spending has declined from two-thirds to onequarter.110 China’s performance in market-oriented applied research so far remains problematic. Three additional elements besides strong S&T capabilities need to be integrated to address the innovation issue: intellectual property (IP) protection, capital market development, and market access to competitive foreign products. Until China makes substantial progress in these areas, the problem of creating a culture of innovation is unlikely to be solved. Protection of IP rewards innovators for their creativity; capital markets, particularly venture capital, support product development for the market; market access to foreign products spurs competition and innovation in Chinese companies.111 China has been notorious for its violations of intellectual property protection, although primarily in low-tech areas such as pirating CDs or books. This, of course, may well have discouraged some would-be foreign investors in Chinese start-up firms. Since joining the World Trade Organization (WTO), the Chinese government has vowed to crack down on intellectual property infringements. However, the extent to which the government in Beijing can prevail in this regard over provincial party bosses intent on protecting local enterprises remains to be seen.
3.9 Summary China has made noticeable progress in the development of electronics, microelectronics, and catching up in the field of nanotechnologies. It is rapidly moving ahead in the race to become the technological powerhouse it has dreamed of becoming for decades. The country’s economic development has become the primary driving force for its S&T advances. In some areas, such as telecommunications and semiconductor technologies, China has made breakthroughs. In other important areas not directly related to economic development, progress in S&T remains more problematic. As one significant example, the country’s health care delivery system has deteriorated badly, particularly in rural areas, as formerly government-managed 108
Blanpied, W. (ed.), “Proceedings of the Sino-US Forum on Basic Research for the Next Fifteen Years,” Beijing, 2004, http://techcenter.gmu.edu/programs/science_trade_policy/us_china.html 109 Hsiung, D.I., “An Evaluation of China’s Science and Technology System and its Impact on the Research Community,” A Special Report for the Environment, Science & Technology Section, U.S. Embassy, Beijing, China, 2004, EST Section, U.S. Embassy, Beijing, http://www.usembassy-china.org.cn/sandt/ST-Report.doc 110 Fuller, D.B., “The Fact Remains, U.S. Tech Leadership Must Be Reinforced,” 7 April 2006, http://www.mercurynews.com/mld/mercurynews/news/opinion/14286352.htm 111 Gu, S., “China’s National System of Innovation,” China’s S&T Trajectory, Rensselaer Polytechnic Institute, Workshop, September 2003
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hospitals and clinics have been privatized. Moreover as the SARS crisis indicated, the government appears ill-equipped to deal rapidly and effectively with emerging infectious diseases. As another example, there remain a number of severe environmental problems in the country, including air and water pollution, deforestation, and desertification.112 While neither China’s health care nor its environmental problems can be solved solely by means of science and technology, neither can they be solved without them. Although the government certainly recognizes the severity of these problems, thus far it has given little indication that it is prepared to divert any substantial resources to address them away from R&D more directly related to economic development. It remains to be seen how China’s Medium- and Long-Term S&T Development Plan (2006-2010) will deal with them. Despite these caveats, there is no doubt that China is emerging as a significant hightech country. It has started to gain the capability of independently developing its own medium-to-high performance chips. The huge domestic telecom market has also helped China advance quickly on telecom technology development. After two decades of government efforts to raise the nation’s S&T level, China’s S&T in electronics, microelectronics, and nanotechnologies in general has significantly improved. In the development of electronics and microelectronics technologies, China is gradually closing its gap with the West in some key areas, such as wireless communications, video processing, and IC manufacturing.
112
“China’s Growing Pains,” The Economist, 21 August 2004
Chapter 4 Development of China’s Electronics Industry
In general, China was a late starter in developing its electronics industries.1 However, significant progress has been made through the implementation of a series of national development plans and government programs. Recent achievements in the electronics field demonstrate China’s entry as a world-class player. In 2005, China’s high-tech exports totaled US$220B, accounting for 28 percent of the country’s total out-bound shipments, and electronics played a large role in this. This chapter summarizes the development of China’s electronics industry. National planning in China’s electronics industry as well as foreign trade and cooperation are also discussed.
4.1
China’s National Five-Year Development Plans
China’s national economic goal-setting and planning mechanism is the “Five-Year Plan” (FYP). Development of the country’s electronics capabilities has hinged on its ability to define and achieve reasonable goals in the FYPs. The following sections summarize the technological and industrial development of China’s electronics industry since the First FYP. 4.1.1
The First Five-Year Plan, 1953-1957
The twin electronics goals of the First FYP were to modernize and strengthen the radio and communications aspects of national defense and to set up automatic telephone switchboard factories for the civilian network. Soviet assistance helped establish 156 key
1 During the late 1800s and early 1900s, China’s investments in electrical and electronics technologies were heavily subsidized by foreign companies such as General Electric (U.S.), Nippon Electrical Company (Japan), and A.R. St. Louis (Canada). The early twentieth-century electronics factories in China mainly conducted simple assembly and equipment maintenance. In the 1930s and 1940s, China’s electronics enterprises reflected the political divisions between the two factions vying for power: the Nationalist Government, led by the Kuomintang (KMT) party, and its ideological rival, the Chinese Communist Party (CCP). The KMT, with Western support, built factories that produced simple electrical equipment and devices such as light bulbs, vacuum tubes, radio parts, motors, wires, batteries, telephones, and switchboards. The State Science and Technology Commission of China statistics indicate that in 1946, there were about 200 factories and 7,000 workers engaged in this work; the gross output value amounted to only 0.02 percent of the gross output value of all national industries. In the same period, the CCP maintained a simple radio network of its own and operated small-scale factories that produced radio devices and parts to support its military needs. As early as 1934, the CCP had established a commission to oversee military telecommunications work. The devastation of World War II and the civil war, the poverty of the country, natural disasters, the failure of the “Great Leap Forward” campaigns of the 1950s, and the chaos brought about by the “Cultural Revolution” in the 1960s and early 1970s greatly impeded development of China’s industrial sectors. However, since then there has been extremely rapid growth in this sector.
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national projects, of which 9 were related to electronics, such as building the Beijing Electronic Tube Factory. During the First FYP, China laid the foundation for development of its electronics industry through establishment of scientific research and educational institutions and through long-term planning, as detailed in the 1956 “Long-Term Plan for the Development of Science and Technology from 1956 to 1967.” This plan listed key electronics projects of national importance: telecommunications and broadcasting systems, research and development of radio electronics, semiconductor technology, and computer and radio technology for national defense. 4.1.2
The Second Five-Year Plan, 1958-1965
The goals of China’s Second FYP electronics industrial development were in three defense-oriented areas: development and construction of electronics equipment for a ballistic missile capability; development and construction of electronics equipment to support atomic energy and aviation development; and establishment of factories to produce electronic measuring instruments and specialized electronic equipment. The Soviet Union’s technical and financial assistance was a key ingredient of the plans of this period. Initially, there was significant progress building new factories and institutes focused on electronics technologies. Research and development institutes built with Soviet assistance included the Chengdu Radio Communication Institute, Beijing Radio Components and Materials Institute, Beijing Electronic Tube and Transistor Institute, and Nanjing Radar Institute. By 1959, 25 Chinese national universities were teaching classes in electronics fields, including radio technology, vacuum electronics, semiconductor technology, and computer science. Leading universities in these fields were Tsinghua, Fudan, Shanghai, Jiaotong, and Zhejiang Universities. Early in this period, the national “Great Leap Forward” campaign commenced. Due to political differences, the Soviet Union abandoned its commitment to assist in China’s economic development. Development of China’s electronics industry stalled and factory efficiency and profit margins declined. 4.1.3
The Third and Fourth Five-Year Plans, 1966-1975
China’s goals for the electronics industry in the Third and Fourth FYPs broadened slightly to speed up construction to meet national strategic and defense needs (e.g., for radar and aviation equipment) and to develop basic products to help build the national economy. Both goals had the greater aim of catching up with the technological ability of advanced countries in certain key areas. However, the Cultural Revolution deflected economic development throughout China. Cut off from the world and racked by civil violence and political extremism, China fell further behind in its industrial development. 4.1.4
The Fifth and Sixth Five-Year Plans, 1976-1985
The Cultural Revolution formally ended in October 1976. As the national economy began to recover during the Fifth and Sixth FYPs, the electronics industry took on a new look. China revised its military and civil electronics production structures, and military factories began producing both military and civilian products. During this period, the Ministry of the Electronics Industry was established. In addition, a so-called “lead group” focused on the electronics industry was formed within the State Council. This lead group was first constituted as the Electronic Computer and LSI (Large Scale Integration) Lead Group in 1982, with then Vice Premier Wan Li as the head of the group. Jiang Zemin, who was then Vice Minister of the Electronics Industry, was a member
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of this group. The group was renamed the Lead Group to Promote Electronics in 1984, with Vice Premier Li Peng as its head. 4.1.5
The Seventh Five-Year Plan, 1986-1990
During the Seventh FYP, the production level in the electronics industry began to accelerate. The electronics industry’s annual target growth rate was 16 percent for the Seventh FYP. By 1988, the gross output value of the electronics industry fell just short of the 1990 goal of US$16B. Exports of electronic goods became increasingly important to the Chinese economy during this period. According to Chinese customs statistics, China’s total exports of electronics products during the Seventh FYP were valued at US$10.5B. The Seventh FYP was the first to include projects to tackle key science and technology problems. In this period there were five large projects relating to electronics: very large-scale integration (VLSI) technology, computer systems, computer software, communication technology, and electronic materials. Major achievements in this period included development of a number of indigenous electronic devices and systems, a GaAs integrated circuit, a 700 keV high-energy ion planting machine, the Taiji 2000 series super-microcomputer, the Huasheng 4000 series workstation and 0500 series 32-bit high-performance computer, a shipborne microwave measuring and control system, and an air transportation control system. 4.1.6
The Eighth Five-Year Plan, 1991-1995
During the Eighth FYP, China’s electronics and information technology industry continued its rapid development. The industry’s key economic goals were accomplished 2 years ahead of the 5-year mark. In 1995, the gross value of industrial output reached US$29B. Exports of electronics products were valued at US$16.5B, which for the first time surpassed the value of electronics imports (US$16.1B).2 During this period, total production of color televisions, radios, audio cassette recorders, and some other electronic components ranked first in the world, as China built its mass production capabilities and improved the global competitiveness of its products. In addition, the structure of China’s electronics industry became increasingly sophisticated. A number of big electronics technology companies, such as Changhong, Caihong, Shanghai Broadcasting and Television, Panda, Hualu, and Lianxiang, came into being. Enhancement of scientific research and technological development programs resulted in significant progress, such as development of VLSI devices, the Panda ICCAD system, and an erasable and recordable CD. Some of China’s mainframe and microcomputers began to achieve international technology levels, and Chinese system software and platforms began to exhibit characteristics tailored to the domestic market. Chinese-made large local digital switchers, such as the 04,601,08 series, entered mass production. In addition, three “Golden Projects” were organized that opened new domestic markets for the electronics and telecommunications industries. In the Eighth FYP, 17 major electronics projects were organized under a campaign to tackle key problems in science and technology. There were more than 400 subprojects in fields such as VLSI microfabrication technology, mass production of 1 to 1.5 µm VLSI technology, CAD/CAM, microfabrication tools, microelectronics materials, microanalysis techniques, advanced personal computers and workstations, computer software, electronic devices for electric power, HDTV techniques, and equipment for air traffic control. The central government allocated US$110M to support these key electronics projects within this FYP. Some 8,000 scientists and technicians participated in these projects.
2
Ministry of Electronics Industry (MEI), Beijing, China, “China Electronics Industry Yearbook,” p. 234, 1997
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4.1.7
China’s Electronics Industry
The Ninth Five-Year Plan, 1996-2000
The overarching electronics goal of China’s Ninth FYP was to build the industry into a major domestic economic sector capable of boosting China into a position of power in the global electronics and information technology marketplaces. To achieve this, the electronics industry was expected to sustain a 20 percent annual growth rate and achieve a gross production value of US$85B, or 8 percent of the total national industrial output, by the end of the century. Total earnings from sales of electronics products were expected to reach US$72B, and exports were expected to reach US$35B by the year 2000. The goal was to place China among the top five electronics-producing nations of the world. In striving to reach these ambitious goals, China worked to restructure its electronics industry from a traditional simple manufacturing system to a complex, multi-tiered modern supply-chain that featured a combination of hardware, software, application, and information service capabilities produced by a variety of types and sizes of enterprises, with large companies playing the leading role.3 The Ninth FYP emphasized four electronics areas: integrated circuits, electronic devices and components, computers and software, and telecommunications and information technology. Other areas of focus included process technologies, expanding national R&D capabilities, and building large enterprises comparable to the world’s largest electronics firms. In addition, the “Golden Projects” aimed at modernizing China‘s national information infrastructures were still under way. 4.1.8
The Tenth Five-Year Plan, 2001-2005
Following the introduction of reforms and open policy in the previous FYPs, especially the Ninth FYP, the electronics industry emerged as the dominant industry in China’s national economy. Among the industry’s biggest achievements was the fact that the telecommunication industry had created a network that is close to the accepted international standard. The scale of the fixed telephone and cellular networks became the second largest in the world. China also became the world’s top manufacturer of program-controlled switchboards, cellular phones, display devices, and monitors. By the end of 2005, over US$205B was spent on building a communications network featuring large capacity, cutting-edge technology, and high security to meet the national economic and social development demands. In 2005, China was estimated to have about 3 to 7 million fiber optic broadband users and a similar number of DSL users. As of November 2005, the number of mobile phone subscribers in China became the largest at 390 million,4 and it was estimated to reach the 500 million mark by 2007.5 The number of cable TV broadband users in China in 2005 is estimated as 120 million.6 Having identified critical issues, the Ministry of Information Industry (MII) put the top priority of the Tenth FYP mission on fostering China’s IT manufacturing industry, telecommunications industry, and software industry, and on promoting the dissemination of national economic and social information in China. The guiding principles of the Tenth FYP were to: •
Reach a balance between speed and efficiency, market economy and government regulation, universal services and effective competition, open market and security;
3 Total production output of large enterprises – i.e., businesses with annual sales of more than US$1.2B – was expected to comprise more than 60 percent of the industry’s total output. 4 Xinhua, Nearly 390 Million Chinese Mobile Phone Subscribers at End of November, 26 December 2006, http://english.sina.com/business/1/2005/1226/59479.html 5 Agencies, “China’s Mobile Phone Users to Reach 500 Million by 2007,” People’s Daily Online, 10 November 2003, http://english.people.com.cn/200311/10/eng20031110_127968.shtml 6 “China Has More Than 90 Million Cable TV Users,” 20 March 2001 http://english.people.com.cn/english/ 200103/19/eng20010319_65409.html
Development of China’s Electronics Industry
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•
•
•
• •
•
4.1.9
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and achieve a coordinated development between manufacturing and service industries Deepen the reform; reduce monopolies; make comprehensive laws and regulations; better manage the industry; push the strategic reorganization of state-owned enterprises; establish modern enterprising policies and incubate competitive enterprises to enable them to operate across different areas and become multinational corporations Strengthen the development of the basic infrastructure; integrate the use of different resources and use them efficiently; coordinate planning to avoid replication in infrastructure building As part of the plan to develop the western region, develop resources that have comparative advantages; open up local and overseas markets; and speed up the structural reorganization of the information industry in this region Increase competitiveness and strengthen the capabilities to innovate; grasp the core technologies in IC and software development; raise the proportion of products with intellectual property rights; support commercialization of research outputs that are profitable; put more effort into the development of new technological applications and new business services; conduct more research in standards development; actively participate in the development of international technology standards; place a high value upon information and network security Adjust the structure of the industry; remove the impediments that hinder the development of the industry Use IT to reform and upgrade traditional industries, and enable the information industry to provide system equipment and services to other sectors, pushing the growth of the national economy and social information Strengthen international cooperation; increase international competitiveness; gradually open the local telecommunication market and enter the international market; use foreign investment effectively; and increase the scale of IT exports The Eleventh Five-Year Plan, 2006-2010
The draft proposal for the Eleventh FYP for the years 2006 to 2010 was set forth by the CPC Central Committee in October 2005. The Eleventh FYP has its basis in President Hu Jintao’s drive to narrow the gap between the rich and the poor and to curb environmental degradation. The suggestions by the Standing Committee members included improving scientific and technological innovative capability, pushing forward urbanization, promoting the coordinated development of regional economy, improving the income distribution system, and deepening structural reform. The Eleventh FYP aims to build new socialist rural areas, optimize and upgrade industrial structures, promote concordant development of regions, build a conservation-minded and environment-friendly society, further system reform and enhance opening-up, efficiently practice strategies to invigorate China through science and education and through human resource development, and give impetus to constructing a socialist harmonious society. In the Eleventh FYP, the economic growth will be defined as “serving the people to improve life quality.”7 Over the next 5 years China plans to pursue growth in a fair, balanced, and sustainable way. Foreign trade accounts for over 70 percent of China's economy. China will try to change its heavy reliance on foreign investment and resources and will control the use of foreign investment in the Eleventh FYP to secure its national economy in the next 5 years. China will continue to promote high-tech cooperation between domestic and foreign companies and protect intellectual property rights. 7 China Internet Information Center, “CPC Sets Blueprint for Next Five Years,” 12 October 2005, http://www.china.org.cn/english/2005/Oct/144729.htm
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China aims to maintain its stable, fast economic growth in the coming 2006-2010 period. The Eleventh FYP reiterates that the economic growth and social progress should be engineered with a “scientific concept of development.” The Eleventh FYP has set a target of doubling the per capita gross domestic product (GDP) by 2010 from US$1.08T in 2000 and reducing the energy consumption per GDP by 20 percent that of 2005. This is the first time that energy consumption per GDP point has been introduced into a five-year plan. China is recasting its development model and pursuing high-quality economic growth to improve the environment and create more job opportunities. The plan calls on China to implement the strategy of revitalizing the nation through science and education and building up the national strength by promoting talent. Science and technology, education, and trained personnel are accepted as the key factors for improving the nation’s competitiveness. The plan emphasizes that in developing science and technology, independent innovation should be emphasized, leapfrog advances should be made in key areas, and science and technology should support and lead economic development in the future. The innovation capacity of enterprises should be enhanced and the development of a national innovation system should be accelerated. It suggests that the development of education should be a priority, and the training of professionals in high technology and technicians for rural areas should be accelerated.8 The Ministry of Information Industry will give some help to critical sectors like semiconductors and software in 2006, since it is the first year of the Eleventh FYP.9 The MII predicts that the information and communication technology (ICT) industry can expect a brighter future in 2006, thanks to the launch of third generation (3G) mobile communications and a more aggressive push to the popularize digital TV. The MII has decided to promote six major information technology projects during the Eleventh FYP. The projects include radio frequency identification (RFID) and digital home plans. The six major IT projects cover sectors such as agriculture, industry, online security, household information construction, emergency service systems in cities, and comprehensive management information systems based on RFID. The digital home entertainment projects include integrating electronic home appliances like TVs, computers, and mobile phones with water, gas, and power supply agencies to provide pre-warning systems.10 During the Eleventh FYP period, China will intensify its R&D efforts to produce key technologies for hybrid, fuel battery, pure electric, and proxy fuel vehicles. The efforts will also lead to the establishment of a vehicle evaluation platform, and spur up the establishment of a standard system, facilitating commercial applications of energy efficient and environment friendly vehicles. It is expected that during this period, China will put proprietary energy efficient and environment friendly cars into massive production, and hybrid cars will see a noticeable growth in the following 5 years.11 China will work to produce new industrial policies, strategic guidelines for revitalizing trade with science and technology, comments on expanding the export of pharmaceuticals, guidelines for supporting and encouraging software and information service outsourcing, comments on further strengthening of technology import activities, and a statistic catalog for China’s technology import and export. China will provide priority support for proprietary technology products in loans, foreign exchanges, tax holidays, R&D, and training.12
8
“CPC Emphasizes Development of Education, Science,” 11 October 2005, http://english.sina.com/china/1/2005/1011/48991.html 9 The Ministry of Science and Technology of the People’s Republic of China, “China Science and Technology Newsletter,” http://www.most.gov.cn/eng/newsletters/2005/t20051024_25579.htm 10 “Eleventh Five-Year Plan Promotes New Technologies,” 31 October 2005, http://www.chinatechnews.com/index.php?action=show&type=news&id=3110 11 The Ministry of Science and Technology of the People’s Republic of China, “China Science and Technology Newsletter,” http://www.most.gov.cn/eng/newsletters/2005/t20051024_25579.htm 12 Ibid
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During the Eleventh FYP, China will facilitate the economic growth by actively advancing industrial information process, raising operation efficiency and management level, developing new businesses including e-commerce, facilitating the change from a traditional service industry to a modern one, nurturing new economic growth points, and promoting the transformation of high consumption and high pollution sectors with information technology.
4.2
Government Organizations – The Ministry of Information Industries
The Ministry of Information Industries was created in the midst of the bureaucratic reshuffling of March 1998 by merging the former Ministry of Post and Telecommunications, which oversaw network standards and access, and the Ministry of Electronics and Information, which oversaw computers and software. At the same time, there was a divesting of the resulting ministry of responsibility for postal administration and the telecom trunk line networks. The MII is now a super-agency overseeing telecommunications, multimedia, broadcasting, satellites, and the Internet.13 The branch departments of MII are the MII Office, the Department of Policies and Laws, the Department of Integrated Planning, the Department of Science and Technology, the Department of Economic System Reform and Operation, the Bureau of Telecom Administration, the Department of Economy Adjustment and Telecom Clearance, and the Department of Electronic and Information Products Administration. The main functions of MII include: •
•
• •
•
• • • • • •
13
Formulating development strategies, policies, laws, regulations, plans and technical criteria for the information industry, the public telecom network, the radio and television network, and military telecom networks Revitalizing the telecom and software industries and the manufacture of electronic and information products by promoting R&D, technology imports, the application of research, and domestic industry Approving telecom networking and terminal equipment and supervising product quality Allocating and managing radio frequency resources, satellite orbit positions, telecom network codes, domain and website resources; approving the establishment of radio stations; and monitoring radio operations Ensuring fair competition in the telecom and information service markets and promoting service quality, approving telecom and information service licenses, drafting regulations for interconnection and the settlement of telecom networks Regulating telecom service fees Constructing and managing special telecom networks for the party, government organs, and the military; and guaranteeing state telecom and information security Adjusting the product mix, reorganizing the relevant state-owned enterprises, preventing redundant construction and rationally allocating industry resources Promoting the spread of information technology through education campaigns Organizing the development and use of information resources and launching information projects Coordinating economic relations between postal and telecom enterprises, subsidizing postal and telecom services, and administering the State Postal Service Bureau
ChinaOnline, “PRC Ministry/Commission Profile – Ministry of Information Industry (MII),” January 2000, http://chinaonline.com/refer/ministry_profiles/pdf/miil2.pdf
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Participating in related international organizations, signing inter-government agreements, and organizing economic and technological cooperation with foreign countries
The MII also oversees the provision of so-called “basic” telecom services (landline and mobile telephone services) through five state-owned companies specializing in different types of service: China Telecom (the landline telephone business of the former China Telecom), China Mobile, China Satellite, China Tietong, and China Unicom, which absorbed the paging business. China Netcom was established to build a broadband IP network.
4.3
Foreign Trade and Investment in China’s Electronics Industry
Since 1983, approval and oversight of cooperative programs have been given to the provincial and municipal governments, as China shifted from simply buying foreign equipment and know-how, to allowing foreign companies to invest in China via contractual agreements, joint ventures, and foreign direct investments. After entry into the WTO, China examined over 1,500 laws, regulations, and documents concerning foreign trade and eliminated 500, revised 200, and introduced 20 new regulations to meet the WTO’s rules for foreign-funded enterprises. China has been luring outside investment with incentives like subsidized loans, tax exemptions, and a 50 percent discount on land. Representatives from technology parks along the Shanghai-to-Suzhou corridor have traveled the world promoting their zones to foreign investors. Foreign investment service centers that consist of government departments in charge of foreign direct investment (FDI) activities are provided for overseas investors. The centers supervise the government departments to facilitate investment formalities in the fastest possible way. They provide access to laws, regulations, and preferential policies, assist firms in finding partners, and provide design and construction services. For example, as of January 2006, the Tianjin Economic Technological Development Area (TEDA) has attracted a total investment of US$29.55B with 4,084 foreign investment companies having registered. Of these more than 100 Fortune 500 companies had invested in TEDA enterprises.14 FDI has focused on attracting high-tech industry; upgrading foreign-invested enterprises beyond simple processing and assembling; and inviting foreign purchasing, venturing, or investing in state-owned enterprises. Today foreign companies are no longer required to take local partners to form joint ventures. In fact, Dell set up a wholly owned subsidiary. Most foreign investments in China’s electronics industry are in the form of joint ventures. Exports by FDI firms in China have come to account for 45.5 percent of the country’s total exports, 27 percent in gross output value, 28.38 percent in capital expenditure, and 11 percent of employment in the non-agricultural sector.15 Thus the contribution by FDI firms towards China’s economic development has been, and continues to be, significant. Taiwanese firms now have more than half of their production in China.16 While the Taiwan government had outlawed investments in the mainland that exceed US$50M and had banned companies in Taiwan from building digital cameras, laptops, or semiconductors on the mainland, Taiwanese investors have ignored the government by investing through 14
“TEDA Started the Year with Impressive Investments from Outside,” http://www.goldentianjin.net.cn/EN/news/01.asp?sele=1649 15 For a summary review of the contribution of foreign investment in China’s economy, refer to China’s Almanac on External Trade and Economic Statistics 1999/2000 16 Dedrick, J., “Enter the Dragon: China and the Global Computer Industry,” The Global IT Industry: The Future of China and India, UCSC Regional Center, Moffett Field, CA, 30 May 2003
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offshore companies. For example, much of the financing for Grace Semiconductor Manufacturing Corporation, at a cost of US$1.63B, comes from a Taiwanese company registered in the Cayman Islands. By the end of 2004, Guangdong Province in southern China accounted for 17.8 percent of China’s total utilized foreign direct investment. Foreign investments in Guangdong are mainly engaged in manufacturing industries including computer accessories, computer, biological products, mechanical and electrical products, refined chemicals, hardware, and traditional industries. 17 According to the Beijing Semiconductor Industry Association, Beijing has taken the lead in China in terms of semiconductor chip design and manufacture. SMIC Beijing Co Ltd is currently the backbone of Beijing’s semiconductor manufacturing business. 18 Semiconductor design companies are shifting research and development to China. For example, in 2000 Taiwan’s VIA Technologies set up research and development houses near Shanghai to draw on engineering talent from the city’s universities. The designs of mainboards, PCs, servers, and information appliances are carried out by Chinese engineers there. 19 Taiwan’s semiconductor assembly company, ASE group, built USI facilities in Shenzhen and Shanghai.20 Siliconware Precision Industries (SPIL), another assembly company from Taiwan, has also built a facility in China. Quanta, the world’s largest laptop computer maker, built a “manufacturing city” in Shanghai with the capacity to produce 5 million laptops a year. In 2004, it ended most of its remaining notebook production in Taiwan.21 By June 2005, the production from Shanghai, which started in 2001, has contributed more than 90 percent of its output. So far, the United States has formally blocked the sale to China of manufacturing technology that would allow plants to make certain electronic parts and products. However, the U.S. has already sold China most of the critical technologies with the purchase of the 0.13 µm, 8 inch Motorola semiconductor fab, the computer division of IBM, etc. Furthermore, many analysts say economic pressure will eventually topple any obstacle. Indeed, European companies are already selling advanced semiconductor manufacturing equipment to China. China is luring outside investment with incentives like subsidized loans, tax exemptions, and a 50 percent discount on land. Representatives from technology parks along the Shanghai-to-Suzhou corridor have traveled the world promoting their zones to foreign investors. Many well-recognized companies, including IBM and Intel, are shifting their money and focus to fast-growing regions like China. On 12 May 2005, Intel China announced the completion of a new technology development center on its Shanghai Pudong campus, which reflects Intel’s continued investment in China.22 In December 2005, the first US$200M state-of-the-art assembly and testing facility in Chengdu, Sichuan province began its production.23 The second advanced assembly and test facility in Chengdu will be built, and the production is scheduled to start in early 2007.24
17 Hong Kong Trade Development Council “Market Profiles on Chinese Cities and Provinces,” http://www.tdctrade.com/mktprof/china/mpgud.htm 18 People's Daily Online, “Beijing to Foster Semiconductor Business,” http://english.people.com.cn/200306/17/eng20030617_118382.shtml 19 Nikkei Business Publications Asia Ltd, “Taiwan Firms Shift R&D to China,” http://neasia.nikkeibp.com/archive_magazine/nea/200204/srep_178979.php 20 ASE Group, “Manufacturing Facilities,” http://www.aseglobal.com/content/1-6.htm 21 The Wall Street Journal, “The Laptop Trail,” http://online.wsj.com/public/article/SB111825761813954442-d4x_lQnm5A2GOO1NR6Wi_DBAyys_20050709.ht ml?mod=blogs 22 Intel Corporation, “About Intel China,” http://www.intel.com/community/china/ 23 Intel Corporation, “China Transforming Through Technology Innovation and Commitment to Education, Says Intel Chairman ,” http://www.intel.com/pressroom/archive/releases/20051206corp.htm 24 Reed Business Information, “Intel Plans Second Plant in Chengdu,” http://www.reed-electronics.com/electronicnews/article/CA512469.html
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4.4
Imports and Exports of Electronics Products
Export orientation is a salient feature of China’s electronics industry, which leads the nation in manufacturing products trade. The China National Electronics Import and Export Corporation (CEIEC) is the main import/export channel for China’s electronics products. Established in 1980, CEIEC is a foreign trade company integrating trade with manufacturing and electronics technology. Its total import/export volume ranked seventh and its export volume fifth on the list of large-scale foreign trade enterprises of China. Facing the intense competition in the global marketplace, CEIEC set up 30 various trade companies and joint ventures in countries including the United States, Germany, Thailand, Brazil, Japan, South Africa, and Russia. All of them have acted to enable CEIEC and domestic enterprises to expand their foreign economic cooperation and trade. Table 4.1 displays the value of China’s electronics trade. Table 4.2 presents China’s high-tech trade by type of enterprise. Table 4.1: China’s Electronics Imports and Exports25 Product Category Integrated circuits and components of microelectronics equipment Components of TV, radio, and telecommunication equipment Automatic data processing equipment and components
2005 (Jan-Sept) (Unit: US$M) Import Export 6,241
10,398
2,133
11,854
3,489
54,538
Table 4.2: China’s High-Tech Imports and Exports by Type of Enterprise26 Type of Enterprise State-owned Enterprises Foreign-owned Enterprises 1. Wholly owned 2. Cooperative joint venture 3. Equity joint ventures Collective Enterprise Private Enterprise Others
2003 (Jan-July) (Unit: US$M) Import Export 15,368 6,112 42,702 11,314 30,388 1,001 2,336 88
44,827 11,506 32,120 977 1,124 3
China’s international trade in electronics products has the following prominent features: • •
•
25 26
The ratio of exported electronics products to total national trade volume is growing annually. This ratio has increased eleven times in the period between 1985-2005. The growth of trade volumes in electronics products is faster than that of all products as a whole. The average growth rates of both import and export volumes in electronics products were also significantly higher than those of the national average growth rates in foreign trade. The share of exported consumer electronics products, mostly video and audio products, has decreased, and the share of investment electronics products, mostly
Ministry of Commerce of the People’s Republic of China, http://english.mofcom.gov.cn/statistics/ statistics.html Ibid
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•
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computers and basic components and devices, has been increasing annually. The percentage of exported electronics products made in joint ventures or foreign-funded enterprises is still increasing annually. Encouraged by national policies, contracted overseas projects made a business turnover of US$4.3B from January 2004 to May 2004. During the same period newly signed contracts stood at US$8.32B. The export volume of foreign-funded enterprises is growing annually and accounts for more than two-thirds of total export volume. About 80 percent of China’s electronics exports are merely processed and assembled in China. In fact, the volume of re-exported products after processing is increasing. This indicates that the general level of sophistication of China’s electronics industry is still fairly low, and most exported electronics products are still labor-intensive.
Major National Electronics Projects
National planning of major electronics projects called “Golden Projects” has been implemented to modernize the country’s information technology infrastructure and help local industries. The Golden series projects include a nationwide public economic information processing network (Golden Bridge Project), an electronic monetary and modern payment system (Golden Card Project), a foreign trade information sources network (Golden Customs Project), an electronic taxation system (Golden Taxation Project), the industrial production and circulation information network (Golden Enterprises Project), an education and research network (Golden Intellectual Project), an agricultural management and service network (Golden Agriculture Project), and a national economic micro-policymaking support system (Golden Policy Project). In addition, long-range national planning encompassing the electronics industry includes a semiconductor project called the 909 semiconductor manufacturing projects, the air traffic control system project, and the Three Gorges Dam project. 4.5.1
Golden Bridge Project
The Golden Bridge Project, launched in 1993, is China’s version of the information superhighway. The project aimed to construct a network across China, and ultimately incorporate all of China’s information systems efforts. The purposes of this project are to facilitate macroeconomic control and strategic decision-making by the state, to facilitate the sharing of national economic and social information, and to build and promote the development of a modern electronics information industry. The backbone of Golden Bridge is an interconnected space satellite and ground fiber optic network linked to a domestic private network. Apart from providing Internet access, the system allows email, electronic data interchange, database online services, information sources, and applications service systems. It offers an integrated telecommunications system for a variety of information service systems, such as banking, customs, foreign trade, domestic trade, traveling, weather, transportation, agriculture, irrigation works, forestry, education, research, and development. JiTong Communications Co., Ltd., a joint stock company owned by a consortium of 26 shareholders affiliated with MII, was responsible for initiating the Golden Bridge Project with a satellite truck network in March 1993. At the end of 1994, the basic satellite system of the Golden Bridge Network had been completed. By 1996, the Network had gone into operation in 24 provinces and cities and was interconnected with CERNET, the State Information Center, the Information Center of State Economic and Trade Commission, and the National Electronic Press Service Center. In February 1997, the Info-Highway Network began its operation. In 3 months, it achieved the connection of eight cities including Beijing,
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Shanghai, Guangzhou, Fuzhou, Shenzhen, Xi’an, Shenyang, and Harbin.27 It became the earliest and largest private ISP/ ICP. In late 1997, China's first national Internet backbone (ChinaNet) was connected with three other networks -- China Science and Technology Network (CSTNET), China Education and Research Network (CERNET) and China Golden Bridge Network (CHINAGBN). In August 1999, over 200 colleges in 6 provinces used “All-China College Students Recruiting System” on CERNET. In March 2000, a national Internet exchange center started operation in Beijing, which increased the inter-connection bandwidth of domestic backbone networks from less than 10 Mbit/s to 100 Mbit/s. In June 2000, China Electronic Commerce Association was formally established. It aimed at strengthening the cooperation and communication among China and overseas entities in the field of e-commerce. In September 2000, Tsinghua University finished constructing DRAGONTAP, the first domestic exchange center of the next generation Internet. Through DRAGONTAP, the three domestic backbone networks (CERNET, CSTNET, and NSFCNET) were connected to STARTAP, an American exchange center of the next generation Internet located in Chicago, and an exchange center of Asia Pacific Advanced Network (APAN) in Tokyo, Japan. The connecting speed of the two lines was 10 Mbps. The project built up the connection of many scientific networks such as Abilene, vBNS, and CA*net3l; it also achieved the connection of the next generation Internet throughout the world.28 In September 2001, “The Program for the Tenth Five-Year Planning of Information Industry” was issued. This is the first industry program after establishing the strategy of informatization by the government. By the end of December 2003, the total number of domain names in China was over a million. In December 2004, the IPv6 address of China’s Country Code Top Level Domain (ccTLD) name server was successfully registered in global domain name root server as .CN. In December 2004, one of the first backbone networks of China Next-Generation Internet (CNGI), CERNET2, was launched.29 Internet services, email, electronic data interchange, and database online are now available in major regions of the country. It has promoted e-commerce and faster dissemination of information for industrial and social development. 4.5.2
Golden Card Project
On 1 June 1993, while visiting Shahe General Satellite Clearing Center of the People’s Bank, Jiang Zemin, the general secretary of the Communist Party of China, announced that credit cards should be used by the people in order to reduce the amount of cash in circulation and enhance national macroeconomic control. This started China’s “Golden Card” project, which emphasizes the development of magnetic card technology and its applications. The Golden Card project serves government agencies, banks, the postal service, telecommunications, domestic trade, and tourism by making full use of communication network resources such as the Golden Bridge network. The aim of the project was to connect domestic commercial banks’ automatic teller machines (ATMs) with point of sale (POS) machines nationwide and thereby popularize credit cards and cash cards that will enable people to make electronic cash deposits, withdrawals, and payments. The goal is to use telecommunications networks to replace cash transactions to increase people’s convenience, comfort, and access to information. The project was divided into three phases: experiment, promotion, and popularization. In October 1993, the State Office for the Golden Card Project, comprised of the People’s Bank of China, the Ministry of the Electronics Industry (MEI), the Ministry of Posts and Telecommunications, the Domestic Trade Department, and the National Tourist Bureau, was founded within the MEI. After the experimental phase, a credit card network 27 28 29
China Internet Network Information Center, http://www.cnnic.net.cn Ibid Ibid
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was to be established for settling accounts in all shopping centers with annual sales revenue of US$4.8M or above, and each city was to have 40,000 POS terminals; the country was to have 10,000 on-line POS terminals for tourism, restaurants, civil aviation, and railway transportation as well.30 By January 2002 there were 55 financial institutions in China – four state-owned commercial banks, 10 shareholding commercial banks, one post office, 29 city commercial banks and 11 rural credit unions that had issued 330 million bank cards.31 Among the 12 provinces and cities experimenting with the Golden Card Project, 11 have succeeded in using ATMs and POS terminals by interconnecting themselves to the Golden Bridge Network (CHINAGBN). The Bank of China’s decision to apply the “Yinlian” banking card in five major Chinese cities was a major breakthrough in spreading the nationwide payment system. Starting January 2002, Chinese Yinlian bank cardholders in Beijing, Shanghai, Guangzhou, Hangzhou, and Shenzhen could withdraw cash from ATMs belonging to any bank and use only one POS machine to do the settlement.32 Non-banking card applications now include organization identification cards, taxi IC cards, auto transportation charging systems, the Shanghai tax reporting system, gasoline IC cards in the city of Qingdao, a housing funds system in Tianjin, and an electronic wallet electronic bankbook system in Guangdong. During the Tenth FYP period (2001-2005), it was estimated that China would have issued a total of 1.8B IC cards,33 accounting for over 15 percent of the world’s total. 4.5.3
Golden Customs Project
In 1993, an information service net, the Golden Customs Project, was established to connect foreign trade companies with banks and China’s customs and tax offices. This project aims to create paperless trading by automating customs checks and eliminating cash transactions for international trade. Its main tasks included: •
•
• • •
Establishing a foreign trade information services network interconnected with government departments such as customs, commodity inspection, tax revenue, the Ministry of Foreign Economy and Trade, the National Statistics Bureau, Foreign Currency Administration, and banks and foreign transportation and import/export enterprises through the Golden Bridge Net Establishing an information application system for export tax-return management, foreign currency exchange and clearing, and maintenance of import and export statistics Establishing an information exchange service center with branches Achieving standardization for information exchange, bills, and certificates in order to enhance and improve foreign trade management Supporting the realization of paperless trade by establishing experimental units for EDI application, nationwide e-mail service, and an electronic post office
The Golden Customs project helped build four application systems for quota license system, import and export statistics, export drawback, and a system to cancel after verification of making remittance for import and receiving remittance for export. These four systems provide import and export information to the government. The Golden Customs project plays an important role in pushing the work forward in shortening the difference of import and export trade between domestic and international, timely settlement of remittance 30 “China on Way to Becoming IC Card King,” 19 December 2001, http://www.chinaembassy.bg/eng/dtxw/t131722.htm 31 China Daily, “ Golden Card Project May Speed Up,” 15 January 2002, http://www.chinadaily.com.cn/chinagate/doc/2002-01/15/content_247574.htm 32 Ibid 33 People’s Daily Online, “MII to Adopt Market-Based Telecom Rules,” 21 February 2001, http://english.peopledaily.com.cn/200102/21/eng20010221_63024.html
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for export and compact against the illegal acts cheating customs out of refund of tax. With “China’s Electronics Port,”34 each administrative department can cut across departments and trades to verify the network data, as required by law enforcement and administration, and the enterprise also can handle the various import and export procedures on the net.35 In 2001, Shenzhen Customs opened an office in the Shenzhen Export Processing Zone to offer 24-hour customs clearance service. As all enterprises operating in the zone are linked up with Customs by computer network, customs declaration can now be completed fully online. The Shenzhen Customs has successfully introduced the global positioning system (GPS) to facilitate the tracking of goods between customs checkpoints and the export processing zone so that cargoes entering or leaving the border checkpoints no longer are required to be unpacked for customs inspection.36The efficiency has been improved significantly. For example, for products transported from Hong Kong to Shenzhen, the overall duration for declaration, processing, and transportation has been shortened from 4-5 hours to 2 hours.37 4.5.4
Golden Taxation Project
In 1994, Vice Premier Zhu Rongji decided that China should establish a computer network system for tax collection that was later named the Golden Taxation Project. This is a nationwide information management project to enhance tax collection and management and prevent losses of tax revenue due to tax evasion. The basic infrastructure was completed in August 1994 in more than 50 cities and counties, and the application software runs in the network of the General Clearing Center of the Peoples Bank of China. As of 1 January 2001, important components of China’s Golden Tax Project, the authentication, auditing and checking information management systems, were launched in four cities and five provinces (Beijing, Shanghai, Tianjin, and Chongqing municipalities; and Liaoning, Shandong, Jiangsu, Zhejiang, and Guangdong provinces). These systems were also put into operation in 22 other provinces later that year. The auditing and checking systems cover tax authorities at all levels nationwide through the Internet, and a nationwide value-added tax (VAT) monitoring system was established across the country. China also introduced an anti-counterfeit and invoice-related tax control system to taxpayers.38 By 2010, an application system platform based on a uniform tax specification is expected to be established. The design of this information management system is expected to take into consideration the requirements of tax authorities at various levels.39 The Chinese taxation authority has already installed over 100 IBM servers, a mix of eServer p5 595 and p5 570 machines according to Karl Freund, vice president of Unix strategy at IBM.40 4.5.5
909 Project
The 909 Project was the most expensive semiconductor engineering project in China’s history. The objective of the project was to provide a major boost to domestic manufacturing capability by establishing a domestic semiconductor industry that can 34
www.chinaport.gov.cn Technical Cooperation among Developing Countries/Economic Cooperation among Developing Countries (TCDC/ECDC) Network in China, “Spreading and Application Situation of Chinese Electronic Information Technology,” http://www.ecdc.net.cn/newindex/chinese/page/sitemap/reports/IT_report/english/08/02.htm 36 www.tdctrade.com, “Shenzhen Customs to Extend Online Supervision,” Issue 09,15 September 2001, http://www.tdctrade.com/alert/cba-e0109a.htm 37 China Radio International Online, http://gb.chinabroadcast.cn/3821/2005/08/26/
[email protected] 38 Peoples Daily, “Golden Tax Project Operational in Four Cities and Five Provinces,” 1 January 2001, http://english.people.com.cn/200101/02/eng20010102_59428.html 39 “IBM: Serving the Golden Tax Project with State-of-the-art pSeries Unix Servers,” 17 November 2005, http://www-03.ibm.com/industries/government/doc/content/news/pressrelease/1455327109.html?g_type=pspot 40 Martens, C., “IBM Lands Major Chinese Server Deal,” InfoWorld, 17 November 2005, http://www.infoworld.com/article/05/11/17/HNibmchina_1.html 35
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eventually meet the rapidly increasing domestic demand for high-technology devices. The project began in the Ninth FYP in 1996. This project included an 8-inch silicon wafer processing line, manufacturing plants, and an IC foundry facility. The General Company of Ferrous Metals of China was in charge of manufacturing the silicon wafers. The HuaDa IC Designing Center was responsible for designing the plant. Many other IC design units have taken part in designing IC products and services. The Hua Hong Microelectronics Company, Ltd., was founded at the end of 1995 when China’s State Council decided to establish an 8-inch wafer processing line in Pudong, Shanghai, and selected NEC as the foreign partner. The goal was to build a US$1B IC production line in the Shanghai Pudong Jingqiao Development Zone. The plant was to be China’s largest IC production facility, capable of manufacturing 20,000 8-inch silicon wafers per month. Currently Shanghai Hua Hong NEC Electronics owns one 8-inch fab capable of 0.35 to 0.18 µm and plans to build a 300 mm fab at a cost of US$2B.41 The registered capital of Shanghai Hua Hong NEC Electronics Company, Ltd., was US$789M in November 2003. It grew to US$894M as of September 2004.42 As of October 2005, Hua Hong NEC is a joint venture among NEC Japan (9.54 percent), NEC China (7.83 percent), NEC International (5.0 percent), Jazz Semiconductor USA (10.00 percent), Shanghai Zhangjiang Group Co (0.49 percent), and Shanghai Belling (11.22 percent).43 The plant covers an area of approximately 210,000 m2.44 Beijing Hua Hong NEC IC Design Co., Ltd. was established in Beijing in June 1998 and began operations in January 1999. The joint-venture company has broadened China’s semiconductor industry by adding state-of-the-art design capabilities. Overall investment in the joint venture amounted to US$30M, with capitalization of US$20M, 41 percent contributed by NEC, 10 percent from NEC (China) Co., Ltd., and 9 percent from Shougang NEC for a total of 60 percent from the NEC Group, and the remaining 40 percent from Chinese partner Beijing Hua Hong IC Design Co., Ltd.45 In 2003, NEC purchased all the shares from co-investor Beijing Hua Hong Integrated Design Co., Ltd. Beijing Hua Hong NEC became a wholly owned subsidiary of NEC, with a new name of NEC IC Design Beijing Co., Ltd.46 4.5.6
Electronic Air Traffic Control Project
During the Ninth FYP, China invested US$1.1B to build a state-of-the-art electronic air traffic control system that began to function by the year 2000 in eastern China. The system combined ground radar control with an air navigation system to ensure air safety. China installed over 300 field satellite stations, 300 air-oriented transceivers, 50 meteorological radar apparatuses, and 60 sets of satellite cloud picture receivers. Over the past 10 years, the Civil Aviation Administration of China (CAAC) has spent about US$1B on air traffic management infrastructure improvements. By 2002, China had installed 31 primary radars, 52 secondary radars, more than 1,000 very high frequency communications systems, over 160 omnidirectional range and distance measurement systems, and more than 140 instrument landing systems.47
41 EE Times Online, “China’s Hua Hong NEC Mulls 300-mm Fab,” November 2005, http://www.eetimes.com/news/latest/business/showArticle.jhtml?articleID=173402196 42 China Economic Net, http://www.ce.cn/kfq/gxjskfq/gxjskfqzxqytj/200504/06/t20050406_3533320.shtml 43 TWP, “Wafer OEM: Insufficient R&D Patents, Chinese Wafer OEM Factories Faced with a Technical Bottleneck,” http://203.66.123.22/ne/magazine/magazine_article.asp?Id=1006 44 Semi-conductor Technology, “Pudong Wafer Manufacturing Facility, China,” 2002 45 NEC Press Release, “Beijing Hua Hong NEC 1C Design Co. Ltd Opens for Business,” 12 July 1999, http://www.necel.com/english/news/9907/1202.html 46 The Japan Corporate News Network , “NEC Completes Share Purchase in Beijing Hua Hong NEC IC Design,” http://www.japancorp.net/Article.Asp?Art_ID=6156 47 US International Trade Administration, “Air Traffic Control Equipment Market in China,” http://www.ita.doc.gov/td/aerospace/China/Air%20Traffic%20Control%20Market%20in%20China-rev.htm
86
China’s Electronics Industry
China also introduced ground-to-air communications and automatic dependent surveillance services for international and polar routes in the west. The current airspace structure is being reorganized, reducing the total number of area control centers from 27 to five by 2010. Airspace management in X’ian, Kunming, Chongging, and Wuhan is being improved, and over the next 5 years, two new enroute centers (in addition to Beijing, Shanghai, and Guangzhou) will be built.48 4.5.7
Three Gorges Electronic System Project
The Three Gorges Dam on China’s Yangtze River is a huge national engineering project on which actual planning began in the 1980s and construction began in 1994; it is scheduled to take 20 years to complete. If built according to plan, it will be the largest hydroelectric dam in the world, almost a mile wide and 575 ft high, above the world’s third longest river. The project includes a massive power generation facility, locks for diverting shipping, and a reservoir that will stretch over 350 miles upstream and force the displacement of 1.2 million people. The plans have been controversial both internally and abroad because of the necessary displacement of people, environmental destruction, and engineering problems in the steep river gorge where the dam is to be built. The Three Gorges power station is designed to include 26 hydraulic generators with a capacity of 700,000 kW each and a total capacity of 1.82M kW. An essential component of the plan is a comprehensive state-of-the-art electronic systems management project, with five components: •
• •
•
•
The Three Gorges Project Information Management System is a unified information services system that can assist in the whole process of design and management of the Three Gorges Dam, water control, and power generation project. The Three Gorges Telecommunication System provides communications support for the power station, electrical power system, flood control, and shipping management. The Three Gorges Power Station and Power Transmission Automated Monitoring System is the heart of the Three Gorges key water control project, which will monitor and manage the operation of the power station, substations, and transmission system; conduct data collection; process, monitor, and operate all equipment; and deal with accidents and breakdowns. The Navigation Control System manages shipping activities and ensures navigation safety in the Three Gorges area, as well as publishing shipping information, weather and hydrological reports, and administrative instructions. The Weather and Hydrological Information System includes meteorological radar, weather satellite receiving systems, hydrological information collection and process systems, and a weather information network.
Construction of the Three Gorges Project will inundate 632 km2 of land. When the dam is completed in 2009, 1,100 villages will be submerged. Beginning 2005, 1 million residents have already moved to new homes in resettlement villages. One million and nine hundred thousand people are expected to move out totally.49 The total official estimated cost of this project is approximately US$21.7B. As of May 2005, US$13.6B had been spent on the project.50 Half of it came from surcharges on electricity bills, and 12.5 percent was a loan from the State Development Bank of China. The remainder is expected to be raised from bond issues and loans from other domestic and foreign banks.
48
Ibid International Rivers Network, “Three Gorges Campaign,” http://www.irn.org/programs/threeg/ 50 China Internet Information Center, “Three Gorges Project Generates 10Bln Kwh of Electricity,” http://www.china.org.cn/english/2005/May/127787.htm 49
Development of China’s Electronics Industry
4.6
87
Major Electronics Companies
The bulk of China’s electronics enterprises is located in Guangdong and Jiansu Provinces and in the Greater Shanghai City area. State-owned enterprises accounted for the largest share of output and sales of electronics, followed by Chinese-foreign joint venture enterprises. According to the annual ranking report by the Ministry of Information Industries, the Haier Group Company has jumped to the top position on the list of the first-100 Chinese electronics and information enterprises, with revenue of US$12.5B. The Haier Group Company was second on the list in the 2001 rankings. The Haier group is followed by BOE Technology Group and TCL Group (Table 4.3).
51
BOE Technology Group Co., Ltd TCL Group Legend Group Holding Company Shanghai Posts & Telecommunications Equipment Co., Ltd Huawei Technology Co., Ltd Midea Holding Co., Ltd Panda Electronics Group Hisense Group Shenzhen Zhongxing Telecommunication Co., Ltd Beijing Pekin University Founder Group Shenzhen Huaqiang Group Company Konka Group Co., Ltd China Great Wall Computer Group Co., Ltd Shenzhen Chuangwei-RGB Electronics Co., Ltd Shanghai Bell Telephone Equipment MFG Co., Ltd Langchao Electronic Information Industry Group Guangzhou Wanbao Group Co., Ltd Guangdong Galanz Group Co., Ltd
2 3 4
Air conditioners, refrigerators, small appliances Microwave ovens, air conditioners, small appliances
Computers, servers, mobile phones, network systems
ADSL, telecommunication equipment,
TVs, DVD players, HDTV
Computers, hard disks, monitors
Computers, scanners, printers, e-publishing system Laser diodes, micro-motors TV, HDTV, refrigerators, mobile phones
Switching machines, mobile phones
Switching machines, transmission equipment Air conditioners, microwave ovens, small appliances Mobile phones, switching machines, TVs TVs, air conditioners, refrigerators, switching machines
Mobile phones, TVs, CRTs
TVs, refrigerators, air conditioners, washers, mobile phones, computers LCD display devices, monitors, CRTs TVs, mobile phones, computers, air conditioners Computers, printers
Main Product
1,281 1,278
1,310
1,398
1,530
1,570
2,753 1,822 1,654
2,809
3,901 3,718 3,465 3,377
4,210
5,582 5208 5,188
12,576
Revenue (US$M)
77 28
28
111
15
27
106 43 21
176
622 69 96 54
178
162 72 183
225
Profit (US$M)
394 593
35
421
196
1,234
79 1,375 155
789
1,058 1,105 1,119 499
1,959
576 770 72
1,044
Export (US$M)
15 19
64
102
52
21
142 64 85
279
491 111 41 154
146
95 175 146
540
R&D (US$M)
Ministry of Information Industries of People’s Republic of China, “Top 100 Electronics Companies of China in 2005,” 17 June 2005, http://www.ittop100.gov.cn/200506/163194
18 19
17
16
15
14
11 12 13
10
6 7 8 9
5
Haier Group Company
Company Name
1
Rank
Table 4.3: Top 100 Electronics Companies of China in 2005 (US$)51
88 China’s Electronics Industry
Holley Share Holding Co., Ltd
Dailian Daxian Group Co., Ltd
Foryou Group Co., Ltd Tsinghua Tongfang Co., Ltd Hennan Ancai Group Co., Ltd
Aucma Group Co., Ltd
Shenzhen Electronics Group Co., Ltd
Xoceco Group Co., Ltd Jiangsu Shinco Electronics Group Co., Ltd Shanghai Feilo Co., Ltd Qiao Xing Universal Telephone, Inc, Shenzhen Sed Electronic Equipment Co., Ltd IRICO Group Co., Ltd
22
23
24 25 26
27
28
29
Huadong Electronic Group Co., Ltd
BYD Co., Ltd
XJ Group Co., Ltd Amoi Electronic Co., Ltd
Etern Group Co., Ltd
Shanghai Hua Hong Microelectronics Co., Ltd.
35
36
37 38
39
40
34
33
31 32
30
Desay Holdings Co., Ltd Ningbo Bird Co., Ltd
Company Name
20 21
Rank
IC cards, circuit boards, CODECs, smart cards, MCU circuits
CRTs CRTs, air conditioners, electronic transformers, self-ballasted lamps Nickel-cadmium batteries, mechanical parts, LCDs and LCMs, chargers Power industrial automated system, control systems Mobile phones, communication equipment, notebooks, LCDs Electric cables, optical fiber cables, optical components, automobiles
Mobile phones, security systems, control systems
Capacitors, speakers, optical fiber cables, optical devices Mobile phones, telephones, fax machines, voice recorders
HDTV, portable DVDs, DVD players, GPS
Telephones, DVD players, car audio sets, batteries Mobile phones Circuit boards, semiconductor chips, electric kilo water hour meters Mobile phones, car auto, set-top boxes, electron guns, circuit boards Circuit boards, car multimedia, laser diodes, fine chemistry Computers, DVD players, semiconductor chips CRTs, storage batteries Air conditioners, refrigerators, freezers, communication equipments CRTs, semiconductor chips, GPS, HDTV, glass bulbs for chromatron TVs, HDTV, LCDs, fax machines, communication systems
Main Product
Table 4.3, continued
595
621
642 629
792
798
839
860
882 877
902
908
916
924
1,053 1,030 1,011
1,131
1,244
Revenue (US$M) 1269 1,268
10
40
47 10
143
48
83
12
118 39
17
9
68
12
54 29 63
4
78
Profit (US$M) 53 32
263
8
4 66
507
187
142
371
336 39
589
215
378
61
753 65 142
65
95
Export (US$M) 830 254
40
14
40 36
24
31
67
2
35 4
20
24
2
49
3 60 25
48
22
R&D (US$M) 60 65
Development of China’s Electronics Industry 89
58 59 60 61 62 63
57
56
55
54
53
49 50 51 52
48
47
46
45
44
42 43
41
Rank
Guangdong Donglingkaiqin Group Co., Ltd Shenzhen Xintianxia Group Co., Ltd Zhejiang Fuchunjiang Group Co., Ltd Huiyuan Group Co., Ltd FiberHome Technologies Group Beijing JVC Electronic Product Co., Ltd Jiangsu Zhongtian Technologies Co., Ltd
Futong Group Co., Ltd
Hennan Xinfei Electronic Group Co., Ltd Jiangsu Hongtu High Technology Co., Ltd
DMEGC Magnetics Co., Ltd
Mobile phones
Guangzhou Nanfang High Technology Co., Ltd China Hualu Group Co., Ltd Chang Bai Computer Group Co. Seastar Scientech Investment Holding (Group) Co., Ltd Guangzhou Jinpeng Group Co., Ltd Fujiang Electronic information (Group) Co., Ltd Hengtong Group Co., Ltd Shanghai Hongsheng Technology Development Co., Ltd Insigma Technology Co.,Ltd Wanlida Group Co., Ltd Daheng New Epoch Technology, Inc. Tsinghua Unisplendour Co., Ltd 468
Computers, laptops, digital products Optical fibers, optical devices, communication cables Electric cables, optical fiber cables, digital cable TV systems Optical fiber cables, communication systems, softswitches DVD burners, LDTVs, DVD players Electric cables, optical fiber cables, Al-alloy wires
Small appliances, electronic devices
DVD players, optical fibers, optical devices, communication systems Optical fibers, optical devices, communication cables, data cables, electronic lines
Refrigerators, freezers, air conditioners
Server, firewalls, broadband multimedia conferences DVD players, home theater systems, personal digital devices CAD systems, cable TV systems, semiconductor devices Scanners, laptops, computers Speakers, hard magnet series, hard ferrite magnets, strong NdFeB magnets
DVD players, home theater systems, LCD TVs
Optical fiber cables, optical devices, communication cables
344 328 318 315 308 306
351
362
373
380
381
439 408 389 384
450
451
454
GSM systems, mobile phones, visual monitoring systems Computers, network, TVs, communication systems
506
524 508
559
Revenue (US$M)
Computers, laptops, monitors
DVD players, home theater systems TVs, printers, electronic devices
Main Product
Company Name
Table 4.3, continued
8
7 11 17 7 3 30
11
24
6
20
29
11 12 9 4
9
26
14
4
20
19 4
Profit (US$M) 6
1 3 0.0 4 265 2
292
10
59
34
149
8 317 9 1
447
9
52
0.0
0.0
350 247
Export (US$M)
5 11 1 15 0.0 14
12
18
1
2
15
34 5 20 7
2
0.4
6
14
2
18 4.4
R&D (US$M) 1.4
90 China’s Electronics Industry
HEDY Computer Co., Ltd Shanghai Feilo Acoustics Co., Ltd China Silian Instrument Group Co., Ltd YangTze Optical Fiber and Cable Co., Ltd Xihu Electronic Co., Ltd Xianyang Pianzhuan Group Co., Ltd China Resource Microelectronics (Holding) Ltd. Aerospace Information Co., Ltd China Zhenhua Electronic Group Jianxi Electronic Group Co., Ltd
66 67 68
Nantian Electronics Information Co., Ltd Yunsheng Co., Ltd Shijiazhuang Baoshi Electronic Group Co., Ltd Dongxing Group Co., Ltd Liaoning Radio Erchang (Group) Co. coslight International Group Co., Ltd Tellhow Sci-tech Co., Ltd Guangdong Shengyi Sci. Tech Co., Ltd
80 81
83 84 85 86 87
82
Guangzhou Radio Group
Sichuan Jiuzhou Electronic Group Co., Ltd Beijing Huaqi Information Digital Technology Co., Ltd
79
78
77
76
73 74 75
72
70 71
Hualun Group Co., Ltd
Neusoft Group Co., Ltd.
65
69
Shanghai Jinling Co., Ltd
Company Name
64
Rank
MP3 players, USB flash drives, speakers, portable hard disks, monitors Radio communications, banking equipment molds, manufacturing and machine tooling Network systems, network security systems High performance magnetism materials Glass bulbs for chromatron, electron guns, high frequency electrode less discharge lamps Auto conditioners, high performance magnetism materials Radars, oscillographs, auto audio systems Storage batteries, mobile phone batteries, power systems Trailer power stations, circuit switchboards, cable racks Copper clad laminates, resin coated copper foils
DVD players, cable TV systems, radars
IC cards, firewall systems Semiconductors, switchers, mobile phones, telephones Computers, semiconductor chips, LED chips Optical fiber cables, optical devices, communication cables, LAN cables
Circuit boards, semiconductor chips
TVs, mobile phones, monitors Monitors
Fibers, cables, optical apparatus
Electricity meters, magnetic materials, tuners Firewalls, business management software, X-rays series, ultrasound scanners Computers, PC peripheral devices IC cards, electronic components, software Semiconductor chips, industrial automated systems
Main Product
Table 4.3, continued
198 195 190 187 176
202
211 204
215
223
231
233
251 242 235
261
266 265
271
291 272 272
302
Revenue (US$M) 305
11 11 18 10 28
3
4 11
56
4
19
8
36 8 8
44
7 4
8
10 21 14
62
Profit (US$M) 30
1 102 16 5 125
4
3 161
26
1
37
0.0
0.0 65 51
61
119 124
18
3 66 20
31
Export (US$M) 102
1 4 0.3 8 0.4
0.3
2 4
16
1
20
6
5 2 12
12
5 8
1
1 4 4
48
R&D (US$M) 10
Development of China’s Electronics Industry 91
Jianyin Xinchao Technology Co., Ltd
Cvic Software Engineering Co, Ltd Guangzhou Huanan Information Products Group. Co., Ltd
89
90
99
100
Shantou Ultrasonic Instrument Co.
Jiangsu Zijin Electronic Group Co., Ltd
97
98
Leshan Radio Co., Ltd
Hong'an Group Co., Ltd Shanghai Baosight Software Co., Ltd Weihai Beiyang Electronic Group Co., Ltd Guangdong Fenghua Advanced Technology (Holding) Co., Ltd
93
95 96
Shanghai Automation Instrumentation Co., Ltd
94
Goldtel Industry Group Co., Ltd
92
91
TianJin Zhonghuan Computer Co.
Company Name
88
Rank
Ceramic capacitors, chip resistors, power inductors transformers Computers, printers, communication products, home appliances Digital flaw detectors, LCD circuit boards
Printers, scanners, circuit boards
Chips, radiation products, plastic-sealed diodes, glass-sealed diodes Fiber cables, category 5 intelligent batteries e-cop network security systems, e-police systems
Computer systems, verification equipment, instruments
Computers, printers, POS machines, printer cartridges Printers, circuit boards, IC cards, environment autocontrol systems Series software, recorders Computer systems, micro-control systems, multimedia systems Gmbit ethernet switches, information machines, multifunction RF card readers
Main Product
Table 4.3, continued
145
155
156
157
163 162
165
168
169
171
171
172
Revenue (US$M) 174
7
3
5
8
16 9
12
5
11
11
3
14
Profit (US$M) 15
58
4
61
116
0.0 4
139
5
0.0
123
3
53
Export (US$M) 129
1
3
7
1
7
6
9
8
5 0.3
3
4
13
R&D (US$M)
92 China’s Electronics Industry
Chapter 5 Semiconductors
China is now the largest integrated circuit (IC) market in the world. In 2005, China’s IC market was somewhere between US$40B and US$47B, an increase of over 32 percent over 2004, compared to the world average increase of 8 percent.1,2 To boost the domestic industry and reduce reliance on imports, the Chinese government has made significant efforts to develop its semiconductor industry and encourage foreign technology transfer and management support. China’s semiconductor industry is now in the high-speed development stage. Facilities are being developed at a rapid pace, and the technology level is scaling up through acquisition and research and development. This chapter presents the status of China’s semiconductor industry and comments on the opportunities and challenges for future development.
5.1
A Brief History of China’s Semiconductor Industry
China’s IC industry was virtually nonexistent before 1982. In that year, China’s Huajing Electronics Semiconductor Group obtained Toshiba’s 3-inch line technology, symbolizing the official beginning of China’s semiconductor enterprise. Initially, Chinese IC enterprises tried to be self-reliant by following the integrated device manufacturer (IDM) format. Contributions from the IC industry, as value added to the national economy, were coined as “1:10:100” (one dollar worth of ICs to 10 dollars worth of electronic products to 100 dollars on the consumer market). Driven by this concept, the central government introduced major campaigns to expedite China’s semiconductor growth. By 1985 China had imported over 20 3-inch wafer semiconductor lines. In the early 1990s, Huajing introduced 5-inch metal oxide semiconductor (MOS) lines from Siemens and Lucent. At the same time, other facilities were built, such as those of Huayue (1980), Shanghai Belling (1988), Advanced Semiconductor Manufacturing Corporation of Shanghai (1989), Shougang-NEC (1993), and Huahong-NEC (1997). In 1998, Huajing set up its 6-inch lines with technology transferred from Lucent as part of National Project 908.3 Help for the budding semiconductor industry also came from global companies such as Motorola, NEC, Mitsubishi, STMicroelectronics, Philips, Siemens, and Toshiba. These companies
1 McClean, Bill, “China Became the World’s Largest IC Market in 2005,” IC Insights, 9 January 2006, http://www.icinsights.com/news/releases/press20060109.html, accessed January 2006. 2 CCID Consulting, http://www.ceic.gov.cn/detail?record=1&channelid=44&presearchword=ID=181230, China Electronics Industry Information Network, accessed February 2006 3 National Project 908 was initiated by the State Council and Ministry of Electronics Industry to align China with the pace of the world’s IC industry. It started in 1990 and ended in 1997 with an output of two outdated 6-inch lines in Huajing. Because of the bureaucracy and low-level management of state-owned enterprises, the project resulted in huge deficits and was regarded as a failure.
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transferred technology, invested capital, built wafer fabs, and formed joint ventures with Chinese partners. By the end of the Eighth Five-Year Plan (FYP) in 1995, China’s output of ICs was far from meeting the ever-increasing demand.4 To meet a major goal of China’s Ninth FYP--to encourage domestic IC production capability and to reduce reliance on semiconductor imports--China launched the largest-ever IC development project in the Pudong New Area of Shanghai5 in December 1995, with an investment of more than US$1.2B. The Pudong Microelectronics Center enterprise was just one piece of a larger project known as Project 909, which called for the establishment of five major IC production companies and as many as 20 design and development centers by the year 2000.6 Its target was to develop 0.3 µm chip technology, produce 0.5 µm chips on a trial basis, and mass-produce less sophisticated 0.8 µm chips. The production goal was 1.2 billion units by the year 2000, with gross sales reaching US$1.2B. Project 909 started with the development of an 8-inch 0.35 µm wafer manufacturing facility in a joint venture between Huahong Group and NEC of Japan. Production began in March 1999 and 1 year later reached 10,000 wafers per month. The output, primarily DRAM, was exported back to Japan by NEC. In the Tenth FYP (2001-2005), the IC industry continued to be a top priority for development, and the Chinese government enhanced its open policy, promoting foreign investment and strengthening its IC design and fabrication capabilities. The key projects included: • Establishing national IC research and development centers, and developing
high-volume IC production technology and system level ICs • Strongly supporting IC design and computer-aided design (CAD) companies, and
establishing a number of design companies with annual revenue over US$10M • Establishing three to four 6-inch IC production lines, four to five 8-inch lines with
0.35-0.18 µm technology, and one to two 12-inch lines with 0.18-0.13 µm technology • Pursuing advanced IC packaging technologies and reaching an annual output of 0.5 to
1 billion units for key packaging companies • Pursuing technology improvement for selected equipment manufacturers and material
suppliers, and forming a better infrastructure China’s solution to the problem of having inadequate domestic IC capabilities was to encourage foreign companies to set up facilities in China. NEC had already established two fabs jointly with China with 0.35 µm technology. Motorola then built an IC fabrication line with 0.13 µm technology in Tianjin. Taiwanese IC manufacturers began investing in China’s IC business in order to benefit from the lower cost structure and gain a foothold in the huge market. United Microelectronics Corporation (UMC) and Taiwan Semiconductor Manufacturing Company, Ltd., (TSMC) invested heavily in manufacturing facilities. In 2003, Intel selected China as the new location for its assembly, packaging, and testing of Pentium 4 chips. In pursuing these goals, China relied on foreign technological know-how, while taking steps to protect its large market from foreign domination. By the end of 2004, foreign investment in the semiconductor sector exceeded US$100B. The focus was in the Changjiang River Delta, Zhujiang River Delta, Sichuan Basin area, and Bohai Bay region of China. Nevertheless, restrictions were imposed on Chinese-foreign joint ventures as well as on wholly-owned foreign enterprises to guarantee a certain level of technology transfer to China. 4
Schumann, E., “Market Focus: China. A Feature of SEMI’s Equipment and Materials Market Statistics Program,” Channel Magazine, February 1997, http://www.semi.org/Channel/1997/feb/market.html Shanghai was chosen as the preferred site for the project because it had become the center for microelectronics production in China, accounting for more than half of the country’s IC output. 6 Johnson, G., “China Promotes Chips as Pillar of Growth,” Information Alert, 26 April 1999 5
Semiconductors
95
As an example of foreign technology transfer, Motorola has been one of the largest U.S. investors in China. It has had several manufacturing operations in Tianjin and joint ventures in other parts of the country. In 1998, Motorola launched an advanced materials joint research program to investigate fundamental properties of ferroelectric thin-film materials. This class of materials has a potential application for advanced non-volatile memory for cellular phones and smart cards. The program draws upon the technological strength of the National Lab of Solid State Microstructures at Nanjing University and the technology application capability of Motorola. In November 1999, Motorola Research Institute (China) was founded. It included 18 R&D centers across China (including Hong Kong), and 650 researchers. The annual R&D funding amounts to US$150M. Research areas include advanced semiconductors, microcontrollers, and software development.7 In 1995, Motorola began to construct a wholly-owned submicron fab in Xianing, south of Tianjin city, at an estimated total cost of US$1.2B. Under the plan, an 8-inch wafer-processing line was to be built to process devices with 0.8 µm technology in 1998 and 0.5 µm BiCMOS and CMOS technology in 1999. Monthly capacity was planned to reach about 12,000 wafers per month. The major applications were to be telecommunications and automobile electronics.8 In May 1998, Motorola announced that it would double the size of the Tianjin wafer-processing facility by spending US$2.6B to turn the site into a “superfab” and a linchpin in its Asian operations. The Tianjin manufacturing complex was planned to contain high-volume, front-end, wafer-fab lines and advanced back-end chip-assembly operations. The second phase of the production plan, which called for a 0.35 µm fab line, started in 2000, doubling the silicon-processing capability of the site.9 Motorola announced plans to advance the project to 8-inch and 0.25 µm technology. 10 In August 2000, Motorola announced that the Tianjin municipal government approved the company’s investment of US$1.9B (up from the US$1.5B for the fab). This move brought the company’s total investment to US$3.4B, making it the largest foreign investor in China. The Motorola Tianjin Integrated Semiconductor Manufacturing Complex, also called MOS 17, was to produce wireless communication devices, automobile electronics and consumer products, and employ 2,400. This facility was put into production in 2002, with 8 inch 0.18 µm technology. It was the most advanced facility in China. In October 2003, Motorola sold this plant, its biggest investment in China, to a local Chinese contract manufacturer, Semiconductor Manufacturing International Corp. Motorola also built an Asia Telecommunication Product Manufacturing Center in China.11 The center produces 2G, 2.5G, and 3G cellular subscriber and infrastructure products for GSM, TDMA, WAP, wireless IP, and GPRS, and related data technologies for domestic and international market consumption. Motorola continues its investments in China. In May 2003, it signed a memorandum to invest US$90M to establish a research company in Beijing. The research company is to spend US$500M over the first 5 years on human resources and equipment.12 According to Zhongyu Yu, president of the China Semiconductor Industry Association (CSIA), by the end of 2004, there were about 476 IC design houses, 150 IC packaging and assembly factories, and 39 wafer fabs. In 2004, China’s semiconductor industry’s output was US$6.7B, among which packaging and assembly accounted for over 50 percent, wafer 7
Huang Jing Reports, 4 April 2000, http://www.hrw.org/wr2k1/asia/china.html Tsuda, K., “China Pushes Submicron Chip Fabs,” February 1997, http://www.cnerc.gov.cn/ 9 Pecht, M., “How China is Closing the Semiconductor Technology Gap,” IEEE Transactions on Components and Packaging Technologies, Vol. 27, No. 3, September 2004 10 Liu, S., “Local Production Plans Cement Commitment to Potentially Vast Market - Motorola Earmarks US$2B for MCU Fab in China,” EE Times, 7 February 2000, http://www.techweb.com 11 “Motorola Moves on China in US$1.9B Manufacturing Deal,” Electronic News Online, 21 August 2000, http://www.electronicnews.com/enews/news /4329-234NewsDetail.asp 12 Online staff, “Motorola to Establish US$500M China Research Unit,” Electronic News, 19 May 2003 8
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manufacturing took 30 percent, and IC design covered about 20 percent. Domestic companies have made progress in developing a few specific IC products, such as second-generation ID cards, audio decode chips, third-generation cell phone chips, and MP3 chips. In IC manufacturing, there were a total of 39 fabrication plants by the end of 2004: one 12-inch plant, nine 8-inch plants, and 29 4-inch to 6-inch plants. These plants generated a revenue of US$2.24B in 2004, which was a 90 percent increase from 2003. Meanwhile, three more 12-inch plants are under consideration by SMIC, Hua Hong-NEC, and Hynix. IC packaging and assembly reached US$3.49B in revenue in 2004. 13 One highlight of technology innovation in 2004 was the implementation of a national semiconductor illumination engineering project, a cooperative effort by the Ministry of Science and Technology, the Ministry of Information Institute, and 14 local governments.
5.2
Semiconductor Production and Market Size
China’s semiconductor production growth is amazing, but it accounts for a small percentage of the worldwide market (see Table 5.1 and Figure 5.1), and China’s domestic demand for ICs far outstrips her local supply. Table 5.1: The Proportion of China’s Semiconductor Sales Value to Semiconductor Worldwide Market Sales Value14 Percentage
Rest Areas, 22.1%
2003 17.7
2004 19.6
2005 21.7
Americas, 18.3%
China, 19.6% Japan, 21.5%
Europe, 18.5%
Figure 5.1: Worldwide Semiconductor Market by Region in 200415 The proportion of China’s semiconductor sales value in the worldwide semiconductor market was 19.6 percent in 2004.16 The semiconductor manufacturing sector is the weakest link in China’s electronics industry; 85 percent of the electronic products produced in China are dependent on imported semiconductor components. The proportion of China’s semiconductor sales value in domestic electronics information products manufacturing sales 13
Yu, Z., China Semiconductor Industry Association, “China’s IC Industry, The Status Quo and Future,” (presentation) “The Development and Future of China's Semiconductor Industry,” Seminar Series, Stanford University, November 2005, http://iis-db.stanford.edu/evnts/4307/Yu_Zhongyu_CSIA_slides.pdf, accessed December 2005 14 CSIA and CCID, Compiling Committee, Development Status of Semiconductor Industry in China, May 2005 15 Ibid 16 Ibid
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value was 3.75 percent in 2004.17 Consequently, China exhibits a trade deficit between semiconductor import value and export value. This challenge will not be solved quickly, because domestic demand for semiconductors, especially ICs, is growing rapidly in China. Gartner, Inc., forecasts continuous demand growth to reach US$68.6B by 2008.18 Table 5.2 shows the values for semiconductor imports and exports in the last 4 years. Table 5.2: China’s Semiconductor Import and Export Values (Unit: US$ B)19 2001 19.9 3.7
Import Value Export Value
5.3
2002 30.3 5.5
2003 41.7 7.7
2004 62.0 12.4
China’s Current Semiconductor Industry
Sales Value (US$ B)
In 2005, China’s semiconductor industry’s sales was over US$40B, an increase of over 32 percent over the previous year. China’s IC industry has kept its fast pace since 2004. The major applications of ICs, computers, consumer electronics, and network and communications absorbed 88 percent of IC products.20 The market scale and increase rate from 2001 to 2005 of China’s IC industry is shown in Figure 5.2. 50 45 40 35 30 25 20 15 10
46.9 35.9 25.3 17.9 13.6
5 0 2001
2002
2003
2004
2005
Figure 5.2: China IC Market Sales 2001 – 200521 The structure of the market share of IC products in 2005 is shown in Figure 5.3. In computers, the need for IC chips comes from PCs, laptops, printers, displays, keyboards, and mouses, which are OEMed in China. In 2005, the market share of computer products in IC consumption increased 4.8 percent, making it the fastest growing market in 2005. In consumer electronics, the need for ICs comes from flat panel TVs, digital cameras and camcorders, and MP3 and MP4 players. In 2005, the production growth of these electronics was remarkable, and became one of the primary driving forces for the increase of consumer ICs after computer products. In addition, other consumer electronics products, such as microwaves, vacuum cleaners, water heaters, and electrical fans, also had a volume increase in their share of the IC market. 17
Ibid Taipei Times, http://www.taipeitimes.com, 2004 19 Ibid 20 CCID Consulting, http://www.csip.org.cn/createnew/art/01/0105/1141006433191769.shtml, China Software & IC Promotion Center website, accessed February 2006 21 Ibid 18
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Automation and Control, 7.4%
Others, 2.4%
Network and Communication, 18.3%
Computer Products, 42.8%
IC Cards, 0.9%
Consumer Electronics, 27.1%
Auto Electronics, 1.1%
Figure 5.3: Structure of China's IC Market in 200522 Network and communication ICs accounted for 18.3 percent of total IC sales, a decrease of 1.9 percent from 2004. This was due to the relatively low market needs for network and communications equipment. Although the expected rate of cell phone market sales increased, PHS, BSC, DSL, and PBX equipment sales decreased. Moreover, the third-generation mobile communication licenses were not expected to be issued until the first half of 2006. The leading companies in China’s IC market did not change, but their market shares varied somewhat, as shown in Figure 5.4. The most obvious characteristic was that DRAM manufacturers went up in the ranking. Because of the Chinese market’s tremendous appetite for PCs, laptops, and Centrino chips, Intel’s sales increased nearly 30 percent to US$7.7B, which made it No.1 in market share, with 16.5 percent. China’s market sales of DRAM repeated 2004’s rapid development. As market needs for NAND-type flash increased, so did Toshiba and Hynix’s rankings. AMD recorded a 35.5 percent sales increase and rejoined the top 10 companies. Intel, 16.5%
Samsung, 6.2% TI, 3.9%
Others, 50.4%
Toshiba, 3.7% Hynix, 3.7% Infineon, 3.7%
AMD 2.4%
Phillips, 3.3% ST, 3.2% Freescale, 2.9%
Figure 5.4: China's IC Market Share Ranking by Brand in 200523 As the production of computer, communication, and consumer electronics increased, the semiconductor market became increasingly focused on application-specific and general purpose logic ICs. The IC market share by type is shown in Figure 5.5. 22
CCID Consulting, http://www.ceic.gov.cn/detail?record=1&channelid=44&presearchword=ID=181230, China Electronics Industry Information Network, accessed February 2006 23 Ibid
Semiconductors
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Optical Semiconductors 7%
Discretes, 7% General Purpose Logic, 6% General Purpose Analog, 6%
ASIC, 36% Microcomponents, 17%
Total US$41.8 Billion
Memory, 21%
Figure 5.5: China's IC Market Share by Type in 2004
China's Production Revenues (US$B)
It is estimated the IC market in 2006 will continue to increase. The 2006 IC sales are predicted to be US$62B, an increase of 32 percent over 2005. In the coming years, the development of third-generation mobile communications, digital home construction, and flat-panel TV are believed to become the driving force of China’s IC industry. The IC market rate is expected to peak in 2007 with a 33.6 percent growth rate. After that, the increase in rate is expected to slow down due to slower industrial transfers and a saturated market for overall units.24 The 2010 IC market value is estimated to be US$167B. In 2004, China’s semiconductor production revenues grew by 45 percent to US$12B. Compared to the world average of 28 percent increase, this was a considerable increase, but domestic IC production only met about 30 percent of domestic demand. China’s domestic production revenues in recent years are shown in Figure 5.6. In 2004, the production revenue of discrete devices accounted for about 45 percent of total revenues. The 2004 semiconductor production revenues by sector are shown in Figure 5.7. 14 12 10 8 6 4 2 0 2000
2001
2002
2003
2004
Figure 5.6 China's Semiconductor Production Revenues and Growth, 2000 - 200425 China’s wafer fabrication capabilities are noticeably different from worldwide capabilities. By July 2005, foundry capacity dominated China’s capabilities. In October 2005, there were only four foreign integrated device manufacturers with wafer fabrication 24
“IC Market to continue Expansion but at a Slower Pace in China: Forecast,” People’s Daily Online, 24 February 2006, http://english.people.com.cn/200602/24/eng20060224_245654.html 25 CCID, CSIA, PricewaterhouseCoopers, 2005
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capacity in China: NEC, ON, Philips (through its joint venture with ASMC and JSMC), and Rohm. During 2005, 20 new wafer fabrication facilities were committed and under construction in China increased by 25 percent. The 20 facilities under construction include 10 for foundry production, five for IDM production, three for discrete, and two for foundry/IDM production. They have the potential of increasing China’s wafer fabrication capacity by 60 to 70 percent. Integrated circuit design, 6%
a) 2003
Integrated circuit manufacture, 9% Discrete device, 49% Packaging & testing, 36%
Total = $8.3 billion Integrated circuit design, 8%
b) 2004
Integrated circuit manufacture, 18%
Discrete device, 45%
Packaging & testing, 29% Total = $12 billion
Figure 5.7: China's Semiconductor Production Revenue by Sector in 2003 and 200426 5.3.1
Discrete Semiconductor Sector
China has become the largest discrete semiconductor device market in the world. In 2003, China’s market accounted for one-fourth of all global sales. According to the Ministry of Information Industry (MII), the production volume of discrete semiconductor devices in China in 2005 increased 47 percent over that of 2004 to 206 billion pieces. In 2004, the discrete device output reached nearly 140 billion pieces, an increase of 35 percent over that in 2003. The sales value was US$5.6B, up by 34 percent over 2003, a growth rate of 16 percent in worldwide sales value of discrete devices.27 The value of the discrete device market from 2000 to 2004 is shown in Figure 5.8. The demand for discrete devices comes 26
“China’s Impact on the Semiconductor Industry 2005 Update,” PricewaterhouseCoopers, Technology Center Publication, pp 22, 2005 27 CCID Semiconductor Section, December 2003, http://physics.scu.edu.cn/bbs/html/20031213114946.htm (in Chinese), accessed January 2006
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from many areas, but primarily from consumer electronics, computers and peripherals, and network and communication devices. These three areas accounted for over 60 percent of market demand.
Sales Value (US$B)
6 5 4 3 2 1 0 200
200
200
200
200
Figure 5.8: Sales Value of Discrete Devices While many multinational semiconductor firms are decreasing production of low-end products in favor of advanced devices, China’s government has continued to support the growth of discrete device production. New joint ventures are encouraged. For example, Leshan-Phoenix was established by Leshan Radio Company (in Sichuan Province), Motorola, and ON Semiconductor, with a total investment of US$278M. As one of the largest discrete semiconductor companies, Leshan-Phoenix’s sales were US$150M in 2003. Philips signed with the Chinese authorities to build a new assembly plant for discrete semiconductors in the town of Huangjiang, about halfway between Hong Kong and Guangzhou, in Guangdong province. The factory produces general-application leaded discrete devices. There were more than 20 domestic manufacturers by 2004, but imported products from Japan, Taiwan, the U.S., Malaysia, and Korea accounted for over 70 percent of China’s discrete device market. The top 9 manufacturers of discrete devices in China are Shanghai Xinkang Electronic, Jiagsu Changdian Technology Stock, Leshan-Phoenix, Shenzhen Saiyifa Microelectronic, China Huajing Electronic, Ningbo Mingxi Microelectronics, Mitsubishi-Sitong IC, Yangzhou JingLai Semiconductor, and Shenzhen Shenai Semiconductor. The biggest discrete manufacturing company, Jilin Huaxing Group, had a sales value of US$51M. The biggest discrete device package, assembly, and test company, Sichuan Leshan Radio Co. Ltd., generated a sales value of US$165M in 2004. The primary concerns about China’s discrete semiconductor industry are its low-scale and dispersive manufacturing capabilities and its low-level technology. The major products consist of low-end diodes and transistors. Even with these difficulties, China’s domestic discrete device markets will grow steadily in the next 5 years, with an annual rate increase projected to be between 12 and 13 percent. By 2007, the domestic market is predicted to reach 230 billion pieces and US$6.8B, keeping China the major market for the world’s discrete semiconductor market.28 5.3.2
Integrated Circuit Sector
In 2004, China’s IC output amounted to 21 billion pieces, up by 70.4 percent over 2003. Sales value was US$6.75B, a rise of 55.2 percent. The sales income of China’s IC chip fabrication sector in 2004 amounted to US$2.22B, an increase of 197.5 percent over 2003, accounting for 33 percent of the IC industry sales. The growth and improvement have been exhibited in both IC design and IC fabrication. Figure 5.9 illustrates the geographic 28
CCID Advisory, 2003, http://www.ccidadvisory.com
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distribution of IC manufacturers in China, including projects in the planning stage. Table 5.3 gives the domestic market share of China’s (excluding Taiwan) manufacturing technology in 2003.29 In 2005, many IC companies extended their product line to 0.13 µm, and a few of them started to design in 0.1 µm technology. At the same time, research on designing in 90 nm is ongoing. Table 5.3: Market Share of China’s Manufacturing Technology Technology Market Share (%)
> 0.6 µm 67
0.6 – 0.35 µm 17
0.35 – 0.18 µm 13
Beijing HuaXia Beijing Xun Chuang Shougang-NEC Mitsubishi-Stone (in plan)
< 0.18 µm 3
Tianjin Motorola Wuxi Huajing CSMC Huajing Suzhou UMC (in plan)
Chengdu Guo Teng (in plan) Leshan-Pheonix (in plan) Zhejiang Huzhou Yuantai
Shanghai Belling ASMC Hua Hong SMIC GSMC TSMC project (in plan) Ningbo Zhong Wei Shaoxing Hua Yue Hangzhou Silan Shenzhen Shen Chao Shenzhen Sai Yi Fa (in plan) SAST Group (in plan)
Figure 5.9: Geographic Distribution of IC Manufacturing in China By the end of 2004, there were 19 chip production lines using 5- to 8-inch wafers, with a total investment of US$10B. In September 2004, SMIC Beijing established the first 12-inch wafer chip production line in China, which was using 0.11 µm processing technology. Table 5.4 lists examples of companies in China with different wafer chip production technologies in 2004. Detailed information for many more companies is listed in Table 5.5. Table 5.4: Companies in China with Different Wafer Production Technologies in 2004 8-inch Technology Company
Monthly Production 29
Huahong NEC, SMIC (2 lines in Shanghai), SMIC (Tianjin), Grace, ASMC, Hejian, TSMC (Shanghai) 300,000 wafers
6-inch Technology ASMC, CSMC, SG-NEC, BCD, Nanke Group, Zhongwei 180,000 wafers
5-inch Technology Hangzhou Shilan, ASMC, Huarun Huajing, Wuxi 58th Institute, Huayue Microelectronic 130,000 wafers
Zhang, Q., “Development of China’s Electronic Information Industry,” 2003 Summit of Integrated Circuit Industry, Beijing, March 2003
NEC (Japan) Philips Semi-conductors
Huahong NEC (Shanghai)
ASMC (Shanghai)
-
N/A
Huayue (Shaoxing)
Hangzhou Silan
Hangzhou Silan
Zhejiang Province
CSMC/Huajing
State-owned
-
CSMC-Huajing (Wuxi)
Capital Iron & Steel Co.
NEC (Japan)
Shougang-NEC (Beijing) Huajing (Wuxi)
Shanghai Institute of Metallurgy
BCD Semiconductor
Shanghai Hua Hong / Shanghai Bell Co.
Shanghai Belling
Huahong Electronics
Taiwan UMC Taiwan TSMC N/A Shanghai Shiye, Zhangjiang Gaoke
Chinese Partner
SIM-BCD (Shanghai)
Alcatel (Belgium)
N/A N/A SST N/A
Hejian (Suzhou) TSMC (Shanghai) GSMC (Shanghai) SMIC (Shanghai)
Shanghai Belling (Shanghai)
Foreign Partner
Company
N/A
Consumer
IC Foundry
4 Mbit DRAM, 64 Mbit DRAM, MCU Consumer
Telecom; IC Card; Consumer electronics IC Foundry
IC Foundry
64 Mbit DRAM Logic IC
IC Foundry IC Foundry IC Foundry IC Foundry
Product Sector
3’’ & 4”, 2 – 3 µm CMOS, 15,000; 5”, 2 – 3 µm Bipolar, 1,600; 5”, 3 µm MOS, 10,000; 6”, 0.6 µm SOC, 10,000 5”, 0.5 µm CMOS, 28,000; 6”, 0.35 µm CMOS, 59,000 4”, 4 µm Bipolar, 15,000; 5”, 2.0 µm Bipolar, 0.8 – 1.2 µm CMOS, 1.0 – 2.0 BiCMOS, 30,000; 5’’, 0.8 – 1.2 µm MOSFET, 25,000. 6” , 0.5 µm, 20,000
6”, 1 – 4 µm bipolar/BiCMOS, 40,000; 4”, 1 – 4 µm bipolar/BiCMOS, 40,000 6”, 1.5, 1.2, 0.6, 0.5, 0.35 µm CMOS, 13,500
8” line, 0.25 µm, 30,000; 5”, 1.5µm Bipolar, 35,000; 6”, 0.6µm CMOS, 35,000. 6’’, 6.0 – 1.2 µm Bipolar, 10,000; 4”, 1.2 µm CMOS, 3 µm CMOS/NMOS, 3.0, 2.4, 1.2 µm BiCMOS, 13,000
8’’, 0.35, 0.25 & 0.18 µm, 60,000 8”, 0.35 & 0.25 µm, 15,000 8”, 0.25, 0.22, 0.18 & 0.15 µm, 27,000 8”, 0.35, 0.25, 0.18, 0.15, 0.13 & 0.09 µm, 42,000; 12”, 0.25 µm , 40,000 8”, 0.35, 0.25 & 0.15 µm 40,000
Technology (inch, micron, monthly wafer capacity)
Table 5.5: IC Manufacturing Technology Status in China in 2005
Semiconductors 103
China’s Electronics Industry
104
The Chinese IC industry can be described in the following terms: • China is an emerging manufacturing power with insufficient capacity, satisfying
only 20-30 percent of its domestic needs. • Research and development is insufficient, with most of the advanced technologies
acquired from foreign countries and an R&D expenditure of less than 2 percent of the industry revenue. • Rapidly growing design capabilities are becoming increasingly sophisticated. • The industry has strong government support. 5.3.3
IC Design
China’s electronics design industry is relatively small. Many of the electronic designs in China center on printed circuit board and low-level system design.30 Most IC designs coming out of China are application-specific ICs (ASICs), MCUs, DSPs, and power-supply management ICs, primarily for communications and consumer products. China’s design engineers are just beginning to design SoC devices. As market demand for IC products has increased, China’s IC design industry has gathered government support and foreign investment. Fabless design is considered valuable for China’s IC industry. Shanghai Hua Hong Group has established design centers in Beijing, Shanghai, Suzhou, Shenzhen, and even in the U.S.’s Silicon Valley, in order to recruit talent to catch up with the latest design trends and technologies. Fudan University in Shanghai and Tsinghua University and Peking University in Beijing are among the many institutions that actively support China’s IC industry in design and testing. There are over 150 design companies and 3,000 engineers across China, with a total revenue of over US$600M. About one-third of design houses are located in Shanghai (50), followed by Beijing (about 40), Shenzhen (about 20), Wuxi (about 20), Chendu (about 10), and Xi’an (about 10). Details for China’s top 10 IC design companies in 2004 are listed in Table 5.6. Figure 5.10 shows the domestic IC design market shares of local design houses, with projections for 2007 and 2010, in terms of high-end chip design (US$7.5 per chip or higher), mid-end chip design (US$2.5 per chip or higher), and low-end chip design (US$0.5 per chip).31 Table 5.6: China’s Top Ten IC Design Companies by Sales Value in 2004 (US$M) Rank 1 2 3 4 5 6 7 8 9 10
Company DaTang Microelectronics Technology Co., Ltd. Hangzhou SiLan Microelectronics Co., Ltd. Actions Semiconductor Co., Ltd. China Huada IC Design Center Z-Star Microelectronics Corporation Shaoxing Silicore Co., Ltd. Hangzhou Youwang Electronics Co., Ltd. Wuxi China Resources Semico Co., Ltd. Shanghai Huahong IC Design Co., Ltd. Beijing Sigma Microelectronics Stock Co., Ltd.
Sales Value 93 63 57 56 52 31 31 28 24 22
30 Tafoya, L., “Issues to Consider When Putting China in Your Business Plans,” Fabless Semiconductor Association, Dallas, Texas, 2003 31 Lui, D., “Opportunities of China Semiconductor Start-ups and VC Funding,” Chinese American Semiconductor Professional Association Newsletter, January 2002, http://www.caspa.com/newsletter/Jan9DinnerTalkPresentation.pdf
Semiconductors
105
90
Market share (%)
80 70 60 50 40 30 20 10 0
2001
2003
2007
2010
High-end
0
1
3
10
Mid-end
1
5
20
60
Low-end
5
25
75
90
Figure 5.10: Market Shares of Local Design Houses The emergence of new design capabilities in China has created opportunities for foundries and electronic design automation (EDA) tool vendors. Leading EDA tool vendors reported significant sales growth in China in recent years. The China IC Design Center (CIDC) claims to have spent about US$2M in licensing design tools from U.S. suppliers. Foundries such as HuaHong-NEC, CSMC – HJ, and Hua Yue have provided their production services to local design houses, and are offering a variety of processing technologies together with tariff-free wafers. Meanwhile, local design houses are improving. CIDC (Beijing) has begun development of its own design tools at its Chinese and U.S. facilities. The development work is expected to yield Chinese-controlled intellectual property. For example, Shenzhen State Microelectronics Co., Ltd., one of Hua Hong’s design houses, is developing an MPEG-2 decoder and other IC designs. Huawei Technologies Co., Ltd, China’s top telecommunications equipment manufacturer in Shenzhen, has developed a variety of advanced tools, and more than 160 engineers are working on ASICs. More than 10 ASIC designs have already been used in Huawei’s telecommunication systems. Multinational companies are also making a concerted effort to enter the Chinese design market.32 Intel, Motorola, Microchip, and NEC operate design houses in China. Microchips Technology Inc. plans to expand its presence in China by opening three more design centers in Shenzhen, Chengdu, and Fuzhou. By providing better benefits and higher salaries, these design firms recruit excellent people. They also collaborate with Chinese universities and offer scholarships to college students. There are 16 IC design companies with annual sales exceeding US$12.38M. By the end of 2004, China’s IC design units numbered 421, with 16,500 employees. It is predicted that annual revenues will increase over 60 percent in the next 3 to 4 years, and in 2008, that sales revenue will probably reach US$10B. There are some highlights during the last year for IC design in China. For instance, the second-generation IC ID card has been developed and put into mass production, and IC chips for MP3 designed by Actions Semiconductor Company claimed first place in the domestic market share.33
Liu, S., “Indigenous Design Industry Gains Ground in China,” EE Times, 11 November 1999 Chen, L., Special Report on “China IC Design Company Survey,” EE Times China, May 2005, http://www.eetchina.com/ART_8800365917_480101_83b5724c.htm, accessed 3 January 2006 32 33
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According to the technology consultant iSuppli, chips designed or partly designed in China will account for 14.8 percent of global semiconductor sales in 2005.34 Design activities in the United States will lead the market at 40.2 percent, followed by Japan at 15.5 percent. After China, Taiwan would be fourth with 10.1 percent. However, many Chinese companies are now developing strong markets, such as Solomon Systech’s TFT-LCD and LED-driving IC, Actions Semiconductor’s MP3 decoder chip, Datang Microelectronic’s SIM chip, and HED’s (CIDC) digital ID chip. The result will be a continued shift to Chinese design, especially as more companies establish design centers in China. By 2004, seven national IC R&D centers were established with a total investment of US$70M; these include the National IC R&D Center in Beijing and the Shanghai IC R&D Center. In order to improve IP development capability and thus the competitiveness of China’s electronic products, the Chinese government is putting significant efforts into establishing more IC R&D centers. These centers focus on 23 IT projects that have been written into the Eleventh FYP. 5.3.3.1
China IC Design Center
In 1986, CIDC was founded in Beijing as a state-owned enterprise. Its focus is primarily on IC design and CAD tools. It has contract fabrication capabilities with foundry partners from the United States, Japan, Singapore, Hong Kong, and Taiwan. The center has successfully designed CPU for smart cards, including the first smart card integrated circuit with solely-owned intellectual property.35 .In 1998, the center began to develop MP3 decoders. Now these intellectual property wholly-owned chips for MP3 decoders are in mass production. The Panda system developed by the center is the first complete VLSI CAD system developed in China. Panda provides a series of tools for high-level design, layout, verification, and layout migration. These are touted as similar to the suite of VLSI design tools sold by Cadence Design Systems in the U.S. Seven versions have been released. CIDC has advanced capabilities for testing mixed-signal ICs (with both analog and digital signals), as well as analog or digital VLSI. It purchased the Teradyne A580 mixed-signal test system, the Electroglas EG2001CX automated wafer prober, and TSSI TDS software for design-to-test linking. In combination, these tools enable CIDC to do thorough prototype testing. With government support, CIDC has established itself as a leader in IC design and provides ongoing technical support to seven regional IC design centers. According to CIDC, non-Chinese customers for design services or Panda tools include C-Cubed, S3, Intel, National Semiconductor, Fujitsu, and NEC. 5.3.3.2
Huada Electronic Design Company
In June 2002, CIDC was reconstructed and based on it, a new company named CEC Huada Electronic Design Company (HED) was founded. HED has incorporated the advanced technology, management experience, management and technology talent, equipment, market, and channels of CIDC into a large-scale integrated IC operation, including design, system application development, and design tool development. Represented products include IC card CPUs, EDA, wireless communication CPUs, digital audio/video solutions development, and ASIC design. HED fully owns its intellectual property and is also a strong competitor in digital set top boxes (STB). In 2005, it had a full series of STB products for handling satellite, cable, and ground transmission. It is the STB solution and CPU provider for most domestic STB 34 35
Reuters, “China Emerging as Chip Design Center,” August 2005, http:// www.news.com, August 2005 China Electronics Industry Yearbook, 1999, Electronics Industry Publisher, Beijing, China (in Chinese)
Semiconductors
107
manufacturers. Tens of millions of STBs with HED’s CPUs inside are used throughout the world. In wireless LAN products, HED provides chipsets for 802.11a/b/g standards, and in early 2004, HED became a member of China Broadband Wireless IP Standard workgroup. HED presented a new generation of the Zeni Electronic Design Automation system. It provides a design platform for full customer design and analog-digital-mixed signal design. It is an integrated design environment including a schematic editor, circuit simulator, schematic-driven layout generator, layout editor and verification tool, and signal integrity analysis tool in one common database.36 5.3.3.3
The National Engineering Center for ASIC Design
The National Engineering Center for ASIC Design (NECFAD) is a Chinese national design base located in Beijing. It was previously the Microelectronics Design Center of the Institute of Automation, Chinese Academy of Sciences. Its focus is on academic engineering research of IC analysis and design methods, and on engineering development of advanced IC analysis systems. It also provides business solutions for IC design and analysis projects. Based on the technology accumulation of the Institute of Automation, an IC analysis system has been developed by the center (version 1.0 and 2.0) that is famous for its unique analysis method, high efficiency, and accurate results. It has been used by many IC design companies and received an award from the government. A more advanced version that can automatically analyze submicron and deep-submicron integrated circuits is also under development. The new version incorporates graphic processing, mode recognition, computer graphics, artificial intelligence, and IC design methods.37 5.3.3.4
Other IC Design Organizations
In December 1998, Guo Wei Electronics Co., Ltd., was founded through a joint investment of the State Development and Investment Corp. and the Shenzhen Advanced Science Enterprise Group. The company develops video frequency compressing products and 0.35 to 0.8 µm 8-inch silicon chips.38 Shanghai Integrated Circuit Design Industrial Center (ICC) was opened in 2000 under the joint auspices of China’s Ministry of Science and Technology and the Shanghai municipal government. It is the first Chinese industrial park dedicated to IC design.39 The local government initially invested US$12M in the park’s construction, which includes more than 19,974 m2 of office space. ICC also offers amenities designed to attract startups, including facilities equipped with the latest tools, workstations, and test equipment. The center also offers design houses and universities a multi-project wafer-processing capability that handles many designs with similar processing equipment. The approach aims to reduce layout and foundry costs for the prototype and low-volume products developed by local designers. Thirteen design houses have moved to the center. The total IC and system revenues are projected to reach US$250M by 2005.40 Shanghai Jiaotong University developed China’s first DSP chip, called Hisys eDSP21600. This 16-bit DSP was produced at the Chinese Foundry Semiconductor Manufacturing International Corporation on its 0.18-µm process, packaged by Shanghai-based Global Advanced Packaging Technology and tested by Shanghai ID
36 37 38 39 40
HED, http://www.hed.com.cn/english/Index/Index.asp, accessed December 2005 http://www.chinatech.com.cn/scienceinstitute/national/43.htm, accessed December 2005 CEInet, 1998, http://www1.cei.gov.cn Liu, S., “China to Fund IC Design Complex in Shanghai,” EE Times, 8 March 2000 Ibid
China’s Electronics Industry
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Design Research Center. Hisys can perform 200 MIPS and has a clock rate of 200 MHz, equivalent to those mid-end chips offered by Texas Instruments.
5.4
Major Domestic Semiconductor Manufacturers
Of China’s current total of 330 semiconductor device plants, 36 plants produce ICs, and the rest produce discrete devices. Table 5.7 lists China’s top 10 IC and discrete manufacturing companies in 2004. Several of China’s largest and most advanced IC manufacturers are described in the following sections. Table 5.7: China’s Top 10 Semiconductor Manufacturing Companies in 2004 No. 1 2 3 4 5 6 7 8 9 10
Company Name Semiconductor Manufacturing International Corporation Shanghai Huahong NEC Electronics Co., Ltd. Hejian Technology (Suzhou) Co., Ltd. Shanghai Advanced Semiconductor Manufacture Co., Ltd. Shanghai Grace Semiconductor Manufacture Co., Ltd. SG-NEC Co., Ltd. Wuxi China Resources Microelectronics Co., Ltd. CSMC-Resources Co., Ltd. Jilin Huaxing Electronics Group Co., Ltd. BCD Semiconductor Manufacturing Co., Ltd.
Sales Value (US$M) 918 332 248 142 120 112 95 80 51 49
Chinese facilities are making deals to acquire foreign semiconductor manufacturing equipment, process software, and know-how for both common and state-of-the-art technologies. Although China’s government is encouraging foreign investment as a means to hasten technology advancement, it is working on major projects to lessen its dependence on foreign chip suppliers. 5.4.1
Semiconductor Manufacturing International Corporation
Semiconductor Manufacturing International Corporation (SMIC) is a pure-play IC foundry that offers 0.09 µm to 0.35 µm IC manufacturing services. Established in 2000, SMIC is a Shanghai-based chip contract manufacturer with fabs in Beijing, Tianjin, and Shanghai. The first phase of construction included three fabs: Fab 1, Fab 2, and Fab 3. Trial production utilizing 8-inch 0.25 µm technology began in September 2001. Regular volume production and ramp-up began in early 2002 with an output exceeding 15,000 units per month. Fab 2 produces 7,000 wafers monthly. Fab 3 supports an advanced copper process with a monthly output of 5,000 wafers.41 In May 2003, Fab 1 was one of the two recipients of the “Top Fab of the Year for 2003” award from Semiconductor International, a leading publication in the semiconductor industry according to Reed Business Information.42 By the end of 2003, the company had 4,443 employees.43 In October 2003, SMIC agreed to purchase Motorola’s MOS-17 plant in Tianjin and to finish equipping it. MOS-17 was a Motorola plant for microcontrollers, basic-decision 41
SMIC, http://www.smics.com/website/enVersion/AboutUs/companyoverview.htm# Kessler, D., “Chinese Fab SMIC Outlines Semiconductor Plans,” The Inquirer, 27 November 2002, http://www.theinquirer.net/?article=6427 43 “SMIC Files for US$714M IPO,” Electronic News Online, February 2004, http://www.reed-electronics.com/electronicnews/article/CA381242?pubdate=02percent2F08 percent2F2004 42
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chips used in devices ranging from toasters to auto-engine computers.44 This 300 mm (12 inch) wafer, 0.13 µm fab plant gave SMIC state-of-the-art chip manufacturing. The purchase was made in January 2004, and later the factory within SMIC was named Fab 7. Fab 7, located in the Xiqing Economic Development Area, has a total floor space of 73,182 square meters, including approximately 8,492 m2 of production cleanroom area. As of 31 December 2004, Fab 7 had a capacity of 14,182 wafers per month. SMIC opened its first 12-inch fab, Fab 4, in September 2004, the first of its kind in mainland China. Fab 4 occupies 180,000 square meters, including 18,000 m2 of cleanroom. Fab 4 now is producing DRAMs for Infineon Technologies and Elpida Memory using 0.11 and 0.10-µm process technologies.45 SMIC is now setting up two more production lines in Beijing and three 8-inch chip production lines in Shanghai, with a total investment of US$10B. SMIC’s technology capabilities include logic, mixed-signal/RF, high-voltage circuits, system-on-chip, and embedded and other memories, LCoS and CIS among them. Key to SMIC’s rapid technology development and excellent fab management is a strong R&D team of experienced engineers from North America, Europe, and Asia, and a network of leading international technology and manufacturing partners. More than just a wafer foundry, SMIC provides a full suite of value-added services that include design services, mask-making, IC manufacturing, and testing. Packaging and final testing are offered through third-party providers. With strong internal offerings and collaboration with a global network of design services, IP, library and EDA providers, SMIC offers its customers wide-ranging and flexible design support. SMIC’s mask operation is one of China’s most advanced, with 0.09 µm to 0.35 µm capabilities and a testing facility for logic, mixed-signal, and memory devices. All SMIC Shanghai fabs obtained ISO9001 certification within 7 months after risk production commenced with zero-defect performance. SMIC Shanghai has also been certified to the ISO14001 standard for its efforts to help protect the environment, and to OHSAS18001 for its commitment to employee health and safety. In February 2004, SMIC also attained ISO/TS16949 certification for automotive applications and the continuous improvement of device quality and reliability. In December 2005, SMIC announced the availability of a 0.18 µm Electrically Erasable Programmable Read-Only Memory (EEPROM) process technology for customers worldwide. To provide a total package solution, SMIC also announced that its internal Design Service Division has developed an embedded EEPROM IP design platform based on this process technology. In January 2006, Infineon and SMIC jointly announced that they will extend their existing cooperation on the production of standard memory chips (DRAMs) into 90 nm technology. Infineon will transfer its leading 90 nm DRAM trench technology and 12-inch production know-how to SMIC, and its 70 nm technology in the future. In return, SMIC will manufacture products in this technology for Infineon. Upon the final qualification of products, which is expected to occur in 3Q in 2006, SMIC will begin to migrate the 300 mm production capacity currently dedicated to Infineon's 110 nm DRAM products to 90 nm.46 SMIC’s sales in the first 6 months of 2005 increased by 29.5 percent to US$528M. Wafer shipments totalled 615,411 8-inch wafer equivalents, up from 375,859 for the same period in 2004. A variety of cooperative projects was going on for SMIC. The CMOS imaging sensor module project with Toppan Printing Co., Ltd., began moving equipment into the Fab 9 facility in August and is scheduled to begin pilot production. The testing and assembly project with United Test and Assembly Center, Ltd., in 44 Huang, L., “SMIC Opens 12-inch Fab in Beijing,” Digitimes, September 2004, http://www.digitimes.com/news/a20040927A2002.html 45 Huang, L., “SMIC Opens 12-inch Fab in Beijing,” Digitimes, September 2004, http://www.digitimes.com/news/a20040927A2002.html 46 SMIC, http://www.smics.com/website/enVersion/Press_Center/pressRelease.jsp, accessed January 2006
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Chengdu also made progress in the same timeframe. A new project for reworking reclaimed wafers into solar power modules was taking off in the new Fab 10 facility.47 5.4.2
Shanghai Hua Hong (Group) Co., Ltd.
China Electronics Company (CEC), Shanghai Juishi Company, and Shanghai Instruments Group founded Shanghai Hua Hong (Group) Co., Ltd., in 1996. The company was incorporated in April 1996 to undertake Project 909, a key state project, with a registered capital of US$603M. In January 1999, the company was renamed Shanghai Hua Hong (Group) Co., Ltd. It consists of six wholly-owned subsidiaries: Shanghai Hua Hong NEC Electronics Co., Ltd., Beijing Hua Hong IC Design Co., Ltd., Shanghai Hua Hong IC Co., Ltd., Shanghai Hua Hong International (USA) Co., Ltd., Shanghai Hong Ri International Electronics Co., Ltd., and Shanghai Hua Hong-Ji Tong Smart Card System Co., Ltd.48 Hua Hong Group owns four production lines: 8-inch, 6-inch, 5-inch and 4-inch chip. Its core enterprise is Shanghai Hua Hong-NEC Electronics Co., Ltd., established by joining Hua Hong Group, NECT Japan, and Jazz Newport Fab LLC America. Shanghai Belling Joint-stock Co., Ltd., under the direction of Hua Hong Group, was the first corporation listed in the Chinese stock market for the microelectronics industry. Hua Hong Group not only possesses top-ranking IC manufacturing technology, but also a group of international, professionally trained administrators who support Hua Hong’s effort to maintain steady development in the future. The main operations of the company include designing ICs and manufacturing chips of various feature sizes, including 2 µm, 1 µm, 0.8 µm, 0.6 µm to 0.35 µm, 0.24 µm, and 0.18 µm. The company’s main products include IC card system application products, such as ID cards, social security cards, all-in-one bus traveling cards, automatic ticket checking systems for railway traveling, bus electronics commutation tickets, purchasing systems in shops, and IC card readers. They also make telecommunications products, such as specialized telecommunications circuits, CODEC, ADSL circuits, ammeter circuits, MCU circuits, SIM cards, and super telephone number cards for mobile telecommunications customers. Shanghai Hong Ri International Electronics Co., Ltd., was established in coordination with National Project 909. Hong Ri is a joint venture funded by Shanghai Hua Hong (Group) Co., Ltd., and Tomen Japan, which undertakes the task of obtaining wafer processing orders for Hua Hong and expands both domestic and overseas markets for Hua Hong Products. Shanghai Hua Hong International (USA) Co., Ltd., was established in 1997 in Silicon Valley. The major business of Hua Hong International (USA) Co., Ltd., is to provide overseas processing orders for the integrated circuit production line of Hua Hong Group. Hua Hong also takes advantage of its Silicon Valley location to collect information on market trends and international IC technology. This location also helps in recruiting. Shanghai Hua Hong - Ji Tong Smart Card System Co., Ltd., was established by Shanghai Hua Hong (Group) Co., Ltd. It mainly deals with the research, designation, and manufacture of IC card systems and IC reading devices. Shanghai Hua Hong NEC Electronics Co., Ltd., was jointly funded by Shanghai Hua Hong (Group) Co., Ltd., and Nippon Electronics Co., Ltd. (NEC). Hua Hong NEC was established in 1997, with registered capital of US$700M. As a vital step in the Ninth FYP Project 909 to establish an advanced semiconductor industry in China, the Chinese government selected NEC in October 1996 as a joint venture partner to design, 47 “SMIC Sales Up, Profits Down,” Electronic News, http:// www.reed-electronics.com, accessed 26 September 2005 48 Shanghai Hua Hong, 2000, http://www.hhnec.com
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manufacture, and market memory and logic semiconductors using 0.35 µm process (and perhaps lower) technologies.49 The Hua Hong plant has 62,000 m2 for manufacturing and 5,000 m2 for clean room processing. The fab was built in Pudong, Shanghai, at a total investment of about US$1.2B. NEC holds 28.6 percent of the total, and Shanghai Hua Hong Group Co., Ltd.’s share is 71.4 percent. There are over 700 employees. The fab started production at the beginning of 1999 with a capacity of 10,000 8-inch wafers a month for memory and logic ICs. At the end of 2000, the joint-venture operation was upgraded to 0.25 µm processing equipment from 0.35 µm, enabling the fab to produce 128-Mbit DRAMs. NEC Corp. has received permission from the Japanese government for the upgrade.50 All of the DRAMs were to be exported to Japan. As part of the agreement, NEC is establishing a working partnership with MII through which NEC can enter into other businesses in China. Beijing Hua Hong IC Design Co., Ltd., was established in 1998 between Beijing Electronic Information Industry (Group) Co., Ltd., and Shanghai Hua Hong (Group) Co., Ltd. In order to learn about advanced integrated circuit manufacture and management and to expand its overseas market, Beijing Hua Hong IC Design Co., Ltd., has shared an investment of US$30M with NEC to establish Beijing NEC IC Design Co., Ltd. Sixty percent of the overall investment in the company is owned by NEC and its affiliates, including Shougang NEC. Beijing NEC IC Design Co., Ltd., aimed to provide Project 909 with 200 kinds of ICs and 20,000 units of 8-inch silicon chips by 2001.51 The focus has been on designing microcomputers, ASICs, IC cards, and other semiconductor products for use in applications in digital video and still cameras, consumer electronics, and mobile communications equipment. In addition, SoC devices are also being designed by the joint venture. Devices designed by the company are produced at Shougang NEC or Shanghai Hua Hong NEC. Shanghai Hua Hong IC Co., Ltd., is a research and design company for integrated circuit products, funded by Shanghai Hua Hong (Group) Co., Ltd., Shanghai Institute of Metallurgy Research, and Fudan University. Equipped with advanced integrated circuit computer-aided design tools, the company mainly deals with research and design for advanced integrated circuit products, including IC card chipsets, chipsets for telecommunications products, and MCUs for consumer products. 5.4.3
Hejian Technology (Suzhou)52
Hejian Technology (Suzhou) Co., Ltd., (HJTC) is a primary foundry service provider located in the modernized Suzhou Industrial Park. Hejian set up its first foundry fab with an investment of over US$1.6B in 2001. Hejian’s business plan is to form a supply chain with numerous companies in the IC industry in the Suzhou area. In May 2003, the first 8-inch wafer started. By 2005, Hejian was producing 60,000 wafers per month using both 0.25 µm and 0.18 µm process technology. HJTC’s 0.18 µm platform supports rich silicon process technology, comprehensive IP, and free library. HJTC’s time-to-market focused foundry services include front-end design, masking, prototyping services, assembly, and test. Hejian plans to set up multiple foundry fabs in 10 years with a total investment exceeding US$10B .
49
NEC, “NEC Signs Contract for China’s Largest Semiconductor Project,” News Release, May 1997, http://www.nec.co.jp/english/today/newsrel/9705/2801.html 50 Robertson, J., “NEC’s Shanghai Fab Set to Crank Out 128-Mbit DRAMs,” Semiconductor Business News, 29 March 2000, http://www.semibiznews.com/story/OEG20000329S0026 51 China Economic Information, Net IT News, September 1998 52 Hejian Technology, http://www.hjtc.com.cn, accessed January 2006
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Advanced Semiconductor Manufacturing Corporation
Advanced Semiconductor Manufacturing Corporation of Shanghai (ASMC) was established in 1988 as a joint venture between Philips NV of the Netherlands and a group of Chinese investors. Northern Telecom, Ltd., (Nortel) of Canada joined the partnership in 1995, and its technology was the basis for ASMC’s second line. However, in 2000 Nortel dropped out of the partnership. ASMC, like Shanghai Belling, is located in the Cao-He-Jing high-technology park in southwestern Shanghai, which offers tax-free exports. The company draws most of its technical staff from overseas and Fudan and Jiaotong Universities in Shanghai, two of China’s premier universities. It employs over 450 people. As of October 2004, the company had three major fabs. Fab 1 is a Class 10 wafer fab equipped to produce 5-inch and 6-inch wafers down to 1.5 µm line width. At full capacity, the facility can manufacture 35,000 5-inch wafers and 2,500 6-inch wafers per month. Fab 2 is a Class 1 wafer fab equipped to produce 6-inch wafers down to 0.6 µm line width. At full capacity, the facility can manufacture 35,000 6-inch wafers per month. Fab 3 is a class 1 wafer fab equipped to produce 8-inch wafers down to 0.25 µm line width. At full capacity, the facility can manufacture 30,000 8-inch wafers per month. ASMC started strictly as a foundry and did not sell ICs of its own design. ASMC serviced IC manufacturers whose own fabrication lines were at capacity, and so-called “fabless” semiconductor companies. Although contracted fabrication is still its primary market, ASMC is working on coordinating design, assembly, and testing of its own products. In 2004, ASMC started offering contract manufacturing services through which the company makes semiconductors on behalf of other chip companies. ASMC achieved ISO 9002 certification in January 1995 and QS-9000 certification in February 1997, and it became the first ISO14001 certificated enterprise in the semiconductor manufacturing field in China in August 1998. ASMC’s Design Service Alliance offers a diversity of expertise, including system-to-RTL design, RTL-to-GDS2 implementation, IP integration, mixed-signal/ analog block design and customization, full chip placement and routing, and full custom layout implementation all the way to one-stop turnkey services. Supporting ASMC’s fab activities are its test services for memory, logic, and mixed devices and ASMC’s backend services for grinding and sawing. Test services range from test program development to wafer probing, failure analysis, and reliability testing. Backend services range from grinding to sawing. The test and backend facility is equipped with sophisticated equipment that can address specific customer needs such as high-voltage probing, low-current probing, multi-die probing, very thin wafer grinding, very small die sawing, and advanced automation features. 5.4.5
Grace Semiconductor Manufacturing Corporation, Ltd.
Shanghai Grace Semiconductor Manufacturing Corporation (GSMC) (Chinese name: Hong Li) was founded in 2000 by Jiang Mianheng, the son of China’s former President Jiang Zemin and vice-president of the Chinese Academy of Sciences, and by Winston Wang, the son of Wang Yung-ching, Chairman of Formosa Plastics. The company’s initial investment was US$1.63B for four plants in Zhangjiang Hi-Tech Park in Shanghai’s Pudong development zone. It was the largest overseas investment in Shanghai Pudong at the time. Since Grace’s opening in 2003, Fab 1A (8-inch line) has been in full production. It reached a monthly capacity of 27,000 8-inch wafers in the second half of 2004. Shanghai Grace has licensed its sub-micron IC technology from Japan’s Oki Electric Industry Co., Ltd. Products include logic, flash, SRAM, mask ROM, mixed signal, RF, and high-voltage devices. GSMC had 0.13 µm full copper technology in the second half of 2004.
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One of the first investors in Shanghai, GSMC has partnered in non-volatile memory technology with Silicon Storage Technology, Inc. (SST) of California, and has secured a significant portion of the total capacity from Shanghai GSMC. In order to expedite the adoption of SST’s Super Flash technology at Shanghai GSMC, SST works concurrently with one of its technology licenses in Japan to facilitate the transfer of a logic process and Super Flash to Shanghai GSMC. IDC designed Grace’s fab based on 12-inch wafer specifications. The two fabs were constructed at the same time with a total manufacturing area of 34,000 m2 and a clean room area of 24,000 m2. This unique design not only allows the buildings to sustain a Richter eight-grade earthquake, but can also provide micro-vibration protection of technology nodes as small as 0.065 µm. 5.4.6
Shougang NEC Electronics Corporation
Shougang NEC, a joint venture of Japan’s NEC Corporation and the Capital Iron and Steel Company of Beijing (Shougang), was founded in Beijing in 1991. This company designs, fabricates, assembles, and tests a variety of ICs, including linear devices, memories, microprocessors, gate arrays, and communications chips. A new manufacturing plant, office, and dormitory building were completed in October 1993. Assembly operations started in 1994, and wafer fabrication began in March 1995. The company employs over 800 people. Most of the engineers were trained in Japan. The company has an annual profit of US$8.7M. NEC provides production and management technology, including advanced LSI circuit diffusion, packaging production lines, and testing equipment. The Chinese share in the joint venture started at 60 percent and has decreased to 49.7 percent; NEC’s stake in the joint venture has risen from 40 to 50.3 percent. Total initial investment was about US$240M for 4-bit microcontrollers and 4-Mbit and 16-Mbit assembly operations. A further investment of over US$100M was made for the production of 0.5 µm devices for 16-Mbit DRAMs.53,54 The ICs produced by Shougang NEC have been used in remote controls for color TVs, air conditioners, VCDs, IC cards, clocks, and palm PCs. In 1999, Shougang NEC invested around US$100M to upgrade its wafer processing technology from 0.5 µm to 0.35 µm. In 2001, monthly production volume was raised to 15,000 wafers. Starting in 2000, Shougang NEC planned to construct an 8-inch 0.25 µm wafer processing line, with a monthly capacity of 20,000.55 In parallel, Shougang planned to form another joint venture, named Huaxia Semiconductor Manufacturing Co., Ltd., (HSMC) with companies from Taiwan and the USA. However, this project met with a lot of difficulties. When it was first announced in 2000, it was considered by Capital Iron and Steel and the Beijing municipal government as the premier project for changing Beijing’s supporting industry. The planned investment of US$1.3B was coming from Shougang, the Beijing state-owned Assets Management Co., Ltd., and three U.S. firms--Alpha & Omega Semiconductor (U.S.), Bvi Deborah Semiconductor Company, and Joshua Semiconductor Company--with the remainder in bank loans. In 2001, the IT market crashed and IC market sales decreased as much as 33 percent from 2000. As a result, Bvi Deborah Semiconductor and Joshua Semiconductor left the project. Shougang had to look for alternative partners. Efforts to enlist some Taiwan semiconductor companies failed. In May 2003, the 8-inch line project was discontinued, and the widely reported Huaxia joint venture project did not even launch. In October 2004, Shougang 53 Tsuda, K., “China Pushes Submicron Chip Fabs,” Nikkei Electronics Asia, Vol. 6, No. 2, February 1997, http://www.nikkeibp.com/nea/feb97/febchina.html 54 Lammers, D., “Japan Gaining Inside Track to China’s Chip Market,” EE Times – Headline News (CMP Media, Inc.), 1997, http://pubsys.cmp.com/eet/news/97/ 956news/japan.html 55 Shougang News, Capital Iron and Steel Co., http://www.shougang.com.cn/ (in Chinese)
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announced that they had stopped further investment in IC exploration and that the remaining US$30M would be invested in their steel upgrading projects. Shougang has apparently given up developing its IC fab.56 5.4.7
Wuxi China Resource Microelectronics Co., Ltd. (formerly Hua Jing Electronics Group Corporation)
Hua Jing Electronics Group Corporation is the largest of China’s state-owned semiconductor plants and a subsidiary of China Electronics Corporation (CEC), a holding company that supports China’s electronics industry. It is located about 150 km west of Shanghai in the city of Wuxi in Jiangsu Province. The company specializes in R&D, wafer processing, packaging, and sales and marketing of both integrated circuits and discrete components. It was selected as a key enterprise for government investment during the nation’s Sixth, Seventh, and Eighth FYP periods, and Hua Jing is also listed as one of the 512 large state-owned mainstay enterprises. Hua Jing began with China’s purchase in the early 1980s of a second-hand, turnkey 3-inch line from the United States. Its principal business was the development and manufacture of discrete devices and both bipolar and CMOS integrated circuits, 57 primarily for television sets and audio equipment. The company had a central research institute solely engaged in the research and development of integrated circuits. Nevertheless, Hua Jing relied heavily on the international semiconductor community for technology support. The technology for 125 mm-diameter wafers (5-inch) was obtained from Siemens AG of Germany.58 Support for bipolar technology came from Toshiba Corporation (Japan). Manufacturing software came from Promis Systems (Canada), including the approximately half-million-dollar purchase in September 1996 of Promis’ Manufacturing Executive System software. AT&T helped to construct the 6-inch wafer processing line as a part of the National Project 908.59 As of early 1997, Hua Jing started production of 6-inch CMOS wafers with 0.6 µm design rules, with an annual capacity of 120,000 wafers. In January 1998, Hua Jing completed a technology transfer from Lucent Technologies Microelectronics Group that began in 1993. The agreement between the State Council and Lucent included worker training, processing technology, and related design tools for 150 mm (6-inch), 0.9 µm, single-poly double- metal complementary metal oxide semiconductor wafer technology.60 The IC chips have been applied to the 5ESS systems made by Lucent’s joint venture in Qingdao, Shangdong Province. Lucent has contracted to purchase telecom IC chips from Hua Jing.61 Intel has also licensed Hua Jing as one of its testing and packaging partners for selected chips.62 Chinese authorities intend for Hua Jing to be a “national champion” in the development of the country’s semiconductor industry.63 The Wuxi Hua Jing Expansion Project to upgrade the semiconductor manufacturing facilities and construct the IC research center was one of a handful of national projects considered to be essential to national development. In order to promote system innovation, two subsidiary companies were founded in 2000--Wuxi Hua Jing Microelectronics Co., Ltd., and Wuxi Hua Jing - Gui Ke
56
Sina Tech, http://tech.sina.com.cn/focus/8_chip/index.shtml, 10 January 2006 IEEE, “Chipmaking in China: Snapshots of China,” IEEE Spectrum, December 1995 IEEE, “Chipmaking in China: Snapshots of China,” IEEE Spectrum, December 1995 59 China Electronics Industry Yearbook, 1999, Electronics Industry Publisher, Beijing, China (in Chinese) 60 China Vista, “Lucent to Complete Contract,” 5 March 1998, http://www.chinavista.com/business/news/archive/mar98/mar05-02.html 61 Asia Pulse, 3 April 2000, http:www.asiapulse.com 62 Intel Corporation, “Intel Commitment to China,” Press Releases, May 1998, http://www.intel.se/apac/eng/andygrove/pr0505.htm 63 Howell, T., R., Nuechterlein, Jeffrey, D., and Hester, S. B., Semiconductors in China: Defining American Interests, Semiconductor Industry Association, Dewey Ballantine, 1995 57 58
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Microelectronics Co., Ltd. The primary business of the former is front-end wafer processing of discrete and bipolar devices and production of silicon wafers. Wuxi Hua Jing Microelectronics Co., Ltd., is equipped with China’s best discrete semiconductor component and bipolar circuit round-chip production lines, with respective annual capacities of 600,000 and 250,000 wafers. In 2002, the company had annual revenues of US$88M. Wuxi Hua Jing - Gui Ke was based mainly at the Institute of Design and Test of the MOS Electronic Circuit Factory of the Group Corporation. It focuses on IC design and development. In 2003, Huajing Electronic Group Company reconstructed and changed its name to China Resources Microelectronics (CRM), a listed company in Hong Kong. After reconstruction, CRM has more than seven subsidiaries specializing in management, manufacturing, design, and so on. The management center of CRM in China is Wuxi CRM (WCRM), with its registered capital of US$72M. It has all the supporting facilities needed for semiconductor production, including de-ionized water, an electricity power plant, and supporting gases. It holds the assets of the Wuxi China Resources Assembly Plant and jointly holds the shares of Wuxi China Resources Huajing Microelectronics Co., Ltd., with CRM.64 Wuxi China Resources Huajing Microelectronics Co., Ltd., (CRHM) is another core subsidiary and a national technology enterprise. It produces the famous Huajing brand ICs and discrete devices. CRHM has one 4-inch production line with a monthly production capacity of 50,000 discrete device wafers and one 5-inch 0.8 mm production line with a monthly production capacity of 20,000 bipolar IC wafers, together with an epitaxial growth center and several product-testing lines. It is ranked first among similar domestic enterprises in its production capacity and sales volume. The products designed and produced by CRHM include chips, power transistors, and bipolar ICs. CRHM now supplies over 600 products under 12 major categories, which are used extensively in communications equipment, audio/video equipment, computers, green lighting, various instruments and equipment, automobile electronics, and other applications. It was certified to ISO 9001 in 1993 and to ISO 9001: version 2000 in 2001.65 China Resources Semiconductor (CRS) is a subsidiary specializing in integrated circuit production. Its IC fabrication technology includes Al-gate CMOS, Si-gate CMOS, bipolar, and Bi-CMOS with 1.2 mm process technology and a monthly capacity of 30,000 4-inch wafers. Its major products include ICs, transistors, voltage regulators, high-voltage metal-oxide-semiconductor field-effect transistors (MOSFETs), optoelectronic devices, and transducers. Wuxi China Resources Semico Microelectronics (CRSM) is one of the five largest IC design companies in China, and is the focal point of CRM’s IC design operations. CRSM has an experienced design team with more than 120 talented engineers from home and abroad. Armed with its state-of-the-art SOC design methodology and testing equipment, it has developed 0.25 µm – 0.35 µm and 0.5 µm-0.6 µm design capability for CMOS and Bi-CMOS ICs. Wuxi CR Micro-Assembly Tech., Ltd., (CRMAT) is CRM’s main platform for assembling and packaging its ICs. With advanced technologies introduced from Toshiba, Siemens, and Intel, CRMAT specializes in multi-leadframe, high-density, and power IC packaging. CRMAT provides packaging foundry services to customers in DIP, SDIP, SOP, SSOP, TS, OP, QFP, PLCC and FSIP, as well as customized packaging based on customer specifications. Ultra-thin wafer dicing less than 150 mm and back-grinding and scribing services are also provided. Semicon Microelectronics (Shenzhen) (SMS) is a semiconductor back-end wafer processing enterprise that integrates essential processes such as IC chip testing, wafer scribing, dice sorting, COB packaging, and simple assembly. 64 65
CRM, http://www.huajing.com.cn/english/wcrm.htm, accessed January 2006 CRM, http://www.huajing.com.cn/english/wcrm.htm, accessed January 2006
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Wuxi China Resources Photomask-making Shop (CRPS) is a specialized photomask manufacturer. It is the best among equivalent domestic enterprises with respect to processing technology and production capacity. 5.4.8
Shanghai Belling Stock Holding Co., Ltd.
Shanghai Belling Microelectronics Manufacturing Corporation was the first joint venture in semiconductor manufacturing in China. It was founded in September 1988 by Shanghai Electronics and Operation Instruments Holding Company, Radio Factory 14, and Shanghai Bell Telephone Equipment Manufacturing Company (itself a joint venture with Alcatel Bell, the Belgian branch of Alcatel). The total investment was US$82.4M.66 By 2000, the total assets of the company had reached US$150M. The company successfully issued stock in 1998, the first company in the Chinese IC industry to do so, and changed its name to Shanghai Belling Stock Holding Co., Ltd. Shanghai Hua Hong Group Co., Ltd., holds 38 percent of its shares and ranks as the largest shareholder of Shanghai Belling, followed by Shanghai Bell Co., with 25 percent of the shares. The company has been consistently rated as one of the top 500 foreign-invested enterprises and one of the top 100 electronics enterprises in China. Shanghai Belling is located in Cao He Jing, a well-established high-technology development zone in southwestern Shanghai. It has over 500 employees with about 40 percent engineers and technicians. Its offices are in Xian, Chengdu, Shenzhen, Beijing, and Shanghai (headquarters). The company uses a Western-style, team-oriented management structure. Since its establishment, Shanghai Belling has built up three product categories: (1) specialized integrated circuits for telecommunications (each year up to 10 million chips have been consumed by China’s telecommunications network); (2) chips for IC cards; and (3) chips for intelligent machine control. Most of Shanghai Belling’s revenues come from ICs made for use in the private branch exchanges of Shanghai Bell Telephone, the first switch-maker in China to use locally made circuits. 67 The remainder of the revenues comes from sales of microcontrollers and memory chips. Shanghai Belling has also independently designed and produced many kinds of IC card chips. Shanghai Belling Technical Center is a state-level enterprise technical center. The center was established in January 1995 and has been a leader in China’s integrated circuit design field. The center is responsible for marketing strategy studies, project scheduling, designing and developing new products, research on new designing techniques, processing technologies, and integrating techniques. In 1999, the company spent US$17M to purchase 34 percent of stock shares of Shanghai Advanced Semiconductor Co., Ltd., to expand its wafer processing capacity. Also, the company purchased 25.5 percent of the shares of Shanghai Hong Ri International Electronics Co., Ltd., in order to improve its worldwide sales network. In October 2003, Shanghai Belling joined Shanghai Hua Hong NEC and they built another 8-inch wafer production line for Hua Hong NEC. In 2004, Shanghai Belling listed a production capacity of 75,000 wafers a month and a processing technology of 0.18 µm to 0.15 µm. The sales value of Shanghai Belling in 2004 was US$91M, with a profit of US$5.4M, according to its annual report. In January 2006, Shanghai Belling announced that their mainstream IC products can meet EU’s RoHS standard, limiting the use of lead, cadmium, mercury, polybrominated biphenyls (PBBs), and polybrominated diphenyl ethers (PBDEs), which are environmental pollutants.68
66
Belling Microelectronics Manufacturing Co. Ltd, 1996, http://www.belling.com.cn/ IEEE, “Chipmaking in China: Snapshots of China,” IEEE Spectrum, December 1995 68 EE Times China, http://www.eetchina.com/ART_8800402191_480201_f64e617e.HTM, accessed January 2006 67
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Hua Yue Microelectronics Corporation
Hua Yue Microelectronics Corporation is a large high-tech national enterprise that specializes in the manufacturing of ICs and discrete devices. The company has 1,000 employees, of whom 400 are in science and engineering. It covers an area of 140,000 m2. Hua Yue sells its products on the commercial market.69 Located in the city of Shaoxing, in the southern part of the Yangtse River Delta, it manufactures bipolar ICs for television sets and telephones. From 1995 to 1997, Hua Yue produced 15,000 to 17,000 wafers a month with 3 to 5 µm feature sizes, of which 7,000 were 100 mm in diameter and the rest 75 mm.70,71 The company then expanded its capabilities to include 125 to 150 mm lines, with 1.2 to 2 µm design rules that enabled it to produce about 50 million ICs per year.72,73 In 1998, Hua Yue purchased a 5-inch 2-µm bipolar manufacturing line from Fujitsu dedicated mostly to analog devices.74 This line was put into production with a yield of over 90 percent.75 The company currently owns a 5-inch product line, named Fab 1; a 4-inch product line, Fab 2; a 5-inch MOSFET product line, Fab 3; a testing factory; and complete water, electricity, and gas facilities. The company has a 2 µm process for bipolar, 0.8 µm to 1.2 µm for CMOS, 1.0 µm to 2.0 µm for Bi-CMOS, and the production capacity for 720,000 wafers. The company produces more than 100 products, which mainly cover ICs for TV, acoustics, telephones, special industry controls, and discrete devices. Fab 1, which was established in 1997, is a 5-inch production line and has a 2.0 µm double process for bipolar and 0.8 µm to 1.2 µm CMOS and 1.0 µm to 2.0 µm process technology for Bi-CMOS. The factory adopted the advanced IC product line management mode from Fujitsu and built up a strictly controlled system of management. Fab 1 has passed the ISO9001 Quality Management System and ISO14001 Environment Management System and audits by Fujitsu and Motorola. The process and the equipment engineers of Fab 1 have been trained at Fujitsu. The factory is an open foundry production line and has technology support from the supplier; the main IC manufacturing material is provided by large suppliers with corresponding certificates. Fab 2 is a 4-inch production line that has passed the ISO9001 Quality Management System and ISO14001 Environment System. The factory has a 4 µm process technology for the standard bipolar MOSFET. It is undertaking process research for discrete devices and bipolar power transistors. Fab 3 is a 5-inch production line for MOSFET and special products. The factory purchased the equipment and adopts 1 µm MOSFET process technology from abroad. It has a monthly production capacity of 20,000 wafers but is capable of producing up to 50,000. Hua Yue Testing Factory specializes in analog and digital IC testing. It provides clients with testing services for digital, analog, hybrid signal, memorizer, radio-frequency, and microwave devices, including wafer testing, IC testing, testing program development, and testing program transformation.76
IEEE, “Chipmaking in China: Snapshots of China,” IEEE Spectrum, December 1995 IEEE, “Chipmaking in China: Snapshots of China,” IEEE Spectrum, December 1995 Koo, G. P., “China Seeks World-class Semiconductor Industry,” Channel Magazine, November 1997, http://www.semi.org/Channel/1998/nov/features/china.html 72 Howell, T., Nuechterlein, R., Jeffrey, D., and Hester, S. B., s, Semiconductor Industry Association, Dewey Ballantine, 1995 73 Tsuda, K., “China Pushes Submicron Chip Fabs,” Nikkei Electronics Asia, Vol. 6, No. 2, February 1997, http://www.nikkeibp.com/nea/feb97/febchina.html 74 Liu, S., “Indigenous Design Industry Gains Ground in China,” EE Times, 21 November 1999 75 China Electronics Industry Yearbook, 1999, Electronics Industry Publisher, Beijing, China (in Chinese) 76 Hua Yue Company, http://www.chmc.com.cn/EN/index.asp, accessed January 2006 69 70 71
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5.4.10
Others
In October 2001, Shenchao Semiconductor Manufacturing Co., Ltd., of Shenzhen in the south of China was founded. It started producing 0.25 µm, 8-inch wafers in 2003 with a monthly capacity of 10,000 units. Major shareholders include Shenzhen Shenchao Science and Technology Investment Co., Ltd., (45 percent) owned by the city government, and ALL Technology, Ltd., (55 percent), a strategic company registered by Taiwan Jiandu Company. Mitsubishi-Stone Semiconductor Co., Ltd. (MSSC), is a joint venture of Japan’s Mitsubishi Electric Corporation, Mitsui Co., Ltd., and the Beijing Stone Group Company. The company was founded in 1996 with registered capital of US$35M. Total investment is US$2B, of which the Japanese side holds 70 percent and the Chinese side 30 percent of the shares. The primary products are microcontroller units (MCU), ASICs, and SRAM, with technology goals of 0.28 to 0.35 µm and 8- to 10-inch wafers. The first phase of this project (back-end packaging and testing) went into production in October 1998. The second phase (the semiconductor design center) is in progress, with a projected investment of US$110M.77 The project is expected to produce 210 million ICs. The largest IC project of Zhejiang Province began in May 2002. The investment came from Yuan Tai Science and Technology Corporation of Malaysia. The first phase of the project comprised one 6-inch 0.35 µm product line with a monthly output of 50,000 wafers and five other semiconductor manufacturing support facilities. The total investment was US$270M. The second phase of the project focused on 8-inch 0.25 µm technology, with another investment of over US$300M. Also in Zhejiang Province, the foundation of another project was laid in Ning Bo to build two 6-inch foundries with a monthly output of 30,000 units. The investment amounts to US$220M. In line with China’s investment strategy, one of the country’s largest semiconductor projects was launched in Nanjing’s new High-tech Industrial Development Zone. Nanjing Semiconductor Manufacturing Corporation (NSMC) has accumulated a total of US$360M from domestic and overseas firms, from Singapore, France, the U.S., Japan, Germany, and South Korea. In 2004, NSMC ranked among the country’s major suppliers of semiconductors, optical electronics, and telecommunications devices. Historically, Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest IC foundry, has lagged behind in China; only in 2002 did it decide to enter the mainland business, prompted by its competitors’ swift deployment there and a shortage of resources in Taiwan. TSMC has selected Songjiang Economic Development Zone of Shanghai as the location for its 8-inch IC foundry. The foundry was built in the second half of 2003 and produced 8-inch wafers by the end of 2003.78 TSMC’s decision marks a milestone in the migration of the Taiwan foundry business to the Chinese mainland. United Microelectronics Company (UMC) of Taiwan, the second largest foundry in the world, is also moving to the mainland, seizing the opportunity to surpass Taiwan Semiconductor Manufacturing Company (TSMC). Two foundries using 8-inch wafer fabrication technology are being built by UMC with its mainland partners in Shanghai and Suzhou.
5.5
Involvement of Foreign Capital and Technology
In order to narrow the technological gap between China and other industrial nations, the Chinese government has been inviting foreign companies to manufacture in China. China has set up various technology parks with tax incentives to entice companies. Many 77
Stone Group, 2000, http://www.stone-group.com/ (in Chinese) TSMC Brochure, “TSMC 0.13-µm Technology Platform,” http://www.tsmc.com/download/english/05_literature/0.13-micron_Brochure.pdf 78
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multinational companies have opened offices in China or moved their regional headquarters to big Chinese cities. For example, in August 2005, Phillips Semiconductor announced that it was relocating its regional headquarters from Taipei to Shanghai. The move represents a restructuring of Philips Semiconductor worldwide operations to secure a place on mainland China and become a greater presence in the burgeoning Chinese market. At the same time that China seeks foreign technology transfer, China generally seeks to maintain control over the direction and decision-making of companies operating in China, and this can at times be a problem for foreign companies doing business there. Other problems for foreign companies include lack of adequate protection for intellectual property and inconsistencies between different branches of the Chinese government. For U.S. companies there is the additional problem of working within U.S. laws that govern export of “dual use” products and equipment that could be turned to military purposes considered detrimental to U.S. security interests.79 For a decade now, companies from the United States, Europe, and Asia have been building and equipping factories in China, training engineers and operators, and co-managing manufacturing operations. Companies active in China’s semiconductor industry are all intensely competitive with one another. China is separately purchasing processing equipment from the United States, Japan, and Europe to help expand production capacity. Motorola, Shougang-NEC, and Hua Hong-NEC already have given China some advanced chip-making capabilities. The Chinese government, through the MII, has listed the production of ICs as a priority development item. The Chinese government is eager to seek technology transfer and investment from foreign countries by giving investors preferential treatment and an opportunity to gain the inside track in China’s huge market. In 1998, the Chinese government notified the U.S. Department of Commerce that it was ready to exempt tariffs on imported capital semiconductor equipment capable of making 0.25 µm line technologies.80 In 1999, an agreement was reached by the Chinese government and the U.S. government on China’s entry to the World Trade Organization (WTO). Under the terms of the agreement, China agreed to eliminate all tariffs on semiconductors, computers, and telecom products by 2005 and to adhere to global standards safeguarding intellectual property. China will also remove its requirement that the country’s foreign chip fabs and assembly plants export most of their output.81 After 15 years of negotiation, China completed its accession to the WTO in December 2001. As a result: • China’s 6 to 9 percent tariffs on ICs were eliminated on 1 January 2002. Tariffs as
high as 35 percent on semiconductor equipment and materials were supposed to be eliminated in 2005. • China’s state-owned enterprises will be required to purchase products on commercial terms rather than on a political basis. Chinese cell phone makers will no longer be required to purchase a set percent of their components from local sources. 79
Current U.S. trade policy toward China is to deny export and technology licenses for fabrication equipment that can produce ICs using below-0.35 µm process technology. The controls were relaxed to allow import of more advanced 0.25 µm equipment. The U.S. position is that export controls are needed to prevent the Chinese from making high-tech ICs for missile and nuclear weapons technologies. Compared with the United States, both Japan and Europe have greater freedom to approve the export of advanced semiconductor equipment, since a global system of controls called CoCom (Coordinating Committee on Export Controls) ceased functioning in 1994. 80 Robertson, J., “China Policy Dominates Chip Meeting,” Electronic Buyers’ News, 4 May 1998, http://www.techweb.com 81 Robertson, J., “China Agrees to Eliminate Chip Tariffs,” Electronic Buyers’ News, 22 November 1999, http://www.techweb.com/se/directlink.cgi?EBN19991122S0001
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• Foreign firms will be allowed to open plants in China without agreeing to transfer
technology to Chinese firms or to export a given percentage of their output. • China is supposed to follow international intellectual property protection norms.
China has passed a special law to protect semiconductor topography designs. The United States’ Semiconductor Industry Association (SIA) has been working closely with China’s IC industry to insure China’s successful implementation of its WTO commitments, including national treatment and protection of intellectual property (IP). GATT Article III on national treatment prohibits a WTO member country from engaging in activity that treats domestic producers and products more favorably than imported products. As a result of bilateral talks and negotiations, the “Understanding of Memorandum over the Issue of VAT Refunds” was signed between China and the U.S. in July 2004. In the memorandum, China called off the regulation of “refund over taxation” as of November 2004. The revision was formally executed on April 2005. In addition, the export tax refund rates have been raised. In December 2004, the Ministry of Finance and the State Administration of Taxation issued a document to raise export tax refund rates from 13 percent to 17 percent for certain IT products, including ICs, some discrete devices, and mobile communication stations.
5.6
Intellectual Property Protection Issues
China’s image as a rapidly growing technology producer has clashed with its tawdry reputation as a center for software and content piracy. Several software and entertainment businesses brought their frustrations to the world stage over the illicit copying and selling of intellectual property that took place unabated on the mainland. China is also a major provider of counterfeit goods to the world, with some of the highest reported incidences of counterfeiting. Fabless companies that use simulation tools in their designs could be vulnerable when they port their IP to a foundry. It is easy to reverse engineering designs. Another opportunity to steal IP comes at the back end after the wafers leave the foundry. The opportunity to copy a design of a chip and perform reverse engineering can occur during the assembly and test stages when wafers are probed. In October 2001, China began to implement the “IC Layout Design Protection Regulation.” With China’s entry into the WTO, China has agreed to implement the Agreement on Trade Related Aspects of Intellectual Property Rights upon accession and with no transition period. Computer software and patent protection rules have been revised and improved. IP protection is imperative, not only for foreign enterprises in China, but also for developing China’s semiconductor industry. In China today, semiconductor intellectual property protection involves an increasingly wide range of issues and challenges. According to intellectual property attaché Mark Cohen at the U.S. Embassy in China, China is a different and more challenging intellectual property environment than it was 10 or more years ago.82 While counterfeiting and piracy still remain unsolved problems, China has recognized intellectual property rights as an important element of its own domestic and international trade policies. China’s State Intellectual Property Office has been tasked by the State Council to draft a national intellectual property rights strategy, which should also spark reaction from academics and other government agencies. The attention to intellectual property rights has been highlighted by the vast number of applications to China’s trademark and patent office, among the most rapidly growing in the world and the most active recipient of design patent applications of any country. 82 Cohen, M., “Intellectual Property Protection for Semiconductors in China: Current and Future Challenges,” Semiconductor Industry Association Forum Newsletter, Summer 2005
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For the first time, in 2004, China’s domestic applications for invention patents exceeded those of foreign applicants. The problem for the semiconductor industry spans a wide range of issues, from basic IP protection to enforcement to standard setting and technology transfer. Many companies rely extensively on trade secret laws to protect their confidential data and ensure that their employees do not use their confidential data for the benefit of their competitors. China has the same legal tool. However, it is important to ensure the formality of identifying and protecting trade secrets. As for patent disputes, especially semiconductor layout design infringement actions, China’s experience in this area is still quite limited. China established an administrative layout design enforcement procedure in early 2005, but few relevant cases were reported. China has a long tradition of innovation, and a large pool of technical talent. In this sense, protecting intellectual property is not merely about China implementing WTO obligations, but about stimulating creation and innovation in the sciences and business in China. Without greater IP protection, China’s innovators may not be able to recoup their investments in research and development, and foreign investors may be reluctant to introduce the latest technologies to their Chinese subsidiaries and partners.
5.7
Challenges and Strategies
Bright as its future is, China’s IC industry still has several problems. The gap between supply and demand continues to widen. In 2004, China’s homemade IC products accounted for merely 16 percent of domestic demand. Communication and cooperation between homegrown IC vendors and system equipment vendors are insufficient. Also, most of the IC vendors are small-scale operations that lag far behind leading international vendors. Moreover, China suffers from a lack of intellectual property resources and from poor R&D capability for IC manufacturing processes. It also relies on imports for IC manufacturing equipment and instruments. This is exacerbated because China has an under-supply of high-level qualified IC design professionals. According to Ms. Qi Zhang, Director General of Department of Electronics and IT Products, Ministry of Information Industry (MII), in the next five years:83 • China will establish an IC industry ecosystem that is relatively complete and large
enough to sustain annual growth of about 30 percent. • China will increase annual sales in its IC industry to between US$30B and US$35B
by 2010 with US$5B to US$7.5B generated from 600 to 800 new IC products created annually. IC manufacturing will produce US$7.5B to US$10B annually, and generate US$16B to US$20B for IC packaging and testing. • ICs made in China will make up about 8 percent of the global IC market by 2010. • The 8-inch and 12-inch, 0.13 to 0.09 µm process will be mainstream by 2010. • China will foster five to 10 IC design vendors with sales revenue topping US$125M and make breakthroughs in key technologies, including mobile communications, computer networks, digital audio and video products, and smart cards.
83
Wang, H., Reed Electronics, Nov. 2005, “China Tackles Problems in Aggressive Five-Year Plan,” http://www.reed-electronics.com/moversandshakers/article/CA6277464.html, accessed February 2006
Chapter 6 Electronic Manufacturing Service Industries
Electronics manufacturing services (EMS) include device-level electronic packaging, printed circuit board (PCB) fabrication, and printed circuit board assembly. In the past decade, China has made substantial progress in all three areas. This accelerated development can be attributed to the joint involvement of the Chinese government, international electronics corporations, and domestic manufacturing facilities. This chapter introduces these core segments of EMS in China.
6.1
China’s Device-Level Electronic Packaging Industry
The primary aims of device-level electronic packaging are to protect the component from environmental contamination, to provide communication links with other components, to facilitate handling and testing, and to remove heat generated during operation. Many companies set up packaging operations in China because of lower intellectual and financial capital barriers, government incentives, and the availability of low cost labor. Over a period of time the electronics packaging sector in China has progressed at an accelerated pace, and China now has a complete supply chain to manufacture electronics ranging from semiconductor devices to complete systems. 6.1.1
Overview
The device-level electronic packaging industry in China has developed rapidly since the 1980s, from labor-intensive simple components to highly specialized packages and hybrid and multi-chip modules. While pre-1990s assembly operations located in China focused on low-end package assembly, foreign investment shifted the focus to advanced packages such as ball- grid arrays (BGAs), chip-scale packages (CSPs), and flip-chip.1 Currently, foreign companies that build a plant in China are exempt from taxes for 5 years and pay only half the tax for the second 5 years. All electronics imports are taxed at 17 percent, but domestically produced products sold in China are taxed at only 3 percent. Local suppliers only meet 20 percent of China’s domestic demand. These factors have led to China’s continuously growing electronics industry.2, 3
1 Vardaman, E. J., “Setting the Foundations – A Look at China’s Infrastructure Development for the Semiconductor Industry,” Circuits Assembly, May 2003, p. 18-19 2 Tsuda, K., “Semiconductor Fabs Flock To Shanghai,” Nikkei Electronics Asia, May 2002, http://www.nikkeibp.asiabiztech.com/nea/200205/srep_183172.html. 3 Liu, S., “China’s Chip Market Rebounds from 2001 Slowdown,” 18 September 2002, http://www.eetimes.com/semi/news/OEG20020918S0043.
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The Chinese government’s Tenth Five Year Plan (FYP) (2001-2005) estimated that integrated circuit (IC) production would reach 20 billion pieces, with sales of US$10B by 2005, and 50 billion pieces, with US$20B sales, by 2010. The sales value of China’s packaging sector in 2004 was US$3.51B, up by 15.2 percent over 2003. By the end of 2004, the number of IC package and test enterprises has amounted to 108, with a total packaging ability of 23 billion chips per year. Recognizing that China has become a major center for advanced microelectronics, many overseas companies have already opened, or are planning to open, electronic packaging facilities in China. For example, Amkor, the world’s largest IC packaging house, has opened a semiconductor assembly and test manufacturing facility in the Free Trade Zone, Pudong, Shanghai. This action signals Amkor’s commitment to diversifying its operational base by expanding into China.4 Amkor has followed up by joining United Test and Assembly Center Limited (UTAC) to perform more seamless test and assembly.5 The main barrier for foreign companies has been overcoming distribution problems. Instead of manufacturing in Malaysia and importing into China, Dell Corporation opened a manufacturing plant in the city of Xiamen, in the south of China. This allowed easier distribution and possible exemption from the 17 percent import tax. In addition to its products, the company offers comprehensive customer services that can compete with local PC companies.6 Taiwanese semiconductor testing and chip-packaging specialist ChipMOS Technologies completed construction on its new IC packaging and testing factories in Shanghai in July 2005. The facility is fully operational. The manufacturing space is about 30,000 m2 and has more than 500 employees. The Shanghai facility currently provides IC packaging and testing for memory and liquid crystal display (LCD) driver semiconductors.7 6.1.2
Foreign Manufacturers
Foreign companies with packaging plants in China include ACE Semiconductor Shanghai, Alphatec Electronics Shanghai, Amkor, STATS ChipPAC Shanghai, GEM Services, Grace Advanced Packaging Technology, Hua Yue Microelectronics, IBM, Intel, Mitsubishi Stone Semiconductor, Motorola (China) Electronics, Nantong Fujitsu Microelectronics, Pantronix China, Philips, Platane Advanced Technology, Samsung Electronics (Suzhou) Semiconductor, Shenzhen STS Microelectronics, Shougang NEC Electronics, and the Wuxi Huazhi Semiconductor Co. The locations of major foreign production sites are predominantly Shanghai and Jiangsu, Guandong, and Beijing and Tianjin. STATS ChipPAC is a major U.S. assembly plant with chip packaging facilities in Shanghai. STATS ChipPAC Shanghai offers high-volume, low-cost turnkey solutions, including wafer probe, assembly, test, and distribution. A new 27,871 m2 facility is presently being built next to STATS ChipPAC’s existing 39,948 m2 facility in the Qingpu District of Shanghai. Building construction began in the third quarter of 2005, with a targeted completion of the factory in mid 2006. In addition to the planned floor space expansion, STATS ChipPAC has been rapidly building its technology base in China with advanced die attach and wirebond processes, advanced mold processes, film die attach, and 300 mm wafers thinning down to 4 mm. With high-volume production experience in three-
4
Amkor Technology, “Amkor Technology China Manufacturing Facility Brochure,” 28 September 2002, http://www.amkor.com/services/assembly_services/index.cfm 5 PRNewswire, “Amkor Forms China Test Alliance with UTAC,” eeDesign, 5 August 2003, http://www.eedesign.com 6 Einhorn, B., “Foreign Rivals vs. the Chinese: If You Can’t Beat ‘em…,” 15 February 1999, http://www.businessweek.com/1999/99_07/b3616101.htm 7 ChipMOS Technologies Ltd., http://www.chipmos.com.tw/Testing/TestingDetail.asp?ref_Id=98&Id=112
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dimensional (3D) stacking and system-in-package (SiP), STATS ChipPAC Shanghai is one of the most advanced integrated circuit subcontractors in China.8 Intel Technology (China), Ltd., was founded in Shanghai in November 1996 with an investment of US$198M, of which US$68M was registered capital. Full commercial operation began in February 1998. This is Intel’s third factory in Asia and its fourth assembly and testing plant worldwide. The plant is primarily engaged in the assembly and testing of flash memory. In 1999, in terms of export volume, the company was ranked first among all foreign-invested companies in Shanghai. Expansion of the phase-one project and construction of a phase-two project kicked off in 2001, with an added investment reaching US$300M (a total of US$500M invested in the Shanghai plant). The increased money was to be used to construct a new final assembly line and test operations for Intel’s new 845 chip sets, which are used with Pentium 4 processors.9 In April 2003, Intel opened a US$500M plant. The construction of a second plant for most advanced semiconductor assembly and testing in Chengdu has begun with production scheduled to begin in early 2007.10 In 2005 Intel Corporation established Asia-Pacific R&D, Ltd., in China based in Shanghai’s Zizhu Science Park, with a focus on product development and platform-level innovations from all Intel product and technology groups. Intel is planning for Asia-Pacific R&D, Ltd., to employ more than 1,000 employees by the end of 2006.11 According to Semiconductor Business News, IBM has invested US$300M to build an organic chip packaging manufacturing facility in Shanghai. This facility will produce electronic cards and high-technology chip carriers incorporating IBM’s leading-edge packaging technologies, proprietary surface laminar circuitry (SLC), and hyper BGA.12 SLC is a surface-mount-like technology that increases the density of printed circuit boards; HyperBGA is a laminate ball-grid array-based flip-chip carrier that combines the advantages of various flip-chip packaging technologies with polytetrafluoroethylene-based laminates.13 These technologies will improve signal integrity and distribution characteristics in a device. They are used in wired and wireless networking applications, web servers, and pervasive computing market segments. Motorola has been the largest foreign investor in China’s electronics industry, with an investment to date of US$3.4B. Motorola has also transferred significant technology to China. For example, the company sold its Tianjin 0.13-micron, 12-inch wafer factory to Semiconductor Manufacturing International in Shanghai as part of a proposed spin-off of its US$4.8B semiconductor business. So far, Motorola has retained its assembly and test plant and packaging plant, employing 1,200 workers.14 National Semiconductor Corp. has built its first Chinese manufacturing facility in the Suzhou Industrial Park. The plant started operations in March 2004 with 500 employees. The semiconductor assembly and test facility includes three buildings with 51,800 m2 of total floor space, and is located about 80 km west of Shanghai. The facility provides highquality SOIC, TO, and other package products for customer displays, wireless, personal computers, and servers.15 Substrate Technologies Incorporated (STI) has been developing and producing a new class of substrates that could accelerate the development of true system-in-packaging (SIP) 8 STATS ChipPAC Ltd., “STATS ChipPAC Rapidly Expanding Capacity and Technology Portfolio in China,” http://www.statschippac.com/en-US/STATSChipPAC/NewsCenter/PressReleases/STATSChipPAC 9 Silicon Strategies, “Intel Investing US$302 M in China Packaging Plant,” 21 September 2001, http://www.siliconstrategies.com/story/OEG20010921S0010 10 Intel Website, 2004, http://www.intel.com/jobs/china/ 11 Intel Corporation, “Intel Expands Research and Development in China”, http://www.intel.com/pressroom /archive/releases/20050915corp_b.htm 12 LaPedus, M., “IBM Announces Advanced Chip Packaging Plant in China,” Semiconductor Business News, 26 October 2000, http://www.siliconstrategies.com/story/OEG20001026S0055 13 Ladendorf, K., “Motorola Will Sell Chip Plant in China,” http://www.statesman.com 14 Ladendorf, K., “Motorola Will Sell Chip Plant in China,” http://www.statesman.com 15 National Semiconductor Co., http://www.national.com/company/pressroom/pages/suzhou.html
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products.16 Asat Holdings, Ltd., has broken ground on a new IC packaging and test plant in Shenzhen, near its headquarters in Hong Kong. The plant produces several types of advanced packages, including BGA, chip-scale, leaded, and other products. Japanese investors have also entered the Chinese electronics packaging arena. Mitsubishi Electric Corp. has a joint venture with Stone Semiconductor in Beijing-Mitsubishi Stone Semiconductor Co., Ltd. Mitsubishi announced its intention to increase its production capability for semiconductors to 35 million units in the first quarter of 2004. In 2003 alone, Mitsubishi upgraded its capacity from 16 to 20 million units. Mitsubishi has completed the first phase of its venture in semiconductor back-end packaging and testing and is currently aiming to achieve its second goal of constructing an R&D center in Beijing. The R&D center is to assist the company’s North China microelectronics base. Mitsubishi Stone Semiconductor is a cooperative undertaking of Mitsubishi Electric, the Beijing Stone Group, and Mitsui. This alliance is committed to manufacturing ASICs and SRAMs used in household appliances, computers, mobile phones, communication products, and other portable designs.17 In 2001, ChipPAC initiated production in China with its chip-scale package EconoCSPsTM. To support the needs of its cell phone manufacturers, ChipPAC developed a full product pipeline and is in the process of qualifying a variety of chip-scale packages ranging from 1.2-mm thick same die stacked to those incorporating three and four chips in the same CSP. The company also has expanded its products in China to address consumer products, such as DVDs with packages QFP and TQFP, and the analog market with SSOP, TSSOP, and other SOIC packages. All of these products are supported with test services to support the computer industry, which had been growing at 23 percent compound annual growth rate (CAGR) in China compared to a projected worldwide growth of less than 10 percent. Other investments are being made in the area of advanced packages and innovative applications, such as moving BGA technology (the PBGA package process is a copy of the Korea plant) into China to package and test PC graphic and chipset devices.18,19 6.1.3
Domestic Manufacturers
Major domestic semiconductor companies in China include the Hua Jing Electronics Groups, Shanghai Belling Stock Holding Co., Ltd., Jiangsu Changjiang Electronics Technology Co., Ltd, Advanced Semiconductor Manufacturing Co. of Shanghai, Hua Yue Microelectronics Corp., Shougang NEC Electronics Corp., Shanghai Belling, Hua Jing Electronics Group, and Shougang NEC. Three companies reached or exceeded the capacity of a billion chips per year, and 20 companies had an annual sales value over US$12.38M. Table 6.1 gives China’s top 10 package/assembly/test companies by sales value in 2004. Major projects to improve packaging and assembly technology under China’s FYP included joint ventures with Mitsubishi in Beijing (US$90M), with SCG Thomason in Shenzhen (US$78M), and with Alphatec in Shanghai (US$75M). While North American electronics manufacturing services companies flock to China, China’s contractors are setting up foreign sales offices to drum up business from major original equipment manufacturers (OEMs). For example, Nam Tai Electronics, Ltd., an electronics packaging company in Shenzhen, has a sales office in California.20 16
LaPedus, M., “STI Unveils Breakthrough IC/Packaging Substrates,” Semiconductor Business News, 12 July 2002, http://www.siliconstrategies.com/story/OEG20020712S0057 17 Mitsubishi Electric, “Mitsubishi Expands Production Capacity for Semiconductors,” 31 January 2002, www.mitsubishielectric.com 18 ChipPAC, “ChipPAC and Grace Semiconductor Announce Alliance in China,” 26 March 2002, http://investor.chippac.com/news/20020326-75336.cfm 19 ChipPAC, “ChipPAC Ramps Production in China,” 14 July 2003, http://investor.chippac.com/releases.cfm 20 Serant, C., “Chinese EMS Firms Set Up Shop in U.S.,” EBN, 8 June 2001, http://www.ebnews.com/printableArticle?doc_id=OEG20010608S0082
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Table 6.1: China’s Top 10 Package/Assembly/Test Companies by Sales Value in 2004 No. 1 2 3 4 5 6 7 8 9 10
Company Name Freescale Semiconductor (China) Co., Ltd. RF Micro Devices (Beijing) Co., Ltd. Renesas Stones IC Co., Ltd. Intel Products (Shanghai) Co., Ltd. Nantong Fujitsu Microelectronics Co., Ltd. Leshang Radio Co., Ltd. Jiangsu Changdian Technology Co., Ltd. Shanghai Matsushita Semiconductor Co., Ltd. Shenzhen STS Microelectronics Co., Ltd. STATS ChipPAC Ltd.
Sales Value (US$M) 1002 319 233 197 179 165 147 106 98 96
The government also plans to support 5 to 6 IC packaging companies, and enable them to attain between half and one billion units a year in production. These facilities are mainly located in the Yangtze triangle (Bohai and its surrounding areas, including Beijing, Tianjin, and Shandong) and the Zhujiang triangle. 6.1.4
Adopted Technologies and Levels
The major electronics packaging technologies include plastic packaging, metal packaging, hybrid microcircuit packaging, and high-density packaging. In 1996, plastic packaging constituted over 95 percent of the total packaging in China. There were more than 1,000 manufacturers of plastic packages in mainland China. Many of them were smallor medium-scale. Many manufacturers had expanded their production due to the rapidly increasing demand of the telecom and consumer electronics industries. These manufacturers produce low-end products compared with foreign packaging companies. Their plastic packages were sold at a price as low as half that of the plastic parts made overseas, which made them competitive in the market. These local companies are also trying to improve their technology and their products’ reliability and quality to meet international standards.21 Low-cost metal packages are made for hybrid ICs, optoelectronic devices, and selected discrete devices. The Chinese demand for metal packages is 2 to 4 billion per year. In China, metal-ceramic packages have been developed for microwave and millimeter wave discrete devices. Directions for development are mainly towards high-frequency, highpower, and low-noise devices. Most of these are determined by the development needs of the Chinese military. The Po Ying Metal and Plastic Manufacture Facility was established in 1985, and is engaged in the manufacture of precision metal and plastic parts. The company has factory buildings with a total area of 11,148 m2 in Hong Kong and Dongguan. It has more than 700 employees and about 400 kinds of machinery equipment. In recent years, the company announced sales revenue of about US$6.23M to US$12.5M. Its imports ranged from US$0.4M to US$0.6M per year while exports were between US$0.9M and US$1.2M.22 In December 2001 the company was awarded an ISO 9001-2000 certificate. Zhejiang Zhongxing Electronics (Group) Co., Ltd., (ZXEC) is one of the leading manufacturers of metal parts, connectors, tuner modules, and IFT coils in mainland China. It has five subsidiaries: Ningbo ZhongJun Electronics Co., Ltd., Ningbo Sunrise Electronics Co., Ltd., Hong Kong Zhongxing Trading Corporation, Ltd., and Shanghai Shen Mo Die and Mould Technology Research Laboratory. This company meets ISO9002, QS9000, and 21 Global Source, “Steady Industry Growth Expected in Mainland China,” 13 March 2002, http://www.globalsources.com/MAGAZINE/EC/0203W2/PLAS03CN.HTM 22 Global Source, “ZXEC Targets US$70M in Annual Sales by 2007,” 25 July 2002, http://www.electroniccomponents.globalsources.com/MAGAZINE/EC/0209W4/ZHONGXING.HTM
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ISO14001 standards. It has US$8.7M in registered capital, with US$3.7M fixed capital and US$5M flow capital. The company had sales of almost US$40M in 2004, and they hope to reach annual sales revenue of about US$70M by 2007.23 A variety of hybrid packages has been developed and produced for both commercial and captive applications. Wuhan Radio Devices Factory, a manufacturer specializing in semiconductor components and device packaging, has developed a series of metal packages with pin counts ranging from 10 to 64. Packages of leadless chip carriers (LCCs) developed by Yixing Electronic Device Factory have been used in many hybrid products. Chinese companies have developed various kinds of high-density packages, including 209- to 300-pin pin-grid arrays (PGAs) and ball-grid arrays (BGAs) and 44- to 200-series plastic quad flat packs (PQFPs) and multi-chip modules (MCMs). Chinese companies have also developed high-density leadframes and high-density sockets. Market demand grew by 50 percent in 2004 and is estimated to grow at a CAGR of 35.7 percent to 703.3 million units in 2006.
6.2
China’s PCB Fabrication Industry
Before the 1990s, China had only one major printed circuit board manufacturer, Dalian Pacific Multilayer PCB Company (DPMC). Now China is the fastest growing country in the PCB fabrication industry.24 There are around 700 PCB manufacturers and 450 raw material suppliers in China located around the Pearl River Delta and the Chanjiang River Delta region.25 In 2004, Chinese companies produced US$7.2B worth of PCBs, making China the world’s second largest supplier, after Japan. In 2005, PCB production was expected to reach US$8B.26 The production amount in 2005 is expected to be 100 million m2 - up 30 percent from 2004. Multilayer PCBs will show the highest growth, probably at the expense of U.S. firms shaken out by the collapse of the telecom bubble. The annual output in China was expected to grow by a factor of almost 3 from 2000 to 2005.27 Information about PCB manufacturing in different parts of China is shown in Table 6.2, which illustrates the estimated growth across production of single-sided (SS), double-sided (DS), and multilayer (ML) boards. Table 6.2: Estimated Growth of PCB Manufacturing in China28 Year Region
2005
DS
ML
SS
DS
ML
South China
7,110
6,350
19,750
8,600
8,800
15,300
Shanghai area
4,360
2,100
2,700
5,200
3,400
9,500
Other areas Total Rigid total (US$M) Flexible (US$M) Total (US$M)
23
2000 SS
6,330
1,020
1,200
7,000
1,550
1,400
17,800
9,470
23,650
20,800
13,750
26,200
3,565
6,850
70
500
3,635
7,350
Global Source, “Po Ying Expects 20 Percent Increase in Sales Revenue for ‘02,” 26 November 2002, http://www.electroniccomponents.globalsources.com/MAGAZINE/EC/0301W5/POYING.HTM 24 Sperling, E., “Special Report: PCB Battle Goes Global,” Electronic News, http://www.reed-electronics.com 25 China Printed Circuit Association, “Multilayer PCBs Seen to Achieve Fast Growth,” 12 June 2003, http://www.globalsources.com 26 Multi-Chem Limited, “A New Phase of Growth,” http://www.listedcompany.com 27 China Printed Circuit Association, “Multilayer PDBs Seen to Achieve Fast Growth,” http://www.cpca.org.cn/en 28 Nakahara, H., “The Great Board Migration,” Printed Circuit Board Fabrication, Vol. 24, No. 8, pp. 18-20, August 2001, http://www.pcfab.com/mag/0108/naka.html
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Ten new large-scale PCB manufacturing plants include Shengyi Electronics in Dongguang, Elec & Eltek in Guangzho, Topsearch in Shekou, Multek Asia in Doumen, Wongs Circuit in Huizhou, and Microline Circuit in Huizhou. There were many other middle- and small-sized plants under construction, such as one by JV (ACP Electronics); Gold Circuit Electronics (GCE) (Taiwan) in Suzhou; Nan Ya PCB (Taiwan) in Kunshan; CMK (Japan), Pentex-Schweizer, and Yang An (Taiwan), all in Wuxi, and Ibiden (Japan) and Unimicron (Taiwan) in Beijing.29 Many Taiwanese PCB makers are still coming to China, either to Guangdong Province (South China) or Shanghai. Shanghai City itself is the location of Unitech, SME (Shanghai Meadville Electronics, an Oriental Circuits facility), Bell, Parlex, Printonics, World Circuit, and many other shops. The town of Suzhou, about an hour’s drive from Shanghai by car, is also rapidly expanding. Suzhou now boasts M-Flex (U.S.), Gultech (Singapore), and Chin Poon (Taiwan). 6.2.1
Foreign Manufacturers
The top 50 PCB manufacturers (out of the 700 or so estimated total) produce more than 90 percent of China’s total. The remaining PCB manufacturers are mostly small, state-run companies, and their contribution to China’s output is not significant. The majority of producers are foreign transplants from Taiwan, the U.S., Japan, Singapore, and Europe. Exceptions are China Circuit Technology (Shantou) Corp. (CCTC), Shennan Circuits, and Dalian Multilayer Printed Circuit. AT&S, Austria, broke ground on a US$173M high-density interconnection (HDI) facility in Shanghai. The AT&S plant in Shanghai is a modern printed circuit board plant focusing on HDI microvia technology and produces printed circuit boards for use in the telecommunications sector. AT&S is now building a second plant at the AT&S Shanghai site at a cost of US$119M. The new factory is set to be operational by August 2006.30 Chin-Poon, Taiwan entered into a joint venture agreement with Finland’s Aspocomp Oyj to form a new company, ACP Electronics Co., Ltd., in Suzhou, China. The new plant manufactures HDI multiple-layer PCBs for mobile phones, as well as PCBs for use in communications, computers, and consumer products, with a capacity of 40,000 square units. Hewlett-Packard Company has invested US$33M to establish a 100-percent owned factory to make PCBs used in cellular phones in Huizhou of Guangdong province. The company planned to invest an additional US$22.4M in two factories in China. In addition, HP and Matsushita of Japan set up a joint-venture electronics materials factory in Guangzhou, with HP holding a 45 percent stake. HP planned to invest an additional US$5.4M in the factory, to reach a cumulative investment figure of US$27.8M. With the additional investment in the two factories, HP’s investment in China would amount to a total of US$77.8M.31 6.2.2
Domestic Manufacturers
Table 6.3 shows the top list of China’s PCB companies by sales income. China Circuit Technology (Shantou) Corp. (CCTC) is a leading PCB manufacturer in China. Established in 1985 and after four expansion projects, CCTC, a CPCA chairman company, now occupies a production area of more than 10,000 m2 and employs over 900 staff. With an annual production capacity of 510,000 m2, China Circuit Technology supplies to a diversified base of customers in computer, telecommunications, aerospace, military, instrumentation, consumer electronics, and automotive sectors worldwide.
29
Nakahara, H., “Bull Market,” Printed Circuit Board Fabrication, Vol. 25, No. 4, April 2002a, pp. 50-54 AT&S Co., http://www.ats.net/en/index.php?content=623 31 Custer, W., “Market Outlook: July 2001,” CircuiTree, 1 July 2001, http://www.circuitree.com/CDA/ArticleInformation/features/BNP__Features__Item/0,2133,28542,00.html 30
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Table 6.3: China’s Top PCB Companies and Their Sales Income (unit: US$M)32 Rank
Company Name
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Guangzhou Tianli PWB Co., Ltd. Topsearch PWB (Shenzhen) Co., Ltd. Huatong Computer (Huizhou) Co., Ltd. Kaiping Elec & Eltek Company, Ltd. Wus Printed Circuit (Kunshan) Co., Ltd. Kalex Multi-Layer Circuit Board (Zhong Shan), Ltd. Elec & Eltek (Guangzhou) Electronic Co., Ltd. China Circuit Technology (Shantou) Corp. Plato Electronic Plant Shengyi Electronics, Ltd. Shanghai Meadville Electronics Co., Ltd. Wongs Circuits (Huizhou), Ltd. Brain Power Electronics Shenzhen Corp. Zhuhai Multilayer PCB Co., Ltd. Shenzhen Shennan Circuit Co., Ltd. Jiangsu Suhang Circuit Board Group Corp. Dalian Pacific Multi-Layer PCB Co., Ltd. Panyu Kyosha IDT Circuit Technology Co., Ltd. New Jime Electronic Factory Shanghai YKC Circuit Co., Ltd. Cangzhou Yuandong Printed Circuit Co., Ltd. Changhong Electronics Group Corp. Printed Circuit Board Manufacture Division Tianjin Printronics Circuit Corp. Wearnes Greatwall Circuits Co., Ltd. Shanghai Unitech Parlex (Shanghai) Circuit Co., Ltd. Shenzhen Kinwong Electronic Co., Ltd. Changzhou Chuanli PCB Co., Ltd.
23 24 25 26 27 28
Sales Income 156.6 116.5 111.6 100.5 83.9 80.1 79.6 63.9 63.9 63.4 37.9 36.8 36.1 32.0 31.7 26.5 24.0 23.1 20.4 19.8 16.3 16.2 14.5 14.5 13.7 12.3 12.2 12.1
Dalian Pacific Multi-layer PCB Co., Ltd., (DPMC) is located in Dalian, China. It is the main supplier of PCBs for the Chinese communications industry; products cover communications, aerospace, computer, industry-controlled machines, elevators, and electronics products for civil use. In January 2004, Dalian Daxian Group Co., Ltd. and Dalian Pacific Multilayer PCB Co., Ltd., formed a joint partnership for PCB production. The two companies invested US$96.6M to control Dalian’s newest PCB manufacturing operation, Dalian Pacific Electronics Co., Ltd. The land area is 110,000 m2 and the company plans to produce an annual output of 360,000 HDI PCBs with a sales value of US$70M.33 Nippon Circuits, Ltd., is an ISO9002-certified Hong Kong printed circuit board manufacturer specializing in medium- to –high-volume, fine-line, single- and double-sided
32
China Printed Circuit Association (CPCA), “2002 Chinese PCB Import & Export (January to April),” August 2002, http://www.cpca.org.cn/en/news/view_article.phtml?ID=91 33 “China’s Dalian Pacific Multilayer PCB Company to Expand,” http://www.circuitree.com/CDA/ArticleInformation/news/news_item/0,2140,104402,00.htm
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and multi-layer PCB production. Nippon has facilities with a floor area of over 18,590 m2 in China. Nippon offers a variety of technologies including silver through-hole, carbon through-hole, flash gold, hot air leveling, Entek, and gold finger. Uniwell Electronic, Ltd., was founded in 1988 in Hong Kong with the intention of providing the electronics community with ISO9002-quality printed circuit boards. Uniwell’s factory in Dongguan, China, has an area of over 11,154 m2. The main office in Hong Kong is the company’s headquarters, where the sales office, customer service, and warehouse are located. Their product range includes single-sided, PTH double-sided, and silver throughhole PCBs. Kai Ping Elec & Eltek Company, Ltd., (EEKP) was founded in 1992. It is one of the strategic flagships within the E&E Group. In 1997, with the anticipation of substantial market growth in high-layer and more complex PCB design, Elec & Eltek upgraded its capability and expanded its capacity by building another outer-layer manufacturing facility on the same site. In 2000, with the tremendous growth of the PCB market in Asia, EEKP further invested in a new cutting-edge manufacturing plant, equipped with the latest laser technology for microvia PCB production, targeting the HDI and high-end telecommunications market. The EEKP manufacturing plant is capable of handling production of HDI and conventional multilayered PCBs (up to 12 layers). Currently EEKP has a total production floor area of over 92,903 m2 in three separate buildings with a capacity of 92,903 m2 of PCB output per month. EEKP was awarded ISO9002 certification in 1995, QS9000 certification in 1999, and in 2000 ISO14001 certification for its dedication to environmental management. In 2004, it had a turnover of US$354B, a 30 percent increase over 2003.34 Established in 1996, Fujian Fuqiang Accurate PCB, Ltd., has 15,812 m2 of factory floor. The production capacity for end products is 232,454 m2 per year. It was issued UL94-V-O certifications in 1998, with ISO9002 certification in 1999. Multek and Viasystems have big PCB operations in China. They have 555 employees and produce 1 to 14 layer rigid printed circuit boards. Their combined output in 2003 was US$460M, accounting for 11 percent of the Chinese output.35 Established in 1984, Shenzhen Shennan Circuits Co., Ltd., is one of the earliest multilayer PCB manufacturers in China. After 18 years of development, Shennan Circuits has grown into a medium-sized PCB shop with a 25,000 m2 production area, around 1,000 employees, and 350,000 m2 yearly capacity (average layer count is 10 layers). Over the past years, Shennan Circuits has invested heavily in the research and development of new technology and new products and is one of the most technologically advanced PCB makers in China. Topsearch PCB (Shenzhen) Co., Ltd., was established in 1987. The company has developed into one of the dominant and most influential PCB manufacturers in Asian Pacific regions and was ranked among the top 100 PCB manufacturers in the world in 2003. It has a staff of about 2,000 people and a factory area of over 50,000 m2, and is capable of a monthly production of 120,000 m2 of multilayer, double-sided PCBs. With its products up to IPC, UL, and U.S. military standards, Topsearch has also acquired ISO9002 and QS9000 quality certificates and a ISO14001 environmental protection certificate. Its products are mainly sold to the countries and regions in America, Europe, and Southeast Asia, with an annual production value of over US$100M. Zhuhai Multi-layer PCB Co., Ltd. (ZML),36 located in Zhuhai, Guangdong, China, is one of the leading Chinese manufacturers of double-sided and multilayer rigid printed circuit boards. Founded in 1986, ZML is a joint venture company with a total investment of US$30M. Occupying 35,000 m2, it specializes in manufacturing single-side, double-side, 34
Elec & Eltek (Guangzhou) Electronic Company Limited, “Manufacturing Capability of Guangzhou Plant,” http://www.eleceltek.com/jsp/eeic/eeic_gz.jsp 35 PCB Update, www.pcbupdate.com 36 ZhuHai Founder Technology Multilayer PCB Co., LTD, http://www.zml.com.cn/english/company.asp
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and multilayer (up to 18 layers) PCBs with a minimum board thickness of 0.1 mm and maximum thickness of 3.2 mm. The main technologies include HAL, flash gold, Entek, selective plating gold, chemical electroless gold, chemical electroless gold plus Entek, electroless gold, blind or buried via PCB, carbon mask, peelable mask, jumping V-CUT, and HDI. The products are widely used on PCs, telecommunications and aviation equipment, and industrial instruments. The main clients are Motorola (USA, China, Singapore, U.K., and Malaysia); Jabil (USA, Malaysia); and SCI (USA). It has 1,000 employees, and its annual production capability is 300,000 m2. It actively carries out the ISO 9000 quality management system, having passed ISO9002 and QS9000 quality controls in 1995 and 1999, respectively. It has also passed ISO14001 environment system management attestation. In addition to the PCB manufacturers, there are also key manufacturing material providers. They provide almost all necessary materials, equipment, and services for PCB manufacturing, thus accelerating the development of the industry. Some of China’s PCB related material and equipment manufacturers are listed below. • • •
• • • • • •
6.2.3
Gainford, a plating equipment supplier Achates, a supplier of dry film resistance East Space Light Electronic Technology Co., Ltd., a photo plotter manufacturer, founded in 1995, with about 300 units sold and a market share of over 80 percent in Mainland China Bao Ding North, a manufacturer of conveyorized spray modules Shenzhen Aike Chemical Co., a large electronics chemicals supplier with a full line of products and ties to a university, which assures good R&D support Guangdong Xi Jiang Electronic Copper Metals Co., Ltd., a supplier of copper anodes, which started as a joint venture with a U.S.-based company Shengyi, a base material supplier Changzhou Lida Electronic Equipment Co. Ltd., a supplier of conveyorized spray modules Kingboard Chemical Holding, a supplier of base material Adopted Technologies and Levels
PCBs are the basic building blocks of interconnection technology. They serve as the backbone of electronic systems. A PCB is composed of one or more layers of copper-clad dielectric sheets laminated together under heat and pressure into a rigid interconnection structure. PCBs contain the circuits required to interconnect components electrically and to act as the primary structure to support the components. In some instances, they are also used to dissipate heat generated by the components. China’s PCB production was initially developed to serve the military and the consumer electronics markets. Most PCBs produced in China for Hong Kong and other consumer contract manufacturers in the 1980s and early 1990s were simple, single-sided boards. Only 20 percent of boards were sophisticated enough for use in the computer and telecommunications industries, and complex boards were merely assembled from complete or semi-knockdown kits. With the increasing sophistication of electronics products generally, the amount of labor-intensive through-hole assembly is declining in China. Today’s electronics products require surface-mount devices (SMD) of smaller size and lower weight. PCB assembly of through-hole components is now reserved for electronic toys, appliances, and other products that have no miniaturization requirements. Today, China’s fabrication includes everything from simple single-sided boards to complex multilayer high-density interconnect boards with microvias. With miniaturization, higher speeds, and the trend towards more digital electronics parts, PCBs are becoming thinner and higher in area density; the trend of development is towards super-thin, super-
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dense packages and microvias. Trial production has begun with high-density interconnect (HDI) boards. The increasing pitch required for IC packaging gives rise to BGA and CSP development. The PCB industry in China is already adapting to this change. In addition, flexible boards will be used more widely. Currently, flexible PCBs account for only 10 percent of the total US$9.84B PCB production value, while in Japan they account for 15 percent of US$9.36B. PCB production in China is mainly for surface-mount technology (SMT). With the shift from quad flat package (QFP) components to BGA, CSP and multi-chip modules (MCM), the numbers of input/output pitches are increasing to over 500 (at present, some I/O pitches exceed 1,500 or 2,000). BGA is an inevitable choice for PCB technology. In China, over 30 PCB manufacturers can produce BGA boards in volume. Meanwhile, thinner PCBs, blind and buried holes, and rigid-flexible and HDI technologies are on their agendas. Most manufacturing and assembly activities with microvia and HDI technologies in China are Japanese operations for portable electronics. Sony, Panasonic, NEC, and Mitsubishi all have cell phone plants in China. It appears as though manufacturing and assembly of microvia boards is rapidly developing within Chinese companies. A big proportion of domestic enterprise in China consists of middle or small manufacturers, and production yield and efficiency are far behind the major players. China’s technology is still far behind that of the U.S., Japan, and even Taiwan. HDI is still in its beginning stage, and special substrates are only available in small quantities. Many medium or small enterprises in central China are burdened by higher product costs and fail to compete with their international counterparts. Generally speaking, China’s PCB industry is still at an early stage of development, but in many areas there are companies with middle- or high-level manufacturing capability. Although the trend toward system-on-chips (SoCs) has reduced the number of ICs on the board, China still has a high 27 percent of board designs containing more than 300 IC packages. The median is at about 100 packages per board. As a result, design complexity is greater for PCB designers in China due to higher IC package counts. However, things are changing. The IPC has been working to translate the IPC Standards into Chinese, sponsored by the U.S. Department of Commerce. IPC now has an office in Shanghai.37 6.2.3.1
Market Growth
In 2003, a China Printed Circuit Association (CPCA) survey of the Chinese PCB industry illustrated that the production value and output of China was US$6B. This PCB industrial output ranks second in the world market after Japan, which had an output of US$9.27B. The total output in the world was US$33.6B. Due to a slowdown in revenue resulting from the downturn in the overall electronics marketplace, most of the global PCB fabrication industry has struggled, but China’s PCB fabrication has not. Global PCB revenue increased from US$35.95B in 2001 to US$42.224B in 2004, an annual growth rate of 5.5 percent.38 Meanwhile, Chinese PCB revenue has grown during 2004 to more than US$6B, taking significant market share from every region.39 In 2005, the revenue growth rate of other major PCB fabricating countries, Japan, Taiwan, North America, and South Korea, is not expected to become greater than 5 percent. China was expected to continue growing at an annual rate of 22 percent until 2005 to reach a production value of US$10.4B.40 The U.S. and Japan have lost market share in the 37
McGuirk, “IPC’s High Road to China,” 1 March 2003, http://www.circuitree.com “China’s Dalian Pacific Multilayer PCB Company to Expand,” 1 August 2003, http://www.circuitree.com/CDA/Archives/cce81866bffe7010VgnVCM100000f932a8c0____ 39 www.detroitnews.com 40 “China’s Dalian Pacific Multilayer PCB Company to Expand,” 1 August 2003, http://www.circuitree.com/CDA/Archives/cce81866bffe7010VgnVCM100000f932a8c0____ 38
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PCB industry because of this growth. In North America, more than 10 percent of PCB fabrication companies were consolidated or closed during 2001, and the U.S. lost about 20 percent of its capacity during 2001. More than 12,000 people lost their jobs in the manufacturing sector in the U.S. PCB industry, about 16 percent of the estimated 75,000 people who manufacture PCBs in North America. 6.2.3.2
Import and Export
In the first half of 2004, the total export of PCBs was US$1.024B, with a year-to-year increase of 58.2 percent. Table 6.4 shows China’s import and export of PCBs for 20012003.41 Table 6.4: China’s Import and Export of PCBs for 2001-2003 2000 (US$10K)
2001 (US$10K)
2002 (US$10K)
2003 (US$10K)
Increase per Year (%)
Import
141,426
152,031
180,820
207,900
13.80
Export
163,676
193,393
236,200
285,800
20.40
22,250
41,362
55,380
77,900
51.85
Trade surplus
6.3
China’s Printed Circuit Board Assembly Industry
China has become one of the world market leaders in printed circuit board assembly (PCBA), with state-of-the-art facilities for both insertion-mount and surface-mount technologies. Table 6.5 presents forecasts of China’s PCB demand by the type of applications through 2005. Table 6.5: Printed Circuit Demand in China by Application (2005) Estimated Electronic Equipment Production (US$M) Audio and video equipment Communications equipment Computers Office equipment Electrical instruments Other applications
15,934 7,743 22,918 2,253 1,335 205
Estimated PCB Demand (US$M) 598 287 508 93 131 21
Some of the circuit board assemblies use insertion-mount components, which enable low-cost components and a significant labor cost advantage. This focus has made China the leading producer of TVs, VCRs, DVD recorders, refrigerators, and air conditioning units.42 However, Chinese companies are also state of the art in surface-mount assembly, especially for such products as computers, telecommunications equipment, and cell phones. 41
Analysis of PCB Industry Development in China, 25 June 2003, http://www.guangdongdz.com, Vardaman, E. J., “Shanghai: The New Silicon Valley?,” Circuits Assembly, Vol. 13, No. 5, May 2002, pp. 20-21, http://www.circuitsassembly.com/pdf/0205/0205forefront.pdf 42
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Wong’s Electronics was the first Hong Kong contract manufacturer to install surfacemount assembly equipment in China in 1987.43 Other manufacturers followed this trend, and companies from Taiwan, Japan, the United States, and Europe have now all established surface-mount assembly plants in China. Current electronics facilities are using advanced assembly technologies such as flipchips and direct chip attach (DCA).44 These assembly processes have state-of-the-art pickand-place machines, reflow ovens, and testers to accommodate various PCB technologies, including single-sided, double-sided, high-density multilayer, blind and buried microvias, via-in-pad, sequential build-up, HDI, and flexible PCBs.45 There are currently captive electronics assemblers in China that specialize in assembly and contract electronics manufacturers (CEM), of which contract assemblers are subsets. Many CEMs offer services not only in board assembly but also in material procurement and management, PCB design, functional testing, box build, distribution, warranty and repair, and product end-of-life support.46 6.3.1
Major Board Assembly Companies
Much of the board assembly capability in China is not native to the country, but established by foreign companies that moved their manufacturing and assembly operations to predominantly southern China to reduce costs. Even price-fighting companies from Taiwan admit that operating costs can be slashed on the mainland, and many have no option but to move their manufacturing operations because of the competition they face.47 In terms of scale, technology, output, and production value, foreign-based assembly companies dominate China’s production, and stated-owned enterprises and private companies are in competition with overseas investors. Foreign companies that are involved in circuit assembly joint ventures in China include Acer, Lucent, Samsung, Alcatel, Microsoft, Sanyo, Apple, Motorola, Seagate, Ericsson, Nokia, Sharp, Epson, Philips, 3M, Hewlett-Packard, Olympus, Intel, and Ricoh. The top EMS companies worldwide are Solectron Corp., Flextronics International Ltd., Celestica, Inc., Sanmina-SCI Corp., Jabil Circuit, Inc., Benchmark Electronics, Inc., and Viasystems Group.48 All of these companies have PCBA operations in China, and all are likely to increase their capacity. Evidence abounds that Taiwanese PCB manufacturers will continue to migrate their manufacturing capability to mainland China. Gold Circuit Electronics49 has invested in the Suzhou plant on mainland China which, along with the existing Chung Li plant, has increased the manufacturing capacity to over 1,000,000 m2 per month. In August 2000, Nanya broke ground on a facility with about a US$1.5B investment in the Kunshan industrial zone, also in Jiangsu province. The factory began mass production by the second quarter of 2001. In 2002, the company opened a copper-clad laminate (CCL) plant with a capacity of 500,000 sheets per month. In 2004, an epoxy resins plant was started up, along with a glass fiber and yarn plant (a fifty-fifty joint venture with PPG Industries). The company has also finished expansion of a second Kunshan plant. As
43 Boulton, W., et al.., “Electronics Manufacturing in the Pacific Rim,” WTEC Panel Report, Baltimore, MD, May 1997 44 MSL-Global Operation: China Operation, 2002, http://www.msl.com/global_operations/china.html 45 Manufacturer of China: PCB Board Assembly, 2002, http://www.manufacturersofchina .com/ 46 Micro Technology Services, 2001, http://www.mitsi.com/Manufacturing/default.htm 47 Nakahara, H., “Bull Market,” Printed Circuit Board Fabrication, Vol. 25, No. 4, April 2002, pp. 50-54 48 eTrons Systems – EMS Corner, “Top 10 EMS Companies,” accessed January 2006, http://www.etrons.com/industry/topten.html 49 Gold Circuit Electronics, 2006, http://www.gce.com.tw/index_en/index_en_1.html
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substrate demand grows, Nanya may migrate its traditional PCBA substrate production to China.50 The largest Taiwanese investment in China so far is Acer’s motherboard plant in Chungshan, about 90 minutes by high-speed ferry from Hong Kong. Though still ramping up production, Acer will eventually produce more than 6 million motherboards a year at the plant. Other companies investing in China include Unicap Electronics Industrial Corp.; World Wiser Electronics, Inc.; Uniplus Electronics Co., Ltd.; Cadac Electronics Co., Ltd.; Boardtek Electronics Corp.; and Oriental First Industry Co., Ltd. Astec, Miniscribe, and Wongs were among the trendsetters helping the dissemination of SMT in China. Wong’s Electronics Co., based in Hong Kong, has more than 20 years of experience in PCB assembly, and can handle various sizes and types of PCBs. They emphasize quality and real-time information feedback in the assembly process with the help of state-of-the-art equipment that ranges from automatic inserting machines, auto-screen printers, and high-speed chip shooters, to IC mounters and reflow ovens. In Shajing, the Shenzhen Welco Technology Factory was established in 1986. It was ISO9002 certified in 1996 and received an “A” Class Enterprise Award in 2002.51 In addition, a new factory was opened in Suzhou in March 2003. It is located in the Suzhou Industrial Park (SIP) with an initial factory space of 12,500 m2. Another 40,000 m2 have been reserved for future expansion.52 Nam Tai53 is an electronics design and manufacturing service provider for some of the world’s leading OEMs. It makes electronic components and sub-assemblies, including LCD panels, LCD modules, RF modules, FPC sub-assemblies, and image sensor modules used in cellular phones, laptop computers, digital cameras, copiers, fax machines, electronic toys, handheld video game devices, and microwave ovens. Finished products, including cellular phones, palm-sized PCs, personal digital assistants, electronic dictionaries, calculators, digital camera accessories, and BluetoothTM wireless headsets for cellular phones are also manufactured. Nam Tai provides OEMs with small form-factor electronic products, thereby negating the need for regional manufacturing and sophisticated logistics support. Nam Tai utilizes advanced production technologies, such as chip-on-board, chipon-glass, chip-on-film surface mount, ball-grid array, tape automated bonding, outer lead bonding technologies, and anisotropic conductive film heat-seal technologies. Its customer base includes Epson, Sony, GE, Canon, Sharp, Ericsson, Seiko Instruments, Texas Instruments, and Lenovo. LeeMAH Asia54 provides contract manufacturing services to worldwide OEMs. The key industries it supports include telecommunications, test and measurement, medical diagnostic equipment, industrial automation and controls, and automotive and computer systems. Their PCB assembly services include PCB/SMT assembly, manual insertion, wave soldering, hand soldering, and fiber optics. 6.3.2
Adopted Technologies and Research Abilities
The variety of PCB assembly capabilities offered by Chinese companies includes small-, medium-, and high-volume production capabilities; reliable PC board vendors; UL material and testing; stable, reputable component vendors, such as KOA-China, AVXShanghai, Jamco-Shanghai AMP-Shanghai, Philips-Shanghai, TI-China, and other Chinese, Asian, and U.S. vendors; SMT and through-hole PCB assembly; testing to customer specifications; anti-static handling precautions enforced throughout all assembly processes;
50
Lee, A., and Lam, E., “Nanya PCB Said to Be Planning Migration of PBGA Substrate Production to China,” 30 December 2005, http://digitimes.com/bits_chips/a20051230A4011.html 51 Wong’s Electronics Co., Shenzhen, http://www.wongswec.com/shenzhen.htm, accessed February 2006 52 Wong’s Electronics Co., Suzhou, http://www.wongswec.com/suzhou.htm, accessed February 2006 53 Nam Tai Corporate Information, 2006, http://www.namtai.com/corpinfo/corpinfo.htm 54 LeeMAH Asia, 2006, http://www.leemah.com/index.cfm?ID=pcb
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reflow and wave soldering capabilities; aqueous and ultrasonic cleaning: and assembly and finished product capabilities. Smaller-scale electronics manufacturing service (EMS) for pre-production has not done very well in China. For small-scale production and assembly, speed, quality, responsiveness, and flexibility are the market drivers. Larger EMS providers that are increasingly shifting capacity to China have lost money on smaller contracts because they are not as flexible as small companies, and are “shifting away from the ‘one stop-shop’ approach that may keep specialized EMS providers in Europe and the U.S. for the long haul.”55 Data for board assembly across China are only available from specialized consulting services, so it is easier to get data on assembly capabilities from both individual Chinese and foreign companies on the mainland. Shenzhen, Guangdong province, is a location of rapid expansion in terms of assembly. USI-China, which opened a plant in Shenzhen in July 2000 with 9 surface-mount lines, is already expanding to 14. D-Link followed a similar path. They opened a plant in Dongguan, Guangdong, in 1998 with three SMT lines running day and night. This facility already accounts for 30 to 40 percent of the company’s total output and its expansion to 14 SMT lines is being achieved on an incremental basis. The following list serves as an example of new motherboard assembly lines in China: MSI (Shenzhen), 8 SMT lines; MSI (Kunshan), 32 SMT lines (not yet completed); ECS (Shenzhen), 20 SMT lines initially; ECS (Dongguan), 12 SMT lines; DFI (Shenzhen), 12 SMT lines (not yet completed); DFI (Dongguan), 4 SMT lines; Chaintech (Dongguan), 8 SMT lines being upgraded to 10.56 Surface Mount Technology (Holdings) Ltd. has headquarters in Hong Kong and possesses manufacturing plants in Dongguan and Suzhou. It has 52 fully automated SMT lines producing a billion component placements per month in these facilities.57 Kye, based in Taipei, Taiwan, established their manufacturing presence in China in 1995. Currently, they are running 62 assembly lines, including 6 that are SMT.58 The Info-Tek Corporation, also from Taiwan, established its first plant in China in 1990. Since then, they have expanded to 22 SMT assembly lines in the Shouzhou area.59
6.4
Summary
Today China is the most attractive region in the world for electronics manufacturing services. It has a developing electronics market that many international corporations are targeting. China also has a large population of prosperous people and companies who are interested in electronic products and equipment. Alliances formed between packaging companies, materials suppliers, assembly companies, and foundries are helping China develop. China now has a complete supplychain capable of producing electronic products. China seems to be poised to rival, if not surpass, the U.S. and Japan as leaders in the electronics industry.
55
Murray, J., “Is the One-stop-shopping Concept a Viable Option for EMS Providers?” Circuits Assembly, 2002, http://www.circuitsassembly.com/online/0207/0207murray.html 56 TaipeiTradeShows.com, “Mobos Continue Capacity Expansion, Preparing for Likely PC Sales Rebound in 2003,” 2002, http://www.taipeitradeshows.com.tw/computex/IT_News/ vol_ percent20110.htm 57 Surface Mount Technology Business Tour, 2002, http://www.ee.cityu.edu.hk/~ieee_con/conf_tour.htm 58 Kye Manufacturing, 2002, http://www.ee.cityu.edu.hk/~ieee_con/conf_tour.htm 59 Info-Tek Corporation, 2002, http://itcsz.ebigchina.com
Chapter 7 Connectors, Cable Assemblies, and Backplanes1
Factory shipments of connectors, cable assemblies, and backplanes produced in China in 2005 were US$15.722B, of which connectors accounted for US$7.4B and cable assemblies US$7B. A strong trend will continue in 2006 with projections of US$18.395B. The subdivision of China production between connectors, cable assemblies, and backplanes is displayed in Table 7.1. The double counting of US$1,276M represents the connectors which are incorporated within cable assemblies and backplanes, having already been counted on the connectors line. Interconnect devices of US$759M includes intelligent or active connectors, PCMCIA connectors, fiber optic couplers, all one-quarter memory card connectors such as the SD, xD, SIM, CompactFlash, and Sony Memory Stick. Table 7.1: China Production Subdivided into Connectors, Cable Assemblies and Backplanes
Connectors Backplanes Cable Assemblies Interconnect Devices Double Counting Total
2005 US$M 8,307 513 7,383 795 (1,276) 15,722
Percent in Total 48.9 3.0 43.4 4.7 100
About 35 percent of the world’s connectors, cable assemblies, and backplanes are produced in mainland China to support electronic equipment and customers who wish to source locally in China. A comparison of China production to the other regions of the world is shown in Table 7.2. As noted in Table 7.2, China production of US$15.7B was the highest production during 2005 of any other region of the world. The elimination of US$7.3B in Table 7.2 represents the shipments of connectors, cable assemblies, and backplanes between regions of the world. The local Chinese companies which produce connectors, cable assemblies, and backplanes account for US$3.6B, or 23 percent of total production. The Taiwanese companies, however, have ramped up at a high rate and in 2005 will account for US$5.8B or 37 percent of the total production.
1
This chapter was prepared by Fleck Research and edited by Prof. Michael Pecht.
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Table 7.2: Worldwide Shipments Connectors, Cable Assemblies, Backplanes, and Interconnect Devices 2005 US$M Worldwide North America Europe Japan Pacific Rim China Mexico/Latin America Eastern Europe/Middle East/Israel Rest of World Double Counting Between Regions Total World
2005 US$M 8,762 6,857 8,563 2,900 15,722 941 424 400 (7,601) 36,968
Foreign companies – including the United States, Japan, Europe, Korea, Latin America, and other regions of world with factories in China – have likewise accelerated production in China and account for US$6.4B or 40 percent of total production. Table 7.3 displays production of connectors, cable assemblies, and backplanes in China subdivided by the region of the world in which the manufacturing companies are headquartered. There are 13 principal industry sectors in China for which connectors, cable assemblies, and backplanes are produced. These are displayed in Table 7.4. Table 7.3: China Connectors, Cable Assemblies, Backplanes, and Interconnect Devices Subdivided by Region of World in which Manufacturing Companies are Headquartered 2005 US$M Region of World China Local Suppliers State Owned Private Companies Joint Venture Private/State China Local Supplier Subtotal Taiwan United States Europe Japan Korea Latin America Other Regions of World Total China
2005 US$M 295 2,542 785 3,622 5,820 4,931 541 445 188 41 134 15,722
The US$15.7B of production in 2005 within mainland China is displayed in Table 7.4 by sector of the industry. For example, US$3.5B of the connectors produced in China are utilized in the computer sector, including PCs, notebooks, PDAs, workstations mainframes, monitors, printers, and peripheral equipment. The driving force for the high Chinese connector and cable assembly activity is both from Other equipment manufacturers (OEMs) and Electronic manufacturing services (EMS) companies. China is now producing desktops, notebooks, servers, workstations, handsets, PDAs, base stations, set-top boxes, digital cameras, medical products, and game consoles,
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among others. This equipment is being built for OEMs such as Dell, IBM (in December 2004, IBM announced the sale of their personal computer business to the Chinese company Lenovo), Kyocera, Microsoft, Motorola, Palm, Alcatel, Ericsson, Nokia, Hewlett-Packard, Emerson, General Electric, Whirlpool, Yamaha, Cisco, Sony, Apple, VeriFone, Kodak, NEC, Hitachi, Mitec, Nortel, Toshiba, Fujitsu, Acer, Gateway, and others. All of these companies need connectors and cable assemblies. In addition, low-cost labor and workers’ productive output are the driving forces for locating production in China. Typically, the Chinese worker produces 54 percent greater output than a worker in other low-cost regions such as Mexico and 2.3 times the work output of a U.S. worker. Table 7.4: China Connectors, Cable Assemblies, and Backplanes Subdivided by Market Demand Sector 2005 US$M and Percent of Total
Computer / Peripherals Telecom (Central office, PBX, RBOC) Communication / Wireless / Cellular Datacom / Networks Military / Aerospace Space / Satellite Automotive Electronics Instruments / Test Equipment Consumer Electronics Commercial Aircraft Industrial Electronics Medical Electronics Balance (Oilfield, Railway, Ships, Electric utility, Motors, Industrial control, Office automation) Total
7.1
2005 US$M 3,583 1,569 1,997 1,854 1,014 350 890 547 2,475 120 390 572 361
Percent of Total 22.8 10.0 12.7 12.0 6.5 2.2 5.7 3.5 23.1 0.8 2.5 3.6 2.3
15,722
100.0
Connectors and Cable Assemblies by Design Type and Sector
In this section, connectors and cable assemblies produced in China are examined by the following market demand sectors: • Computer • Telecom • Communications / wireless • Datacom / network • Military / aerospace • Automotive • Consumer electronics 7.1.1
Computer Sector
There was US$3.583B in connectors, cable assemblies, and backplanes produced in China for the computer sector in 2005. The subdivision of connectors, cable assemblies, and backplanes produced in China within the computer sector is further subdivided by type of equipment in Table 7.5.
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Table 7.5: China Connectors, Cable Assemblies, and Backplanes US$ Volume in Computer Equipment 2005 Subdivided by Type of Computer Equipment, US$M Computers Desktops Notebooks Workstations Servers Mainframe Supercomputers Storage Monitors/Printers Peripherals Total Computer
2005 US$M 1,542 690 24 112 75 <1 197 595 423 3,583
A significant number of desktops and notebooks now are being produced and assembled in China. Electronic manufacturing services such as Flextronics is now producing desktops for Dell and HP, among others. Typical design types of connectors include: • 2.54 mm pitch headers, receptacles • DIN 2.54 mm pitch headers • DIN 2.54 mm pitch receptacles • 1.27 mm (CardBus, IDC) • D-sub connectors on 2.74 mm pitch • Docking connectors • SCSI • Earphone / mini-plug 1.5 mm, 3.5 mm, 6.35 mm (1/4") • IDC connectors for 1.27 mm pitch ribbon cable, wire-to-board connectors (pin headers, sockets, cardedge, PCB, DIN) • IDC connectors for 1.27 mm pitch ribbon cable, I/O connectors (D-sub, plug, DIP) • PGA (P4, Socket 7, Socket 5, Socket A, Socket 370) • Fine pitch quad flat pack (QFP) and TSOP Type 1 • Small outline (SOIC/SOJ, TSOP Type 2, UTSOP) • Area array packages, which include BGA, CSP, LGA • Chip carriers (PLCC, LCC) • • • • • • • • • •
7.1.2
Typical design types of cable assemblies include: MIDI 1284 D-sub Centronics USB FireWire / 1394 SCSI 40 ribbon SCSI 80 ribbon SCSI 160/320/640/1280 ribbon ATA 100 /133 ribbon Telecom Sector
There were US$1.569B in connectors, cable assemblies and backplanes produced in China for the telecom sector in 2005. Telecom includes the telephone infrastructure such as
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central office switches and PBX equipment. In Table 7.6, the connectors, cable assemblies, and backplanes produced in China for the telecom sector are subdivided by type of equipment. Table 7.6: China Connectors, Cable Assemblies, and Backplanes Subdivided by Type of Telecom Equipment 2005, US$M Telecommunications Central Office Switching ATM Frame Relay Transmission Fiber Optics DWDM, SONET/SDH Other Outside Plant Voice/Data Equipment PBX KTS/Hybrid Voice Processing Equipment Consumer Telecom Equipment Data Communication / Internetworking ISDN Frame Relay ATM Videoconference Equipment Total Telecommunications
• • • •
Typical design types of connectors include: 2.0 mm pitch high speed (FB, HM) DIN 2.54 mm pitch header and receptacle D-sub connectors on 2.74 mm pitch RJ-11 (PCB mount, jacks, plugs, gang)
• • • • • •
Typical design types of cable assemblies include: Telephone handset cords (coiled) RJ-11 to RJ-11 Telephone mounting/line cords RJ-11 to RJ-11 Telephone extension cord RJ-11 to RJ-11 Telephone patch cards RCA RJ-11 to duplex RJ-11 (coil cord) Octopus cable sets
7.1.3
2005 US$M 103 21 19 107 52 105 99 67 47 91 145 620 17 23 28 25 1,569
Connectors, Cable Assemblies, and Backplanes in Communications/Wireless Sector
There were US$1.997B in connectors, cable assemblies, and backplanes produced in China for the communications / wireless sector in 2005. This sector includes all wireless communication equipment such as cell phones, mobile radios, and broadcast equipment. Table 7.7 subdivides the production of connectors, cable assemblies, and backplanes produced in China by type of equipment.
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Table 7.7: China Worldwide Shipments Communications / Wireless Market Demand Sector Connectors, Cable Assemblies, and Backplanes 2005 US$M Communications / Wireless Cellular Mobile Telephony Wireless Data Networks Mobile Radio Cable TV Broadcast Navigation Total Communications / Wireless
2005 US$M 1,313 78 146 333 58 69 1,997
• •
Typical design types of connectors include: 1.4 mm (cell phone, LCD) 1.0 mm call handsets (board-to-board, bottom entry, audio and vibra) 0.8 mm cell phone SIM Subminiature coax connectors including SMA, SSMA, SMP, SMB, SMC, Twinx / Triax and high frequency design including K and V Medium coax: N, C, SC, HN, UHF, Twinax/Triax/Quadrax and other custom designs F and PAL (F to F, PAL to PAL, F to PAL, RCA etc.) XLR (XLR to XLR, XLR multibranch)
• • •
Typical design types of cable assemblies include: Cigarette socket cable assembly (auto) Cell phone rechargeable cord (to residence) Hands free earphone
• • • • •
7.1.4
Connectors, Cable Assemblies, and Backplanes in Datacom / Network Sector
There was US$1.854B in connectors, cable assemblie,s and backplanes produced in China for the datacom / network sector in 2005. Table 7.8 displays the connectors, cable assemblies, and backplanes produced in China subdivided by type of equipment. Table 7.8: China Datacom/Network Market Demand Sector Connectors, Cable Assemblies, and Backplanes 2005 US$M Datacom / Networks PC LANs Network Systems Mainframe Networks Network Equipment Other (Facsimile, Modems) Total Datacom/Networks
• • • • •
Typical design types of connectors include: RJ-45 (PCB mount) RJ-45 unshielded (category 3, 4, 5, 5e) RJ-45 shielded (category 3, 4, 5, 5e) Magnetics with ferrule Magnetics with LED
2005 US$M 429 206 104 835 280 1,854
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Typical design types of cable assemblies include: Unshielded (Category 3, Category 4, Category 5, Category 5e) Shielded (Category 3, Category 4, Category 5, Category 5e)
• •
7.1.5
Connectors, Cable Assemblies, and Backplanes in Military and Aerospace Sector
There was US$1.104B in connectors produced in China for the military / aerospace sector in 2005. In addition, there was US$350M in connectors, cable assemblies, and backplanes produced in China for the space / satellite sector. China is very active in military and aerospace programs, including satellites, space, and launch vehicles. Tables 7.9 and 7.10 display connectors, cable assemblies, and backplanes produced in China for the military / aerospace sector, subdivided by category. Table 7.9: China Military / Aerospace Market Demand Sector Connectors, Cable Appliances, Backplanes, and Interconnect Devices 2005 US$M Military / Aerospace Aircraft Fighters Surveillance Transports Helicopters Tankers Aircraft Upgrades Electronic Upgrades Missiles and Smart Bombs Surface Ships and Submarines Ground Vehicles and Ground Electronics Total Military/Aerospace
2005 US$M 285 16 39 215 2 59 34 140 95 129 1,014
Table 7.10: China Space / Satellite Market Demand Sector Connectors, Cable Appliances, Backplanes, and Interconnect Devices 2005 US$M Space / Satellite Space / Satellite Satellites Space Launch Vehicles Total Space / Satellite
• • • •
Typical design types of connectors include: D-sub connectors on 2.74 mm pitch Standard (5015 E/R) Miniature (26482 Series I solder) Subminiature (38999)
2005 US$M 259 54 37 350
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7.1.6
Connectors, Cable Assemblies, and Backplanes in Automotive Sector
There was US$890M in connectors and cable assemblies produced in China for the automotive sector in 2005. Table 7.11 shows the connectors, cable assemblies, and backplanes produced in China for the automotive sector. Table 7.11: China Automotive/Transportation Market Demand Sector Connectors, Cable Assemblies, Backplanes, and Interconnect Devices 2005 US$M Automotive / Transportation Passenger Car/Van/SUV/Light Truck (on-board) Automotive harness Electronic central control box Modular cockpits Switches Electronic modules Telematics / data communications Power distribution systems Off-road Vehicles Total Transportation
2005 US$M
• • • • • • •
Typical design types of connectors include: Unsealed blade connectors from 1 to 68 I/O Unsealed mixed connectors from 3 to 110 I/O Unsealed junctions from 2 to 102 I/O Unsealed high-amperage connectors from 70 to 300 amps Sealed connectors, which include blade connectors from 1 to 60 I/O Sealed mixed connectors from 4 to 38 I/O Junctions to 78 I/O
• • • •
Pin/socket connectors include: Unsealed 5.7 mm pitch from 4 to 64 I/O Sealed 5.7 mm pitch from 4 to 64 I/O Sealed 2.54 mm pitch Sealed 1.27 mm pitch
7.1.7
267 44 204 10 124 112 65 64 890
Connectors and Cable Assemblies in Consumer Electronics Sector
There was US$2.475B in connectors and cable assemblies produced in China for the consumer electronics sector in 2005. In Table 7.12, the connectors and cable assemblies produced in China for the consumer electronics sector is subdivided by type of consumer electronics equipment. Typical connector design types include: • •
DIN (S-video, circular mini-DIN, circular DIN) Audio/microphone/TV (audio/microphone high end, XLR, RCA/phono plug, board mounted, earphone/mini-plug 1.5 mm, 3.5 mm, 6.35 mm (1/4")
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Table 7.12: China Consumer Market Demand Sector Connectors, Cable Assemblies, Backplanes, and Interconnect Devices 2005 US$M Consumer Electronics Video Products Direct view color TV Projection TV Digital TV set/display LCD/Plasma TV TV/VCR combinations VCR decks Camcorder Direct home satellite systems Personal video recorder (PVR) DVD player or recorder TV/PC combination Set-top box Audio Products Rack audio system Compact audio system Separate audio components Home theater Portable equipment MP3 players Mobile Electronics Aftermarket auto sound Aftermarket vehicle security Factory installed auto sound Mobile video/navigation Other mobile electronics Home Information Products Digital cameras Home security systems Other home electronics Accessories Electronic Games Total Consumer Electronics
• • • • • •
2005 US$M 97 21 64 48 42 44 75 55 75 139 7 91 99 134 97 126 104 90 148 46 217 39 11 267 26 8 59 246 2,475
Typical cable assembly designs include: 3.5 mm (to 3.5 mm, to 6.3 mm, to RCA or DIN, 3.5 mm multibranch (RCA, DIN, etc.) RCA (RCA to RCA shielded, RCA multibranch) 6.3 mm (6.3 mm to 6.3 mm shielded, 6.3 mm to RCA shielded, 6.3 mm multibranch) DIN (DIN to DIN shielded, DIN to RCA, DIN to 6.3 mm, DIN to 3.5 mm, DIN to BNC, DIN multibranch (BNC, RCA, 6.3 mm, etc.) 2.5 mm (2.5 mm to 2.5 mm, 2.5 mm multibranch) SCART (SCART to SCART, SCART multibranch (RCA, 3.5 mm, etc.)
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• • •
7.2
F and PAL (F to F, PAL to PAL, F to PAL, RCA etc.) XLR (XLR to XLR, XLR multibranch) MIDI
Analysis of Connector Production in China
The production of only connectors in China during 2005 was US$8.307B, excluding cable assemblies and backplanes. In Table 7.13, connectors in China are subdivided by major connector product category. Double counting of US$409M represents IDC, fiber optic, flex circuits, and filter connectors counted in other categories. Table 7.13: Connector Production in China Subdivided by Major Product Category Connectors Printed Circuit Connectors Circular Connectors Rectangular I/O Connectors IDC Connectors RF Coax Connectors IC Sockets Automotive Connectors Heavy Duty Industrial Connectors Specialty Connectors Fiber Optic Connectors Hermetic Seal Connectors Connectorized Flex Circuits Filter Connectors Custom Connectors IDV (Interconnect Devices) Double Counting Total Connectors
7.3
2005 US$M 2,420 1,504 1,274 301 426 791 890 205 46 203 129 129 29 51 318 (409) 8,307
Analysis of Suppliers in China
The number of principal suppliers who produce connectors, cable assemblies, and backplanes in China was 19,110 in 2005. China’s suppliers compared to those in other regions of the world are shown in Table 7.14. The subdivision of suppliers is shown in Table 7.15. Tables 7.14 and 7.15 define the number of suppliers in China as 19,110. The 19,110 suppliers, however, are the number of China’s principal suppliers. Many Chinese manufacturers believe the number is at least 35,000, and may be as high as 100,000 when every company is counted down to companies with only 5 to 10 workers. Table 7.16 displays the number of suppliers producing connectors, cable assemblies, and backplanes produced in China, subdivided by the location of headquarters. For example, there are 1,070 Taiwanese companies with factories in China. Furthermore, there are 1,750 U.S. companies with factories in China. Over 92 percent of local suppliers produce cable assemblies. Furthermore, the vast majority of cable assembly producers are very small companies.
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Table 7.14: Number of Principal Suppliers of Connectors, Cable Assemblies, and Backplanes in 2005 Number of Suppliers in 2005 North America Europe Japan China Other Pacific Rim Rest of World Total Worldwide
2,690 895 320 19,110 385 470 23,870
Table 7.15: China Subdivision of Connector, Cable Assembly, and Backplane Suppliers 2005 Interconnect Type Connectors Cable Assemblies Backplanes Total
Number of Suppliers 6,415 12,475 220 19,110
Table 7.16: Number of Suppliers Producing Connectors, Cable Assembly, and Backplanes in China, by Home Region, 2005 Nation China Local Suppliers Taiwan United States Europe Japan Korea Other Regions Total
Number of Suppliers 15,925 1,070 1,750 220 75 30 40 19,110
Chinese factories producing connectors, cable assemblies, and backplanes account for 83 percent of all workers. Table 7.17 displays the total number of workers in China engaged in manufacturing connectors, cable assemblies, and backplanes subdivided by the region of the world in which the manufacturing companies are headquartered. Table 7.18 displays the top 10 companies that are manufacturing connectors, cable assemblies, and backplanes in China. The second tier suppliers, those ranked No. 11-20, are displayed in Table 7.19.
7.4
Doing Business in China
In China, assembly workers in connectors and cable assemblies work a 60-hour work week, an 84-hour work week, a 91-hour, and a 73-hour work week. While they do pay overtime, it is all lumped in with a monthly wage, which includes the cafeteria and lodging in the dormitory. This converts to about 3,800 to 4,200 man hours being worked per year at the factory assembly level. Workers involved in assembly operations are typically paid
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monthly with wages depending on the region. Annual labor cost including fringes is shown in Table 7.20. Table 7.17: Total Workers in China for Connectors, Cable Assemblies, and Backplanes, Subdivided by the Region of the World Where the Manufacturing Companies are Headquartered, Displayed in Number of Workers, 2005 Companies Headquartered in: China Local Suppliers Taiwan United States Europe Japan Korea Other Regions of World Total
Workers 511,290 185,520 29,975 6,035 6,895 6,150 4,355 750,200
Table 7.18: Top 10 Manufacturers in China for Connectors, Cable Assemblies, and Backplanes, 2005 US$M Rank 1 2 3 4 5 6 7 8 9 10
Company Hon Hai / Foxconn Tyco Electronic Molex Amphenol Foxlink Suyin Connector Lorom Via Systmes 3M Shenzhen Sun and Sea
2005 US$M 1,406 946 430 304 262 210 139 121 121 103
Table 7.19: Second Tier (11-20) Manufacturers in China for Connectors, Cable Assemblies, and Backplanes Rank 11 12 13 14 15 16 17 18 19 20
Company Speed Tech Sandmartin (SMD) Wieson ACON BizLink Long Well Hsuan Mao Enterprise Greatlink Electronics Jess-Link Products Good Way Industrial
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Table 7.20: Labor Cost Comparison with Fringes per Year Rank Coastal Regions (US$) Internal Regions (US$) Average Labor (US$) Compared to U.S.(%)
China 1,056 – 1,524 324 – 996 972 4.1
Mexico
United States
4,160 17.6
23,670 100
Workers are recruited from the countryside and from different provinces. They come to the factory as a group. An absolutely must rule is that you cannot give one employee in this group an extra break or an opportunity because everyone in the group would expect that they can do the same thing. So supervision is strict. All of the factories employ women around 20 years old. They are all single and do not yet have children. They are deliberately hired with that age bracket in mind so that the business model used by the manufacturers is one in which they furnish a cafeteria and a dormitory, but they do not need day care or schools. Professional employees (engineers, finance, and marketing/sales) with Englishspeaking capability are typically paid monthly with wages between US$288 and US$425 per month. There are few labor rules in China with regard to dismissing an employee, whether a layoff or discharged. Workers are generally let go without penalties or responsibilities from the employers’ side. 7.4.1
Housing
Connector and cable assembly factories in China vary as to the housing for workers. There are three main categories. • In large cities such as Shenyang, workers return to their homes after completion of their shift. Since the shift is 12 hours and travel time to and from the factory is required, the off-time for the worker is 11 hours or less. Workers usually are on a seven-day week. • In the rural areas, where the majority of the factories are located, the company provides housing. The dormitories are usually four stories with usually some 250 rooms. There are several workers assigned to each room. Each room is about 3.66-4.27 meter square (13.4-18.2 m2). It is typical for factories to employ young women who are unmarried and therefore have no children. For the company this avoids the problem of day care. • In the rural areas, where workers are married, they are permitted to live in a dormitory that permits cohabitation. Typically this dormitory is located away from the factory. A small percentage are married. There is a small ratio of male workers to female workers, typically about 5 percent of the total work force being male workers. Female workers are said to have greater dexterity and also have greater capability for tedious and repetitive manufacturing processes. Male workers typically are involved in training, setup, tool and die making, and some primary machine operations. Female workers can receive promotions to lead people and supervisors. Typically the lead people and supervisors are issued a different color uniform. 7.4.2
Meals
The procedure of supplying meals to workers is directly related to the three classifications.
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• •
•
7.4.3
Where workers are in large cities and leave the factories after their shifts, the company supplies one meal at the midpoint of the shift. Where workers are in rural factory sites and live within the factory compound in dormitories, the company supplies three meals. The cafeteria is very austere with bench type seating, and the cafeteria is open three times daily. Where workers are in the rural factory sites and are married it is typical that these workers eat only one meal at the factory cafeteria. Four Types of Business Operations in China
The first type of business operation in China is for export only. This is very typical in China. It is also very typical among the Taiwanese companies who have moved to China because of low-cost labor. They are making commodity cable assemblies and commodity connectors for export only. The second type of business operation in China is a joint venture company. The joint venture company usually has some designated percentage agreed on in advance that they can sell to domestic customers. Third is a private ownership by a Chinese company. Private ownership has been permitted in China for over a decade. The fourth type of company is where a foreign company has ownership. This company is referred to as a WOFE (wholly owned foreign entity). In this scenario, the percent of shipments that can go domestic is also previously negotiated. In some cases, 100% can be domestic.
7.4.4
Export License
An export license is principally the license which the Taiwanese companies as well as the American companies have in China. A domestic license is not easy to obtain. There are numerous restrictions. Generally, the domestic license is only valid for shipment within the local zone, like Guangdong. Most people, even with the export license, sign what amounts to a 75-year contract. The government leases the land to the connector manufacturer. At the end of the 75 years, the Chinese government essentially owns your factory. But it can be renegotiated.
7.4.5
Business Strategies Differ by Region of China
In the southern part of China, where the Taiwanese are concentrated, most companies are set up for totally export as a joint venture, with some percentage going to domestic. But by and large in the southern part of China, there are no big OEM customers, except maybe another Taiwanese company like Acer. As a result, exports are the only concern. In northern China, near Shanghai and Beijing, the usual business model is one in which the factory can ship to the local customers, since this is where telecom and other major Chinese OEMs are located.
7.4.6
Import to and Export from China
Of all the production of connectors and cable assemblies in China, 42 percent or US$6.6B is exported. Connectors, cable assemblies, and backplanes which were shipped to customers in China in 2005 were US$9.3B. Refer to Table 7.21.
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Table 7.21: Consumption in China Import to and Export from China 2005, US$M
Manufactured in China Exported Imported Local Consumption in China
7.5
2005 US$M 15,722 6,618 626 9,730
Major Customers in China
The customers purchasing connectors and cable assemblies in China are given in Table 7.22. The leading licensed telecom operators in China are displayed in Table 7.23. Table 7.22: Top 25 Chinese Electronic Companies Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Company Sichuan Changhong Electronics Shanghai A-V Electronics Konkia Group TCL Group China Greatwall Computer Hisene Electronics Group Beijing University Founder Bejing Telecom Equipment Shenzhen Huawei Tech Caihong Group Shanghai Bell Telephone Eq. Zhejiang E. Communication Shenzhen Huaqiang Shenzhen SEG Electronics Huadong Electronics (Group) Beijing Ericsson Mobile Com. Xiamen Overseas Electronics Langchao Electronic Info Shenzhen Chuangwei Elec. Beijing Intl. Switching Huizhou Desai Group Beijing Matsushita Pic. Tube Jilin Provincial Electronics Shenzhen Kaifa Technology Fujian Star Computer
Foreign automotive manufacturers in China include Ford, General Motors, Honda, Hyundai, Jeep, Mazda, Nissan, Suzuki, Toyota, Volvo, and Volkswagen. Delphi has three plans in China in the cities of Baicheng, Changchum, and Guangzhou plus a customer service facility in Beijing and a molding/warehouse facility in Anting City (Shanghai), China. Delphi joint ventures include: Daesung Electric in Quingdao, China (a joint venture
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with the Parks family), and Packard Electric Shanghai Ltd. In Shanghai, China (a joint venture with Sanlian Automotive). Table 7.23: Licensed Telecom Operators in China Company China Telecom China Mobile China Satellite China Unicom China Netcom Jitong China Railcom
Services Provided Fixed, Internet Protocol (IP)-based Wireless Satellite Services Fixed (including international),Wireless, Paging, IP-based IP-based (including international) IP-based (including international) Fixed (e.g., leased lines to other carriers)
The Chinese government intends to focus on the following major manufacturers known at “The Big Three,” “The Little Three,” and “The Mini Two”: • Shanghai Auto Industry Corp.(VW-Santana, GM-Buick) • First Auto Works (Audi, Jetta) • Dongfeng Motor Corp. (Citroen, Honda) • Beijing Auto Industry Corp.(Jeep, Cherokee) • Tianjin Automotive Industry (Daihatsu-Charade)(not JV) • Guangzhou Auto Industry Corp.(was Peugeot, soon Opel or Honda) • Chongqing Chang'an (Suzuki-Alto) • Guizhou Aerospace (Subaru-Skylark)
7.6
Leading EMS / ODM Companies
7.6.1
Flextronics International
• • •
7.6.2 • •
7.6.3 • • • •
US$14.5B revenues in fiscal 2004, US$15.9B in fiscal 2005 Headquartered in Singapore Leading customers and products: Dell (desktop PC, enclosure, plastics and system assembly), IBM (laptop enclosures), Kyocera (handsets, original design and manufacture (ODM) phone), Microsoft (Xbox), Motorola (handsets), Palm (PDAs). Other products – Camera phones, PCBA, notebooks, servers, metal stamping, plastic injection molding Jabil Circuit US$6.3B for 2004 Leading customers and products: 3Com (PCBA for routers), Alcatel (cordless DEC phones), Canon, Dell, Emerson, GE, HP (laser printer boards), Raytek, Whirlpool, Yamaha Hon Hai Precision Industry US$12.4B for 2004 Headquartered in Taiwan Leading customers: HP, Cisco, Motorola, Dell, Sony, Apple, Intel Products: Xbox, PlayStation, PCBA, cell phones, metal stamping, plastic injection molding
Connectors, Cable Assemblies, and Backplanes
7.6.4 • •
Sanmina-SCI US$12.2B for 2004, US$ 11.73B for fiscal 2005 Leading customers and products: VeriFone (credit payment terminals), IBM (PCs), Ericsson (base stations), Nokia (base stations and set top boxes), Kodak (digital camera boards), NEC (base stations), Hitachi (hard disk drives and some PCBA for monitors), Mitec (base stations), Efore (power converters), Draeger (medical products), Schneider (power modules), Lucent (optical switches ramping early 2004) Other products: wireless infrastructure equipment (GSM and CDMA networks), telecom equipment, wireless, automotive, PCBA
•
7.6.5 • •
Solectron US$11.4B for 2004, US$10.4B for fiscal 2005 Leading customers and products: Alcatel (cell phones), Ericsson, IBM (notebook motherboards), Motorola (base stations and cell phones), NEC (cell phones), Nokia (base stations), Nortel (base stations) Other products: cell phones for local handset customers, wireless infrastructure products
•
7.6.6 • • •
Quanta Computer Taipei, Taiwan Top-tier ODM Customers: Dell and HP represent 40 percent – 50percent of total revenues combined
7.6.7 • •
155
Compal Electronics Taipei, Taiwan Customers: Dell, HP, Toshiba, IBM, Fujitsu, Acer, NEC, Sony.
Table 7.24 lists EMS companies which are headquartered in the United States and produce in China. Table 7.24: EMS Companies Headquartered in the U.S. which Produce in China Company Sanmina-SCI Solectron Celestica Jabil Circuit Benchmark Plexus Pemstar
2
2004 Sales2 (US$B) 12.2 11.4 9.2 6.3 2.0 1.1 0.8
Percent in Asia 30 45 42 34 18 12 27
Sales revenues for 2004. In November 2005, companies reporting revenues for Fiscal 2005 were Sanmina-SCI at US$11.7B, Solectron at US$10.4B, Pemstar at US$ 690M
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7.6.8
Asian EMS / ODM Companies
Table 7.25 lists Asian EMS/ODM companies which produce in China. Table 7.25: Asian EMS/ODM Companies which Produce in China, 2004 Revenue (US$B) Company Flextronics Hon Hai Quanta Computer Compal Electronics GVC BenQ Wistron ASUS Tek Computer Inventec Microstar First International Computers Delta Electronics Elite Group MiTAC
7.7
Manufacturing Processes in China
7.7.1
Connectors
2004 US$B 14.5 12.4 8.7 5.5 3.7 3.2 2.8 2.6 2.4 2.0 1.7 1.7 1.5 1.4
In high speed stamping presses, contacts are produced at rates up to 1,200 strokes per minute. Dies are 1 up, 2 up, 4 up and as high as 20 up. The speed of the presses varies according to the die. In China, there are an estimated 7,215 high-speed stamping presses being utilized for contacts. Copper-based alloys being utilized include brass, phosphor bronze, nickel silver, and beryllium copper, among others (a total of 20 copper alloys have been observed in China). Injection molding presses have cycle times as low as 5 seconds. Single cavity, two cavity, four cavity, and molds up to 32 cavities are being utilized. In China, there are an estimated 7,670 injection molding machines being utilized to mold connector insulators. Resins being utilized include nylon, PBT, and LCP (a total of 15 resins have been observed in China). In China, there are an estimated 1,105 reel-to-reel plating lines. Gold over nickel, palladium, tin, lead, and some silver are used. Investments have been made in water treatment plants. Line speed has been observed up to 40 feet per second. Tool and die capability exists with an estimated 1,905 EDM and wire EDM machines existing in China. Molding dies up to 32 cavities are being built. Stamping dies up to 20 up are being built. There is significant automated assembly occurring among Chinese connector manufacturers. In China, an estimated 3,065 automatic assembly machines are installed. These provide automatic loading of the contacts and the insulator, quality / inspection, and packaging. Manual assembly is, of course, found in most Chinese facilities. An estimated 4,425 manual assembly lines exist in China. Chinese workers are typically each assigned one
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specific task on the assembly line. For example, one worker may insert pins in the USB, repeating this process 8,000 times each day. With regard to other pertinent statistics -- there are an estimated 7,970 graduate engineers engaged in engineering and an estimated 2,975 in sales. In QC within China, there are an estimated, 19,835 workers. 7.7.2
Cable Assemblies
Cable assemblies, since they have significant labor content, are produced almost extensively in China. Typically, the processes required in cable assembly include: •
•
•
•
•
Cable preparation, in which the cable sheath is stripped, the individual wires within the cable are fanned out, the insulation is removed from each wire, and the contact is crimped on each wire. Cable preparation has extensive labor content. The cable assembly line likewise has high labor content. This process involves assembly of the connector to the cable, either by soldering or crimping of each contact to the connector. In the majority of cases, there is one connector on each end of the cable. Usually, the next process is overmolding. Within an injection molding machine, the assembly at the termination end and connector is overmolded, both for strain relief and for asthetics. Following this, electrical inspection occurs, which is generally a test to make certain there is continuity for each contact within the connector from one end of the cable to the other. The last step is packaging of the cable assembly.
In China, there are an estimated 5,480 cable assembly lines. To facilitate the assembly, China has: • • • •
93,605 soldering stations 64,300 crimping stations 32,255 overmold presses being utilized 3,275 injection molding machines found in the cable assembly factories.
Chapter 8 Computers
China’s computer industry dates back to 1955, when the development of computer technologies was initiated in the First Five-Year National Development Plan (FYP) as a national development goal. During that time, China received foreign aid from the former Soviet Union for scientific research in computer technology. In 1958, the first Chinese-made computer (a vacuum-tube computer called the 901) was manufactured at the Institute of Military Engineering within the prestigious University of Harbin. In the 1960s and 1970s, several computer systems were developed by China, including the 100 and 150 series. These were installed in universities, military laboratories, and some industrial conglomerates, primarily to address national security issues including navy command, missile launching, satellite control, geological data analysis, and production systems for oil fields.1 In the late 1970s, China began producing computers for industrial and commercial uses, and China’s first microcomputer was built in 1977. These computers were produced in small quantities and relied on imported components. In the 1980s, with the open-door policy and economic reform, China reevaluated its computer development strategy and switched from research and development of large-scale mainframe computers to the development of personal computers (PCs). In 1985, the State Computer Industrial Administration selected a group of experts to form a scientific research task force. By June 1985, the task force had successfully developed a personal computer capable of processing information in Chinese. The computer was called Great Wall 0520CH and was the first PC using Chinese character generation and display technology. The appearance of Great Wall 0520CH gave rise to the birth of China’s PC industry. In 1986, with the implementation of the Seventh FYP (1986-1990), China began to form a market-oriented computer and electronics industry. During that period, Great Wall 0520CH was used for administrative batch processing and gained a significant share of the domestic market. In 1996, many Great Wall 0520CH computers, purchased by China’s General Customs Administration, were still operating. In China’s Tenth FYP (2000-2005), the development of computer-related technologies included: • •
•
Developing high-performance central processing units (CPU) with clock speeds reaching 500 MHz for domestic high-performance servers and supercomputers Obtaining the capability to independently develop and manufacture new electronic and opto-electronic components and devices, such as next-generation thin-film transistor (TFT) liquid crystal displays (LCDs) Upgrading traditional industries using the latest computer and other advanced technologies
Zhang, J. X., and Wang, X., The Emerging Market of China’s Computer Industry, Greenwood Publishing Group, Westport, CT, 1995
1
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•
• •
Developing new network technologies, including high-performance network servers, intelligent network computers, and high-speed network interface devices with data rates no less than 2 Gb/s Developing the next-generation Internet Developing the domestic software industry by promoting exports, increasing investment, and building software parks.
These goals reflected the efforts of China’s computer industry in four major areas. The first area was to build up domestic industrial capability of core computer technologies. China considered its computer industry a “shell” that lacked core technologies. An example was China’s lack of capability for independently developing and manufacturing microprocessors, the heart of computers. The second area was to renovate and modernize traditional industries using computer technologies. The third area included an effort to consolidate the domestic computer industry to significantly improve its competitiveness both domestically and internationally and to standardize it within the domestic market. The last area was an effort to develop computer technologies with a focus on supercomputers. Chinese-built computers have now become strongly competitive, state-of-the-art products. At the end of 2003, China became the second-largest PC market, behind the United States, which outsources most of its computer manufacturing to China. Top Chinese computer companies like Lenovo, which bought the IBM PC division, and Founder Electronics have not only successfully established a reputation for quality service and a brand-name prominence in the domestic market, but have expanded their products and services to the world market. China’s mainframe computers lag behind PC development, but with the country’s rapid technology and manufacturing advances, this difference is also expected to rapidly decrease.
8.1
China’s Computer Market
Since 1998, China’s government enterprise reform has been a driving force behind the big demand for computers. The growth and use of PCs in China’s midsize and small businesses, and the acceptance of Windows and related applications, are two specific factors contributing to the boom in the Asian PC market. The growth of China’s domestic computer market is, in addition to the government’s continuous spending on its enterprise reform and education infrastructures, steadily increasing due to the growth in personal purchasing power and the nationwide boom of the Internet, China’s World Trade Organization (WTO) accession, and the 2008 Beijing Olympic Games. In 2005, China’s PC market grew 29 percent, with total shipments of 19.3 million units. China’s PC industry had a strong fourth quarter in 2005, recording a 40.7 percent year-on-year growth and 8.3 percent growth from the previous quarter. Notebook PCs outpaced desk-based PCs, with a 46.6 percent year-on-year growth.2 PC sales are expected to reach 23 million units in 2007.3 Table 8.1 shows PC shipments in mainland China since 2000. China’s top PC vendor in 2005 was Lenovo, with 6.35 million units, a 40.5 percent increase from 2004. Lenovo is also the world’s third-largest computer maker. Founder Electronics placed second in China with 2.14 million sales, followed by Tongfang, Dell Inc.,
2
AFX News Limited, “China’s PC Market up 29 Percent in 2005, 19.3 Million Units Shipped – Gartner,” 16 February 2006, http://www.forbes.com/business 3 ETEXPO Online Trade Show, “2004 Computer and Communication Products Review - China is Flying in Full Feather,” 30 November 2004, http://www.etexpo.com
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and Hewlett-Packard (HP), which sold 1.58 million, 1.5 million, and 1.22 million units, respectively.4 The Asia-Pacific region is the high-growth engine among the world’s personal computer markets. In 2005, PC sales in the Asia-Pacific region (excluding Japan) grew at the fastest pace in 5 years, with 41.1 million units sold and 18 percent growth for the year, driven by the demand for notebook computers and hot prices. Computer sales are expected to grow by at least 13 percent in 2006. Lenovo took a 21.5 percent market share in the fourth quarter of 2005, followed by Hewlett-Packard and Dell.5 Table 8.1: Mainland China’s PC Shipments PC shipments, 2000 (thousand unit) PC shipments, 2001 (thousand unit)
8,795
PC shipments, 2002 (thousand unit)
11,270
PC shipments, 2003 (thousand unit)
13,300
PC shipments, 2004 (thousand unit)
15,900
PC shipments, 2005 (thousand unit)
19,300
PC shipment forecast, 2006 (thousand unit)
21,649
Average annual growth (percent)
8.1.1
7,213
20
Market for Business Computers
Computer customers in China include the government, academic institutions, industry, service enterprises, and the military. China’s long-term goals for Chinese educational informationisation 6 by 2010 are: (1) setting up an information and communications technology (ICT) infrastructure that will cover the whole country; (2) broadly popularizing ICT education; (3) improving Chinese citizens’ knowledge of ICT applications; (4) providing a sufficient number of ICT specialists to meet social development needs; (5) putting in place a lifelong education system; (6) making software producing centers and ICT corporations operational; (7) raising the ranking of the general level of infrastructure development and ICT application in education to the top level among developing countries; and (8) matching the level of infrastructure development and ICT application of the developed countries for universities, and for 85 percent of the technical/vocational schools and primary and secondary schools in the developed areas of China. Among the major initiatives for reaching these long-term goals is the School Connection Project, the purpose of which is to enable all primary and secondary schools to have access to the Internet and to encourage the application of ICT. Over 90 percent of elementary schools are expected to be connected to the Internet by 2010. In 2002, an investment of US$108M was made by the national government to support 152 universities to establish campus networks and have access to the China Education and Research Network (CERNET).7 According to Gartner, Inc., the leading provider of research and analysis on the global information technology industry, enterprise information technology (IT) spending in China will reach US$62.3B in 2006, growing at a compound annual growth rate (CAGR) of 6.3 4
AFX News Limited, “China’s PC Market up 29 Percent in 2005, 19.3 Million Units Shipped – Gartner,” 16 February 2006, http://www.forbes.com/business 5 IDC Press Release, “IDC Reports that 2005 Marked the Strongest Growth in the Past Five Years for the Asia/Pacific (excluding Japan) PC Market,” 20 January 2006, http://www.idc.com 6 Informationisation – the process of introducing and integrating information and communication technology. 7 Chen, L., “China, ICT Use in Education,” UNESCO Meta-survey on the Use of Technologies in Education, http://www.unescobkk.org/fileadmin/user_upload/ict/Metasurvey/CHINA.PDF
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percent from 2004 to 2009. Gartner predicts that China can expect to see an annual IT spending growth rate (AGR) of 8.6 percent in 2006, with US$41.4B being spent on telecommunication services and equipment (a 9 percent increase over 2005), US$14B spent on hardware (a 5 percent increase over 2005), US$5.2B on IT services (a 13.5 percent increase over 2005), and US$1.6B on software (a 17.8 percent increase over 2005).8 A group of government-directed projects on the construction of the computer and communications network infrastructure has been another significant contributor to the rapid expansion of China’s business computer market. The so-called “Golden Projects” have been at the core of these efforts. The Golden Projects include the Golden Bridge (a national information-telecommunications network); the Golden Card (a nationwide banking network system linking China’s banks, also known as the National Credit Card System); the Golden Customs (a communications network connecting foreign trade companies with China’s Customs Bureau); and the Golden Tax (a computerized tax system). China has also developed its own “Intelligent Card Program” for identification and registration. In March of 2004, new intelligent ID cards for personal identification and registration started to be issued. These new cards are computer-readable and contain a module that integrates a special chip containing information on the card holder. The Chinese Ministry of Public Security expects this program to be fully completed by the end of 2008. A total of a billion ID cards are expected to be issued.9 Computers are also being used as management tools in large projects, including air traffic control, road transportation, and construction project management, and newly established information systems in government agencies. Large projects on the infrastructure for the hosting of the 2008 Beijing Olympic Games have also been contributing to the growth in China’s business computer market. 8.1.2
Market for Home Computers
Enhanced capabilities, Internet connection, declining prices, and rising income in China have made computers attractive to home users. In addition, the telecommunications bureau cut service charges and many Internet service providers (ISPs) launched less expensive service packages in 2000 to encourage Internet use. In 2005, home PC penetration in metropolitan areas such as Beijing, Shanghai, and Guangzhou was over 30 percent. Typical PC buyers in China are urban residents with incomes higher than the nation’s average. The New Century Group estimates that more than half of the PCs purchased by home users are bought primarily for children’s education, approximately a third for entertainment, and a small portion for work at home. For example, in 2000 the Chinese government launched plans to encourage “quality education.” Students were allowed to have less homework and more time to play. More students were expected to turn to computers during their spare time. Although home purchases of computers generally represent a larger investment for Chinese families than for the average family in more developed countries, the typical PCs purchased for home use in China are comparable in performance and functionality to those purchased in developed countries. China’s cultural emphasis on education as a means to social betterment, the one-child norm, the prestige of home computer ownership, and rising personal income are expected to continue driving home PC purchases to an annual growth rate of at least 20 percent for several years. The sales of the whole market reached over 10 million units in 2005, according to a survey conducted by CCID Consulting, a research arm of the Ministry of Information Industry. The survey predicted that market sales would reach 23 million units by 2007.
8
“Gartner Outlines Key Trends and Predictions That Will Impact Asia Pacific in 2006 and Beyond,” 7 December 2005, http://www.eba.com.hk 9 “China to Issue New Intelligent ID Card,” People’s Daily Online, http://english.people.com.cn
Computers
8.1.3
163
Market for Notebook Computers
Since 2002, laptop PCs have enjoyed the fastest growth. Notebooks sales are expected to grow with a compound annual growth rate of 27 percent from 2005 to 2009.10 The market share of Lenovo’s laptop PCs reached 16.9 percent in the first quarter of 2005, ranking first among local vendors. Overall, the competition in China’s notebook PC market is severe, as the upgrading of mainstream products has accelerated and prices have been slashed. For example, Dell has introduced a US$699 laptop PC into China’s market. Meanwhile, China’s ShenZhou computer has set the price of its laptops at from US$600 to US$1,100. In order to increase laptop PC consumption, the Chinese government offers college students PC loans. A qualified student buyer can get a laptop PC with a 20 percent down payment. Moreover, consumers’ increasing demand for wireless communications features, in addition to sliding selling prices in the end-user market and the continuing replacement effect in the desktop-computer sector, are expected to boost market demand, which in turn benefits the laptop segment.
8.2
Major Domestic Computer Manufacturers
China’s major domestic PC manufacturers are Lenovo (former Legend Group), the Founder Group, the Great Wall Group, the Tontru Group, and the Langchao Group; their subdivisions cover almost all areas in China. In the list of the 1999 top 100 domestic electronic enterprises released by the Chinese government, Lenovo (then Legend), was ranked first in sales, but only tenth in terms of profit. Since then, the major domestic computer manufacturers have gradually improved their overall profit record by promoting technological innovation, focusing more on service than on sales, exploring new businesses, and reducing the cost of incoming materials and components. In the 2003 top 100 domestic electronic enterprises list, Lenovo improved its profit ranking to second place. The overall gross profit margin increased 2 percent to 14 percent from the prior year, and the first half profits for the period ending September 2005 increased by 13 percent. 8.2.1
Legend Group/Lenovo
The Legend Group was established in 1984 by 11 researchers from the Institute of Computing Technology, a branch of the Chinese Academy of Science, with an initial capital investment of US$24,184. The original business involved the distribution of foreign-made computers, printers, and other peripherals. In 1990, Legend began to design, manufacture, and distribute its own PCs. Now, it is the largest domestic PC maker in China, with six local headquarters in Beijing, Shanghai, Shenzhen in Guangdong Province, Shenyang in Liaoning Province, Xi’an in Shanxi Province, and Chengdu in Sichuan Province, and over 100 branches in China and overseas. In 1993, Legend became the first Chinese PC maker to open a design center in California’s Silicon Valley. 11 In 1998, it established the Legend Central Institute in association with the Institute of Computing Technology of the Chinese Academy of Science for research on computer technologies. This institute continues to be the largest company-owned institute focusing on production technology in China. In 2003, the Legend Group changed its name to Lenovo to prepare for its expansion into the overseas market.12 10
11 12
CCID Advisory, Desktop PCS in China: Enabler Wider Technology Adoption, http://www.ccidavisory.com Dexter, R., and Einhorn, B., “Going Toe to Toe with Big Blue and Compaq,” Business Week, 14 April 1997 Lenovo-About Lenovo, History and Timeline http://www.pc.ibm.com/us/lenovo/about/history.html
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Lenovo’s major business areas include computers, system integration, network infrastructure, and software design. In recent years, with the rapidly growing market of wireless communication systems in China, Lenovo has begun to expand its business into telecommunications areas, such as cellular telephone manufacture and communications network construction. Lenovo has consistently formed partnerships or joint ventures with foreign companies to acquire advanced technologies. Major companies having partnerships with Lenovo are Intel in the manufacture of microprocessors, HP in the design and manufacture of computers and printers, Toshiba in the manufacture of notebook computers, Sun Microsystems in the development of server systems, Motorola in cellular phone manufacture, and Siemens in PC production. Lenovo has been the top PC seller in China since 1996. Its total worldwide sales were US$2.6B in 2003 (Figure 8.1). On 7 December 2004, Lenovo announced a deal acquiring IBM’s PC division for a total of US$1.75B, comprising US$650M in cash, US$600M in Lenovo shares, plus the assumption of US$500M of debt from IBM. This is one of the largest acquisitions a Chinese company has ever made. This deal helped Lenovo garner about 9 percent of the world PC market, making it the third largest PC business in the world behind Dell Computer Corp. and Hewlett Packard Corporation. It had over 12.3 percent market share in 2004.
3500
35
Annual Sales Volume
3000
30
2500
25
2000
20
1500
15
1000
10 5
500 0
China Market Share (Percent)
Annual Sales Volume (Thousand Units)
Market Share
0 94
95
96
97
98
99
00
01
02
03
Figure 8.1: Annual PC Sales of Legend Group (now Lenovo) Since 199413,
14, 15
Lenovo is No.1 in the local desktop market with a 29.7 percent share in the first quarter of 2005, according to the Beijing IT research firm Analysys International. That is partially because of increased competition from local “white-box” players that assemble no-frills machines. These PCs are popular in smaller Chinese cities where consumers balk at paying the US$700 to US$950 that Lenovo typically charges. Meanwhile, Lenovo is now introducing its first Lenovo-branded computers to be sold outside its home base of China. Its new 3000 series of computers are supposed to target the same market as its ThinkPad products. Lenovo has a tougher time in that market since notebooks are harder to make, more expensive, and usually sold to higher-end customers who are more brand-conscious. Nevertheless, China’s notebook sales grew at an annual growth rate of 23.3 percent in the first quarter 2005; Lenovo’s share in notebooks was 17 percent in the first quarter of 2005.
13 14 15
Legend Internal Report, 2000-2003 ING Barings Report, 2001 Lam, D., Investment Research Report – Legend, KIM ENG Securities, 15 October 2001
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8.2.2
165
Founder Group
The Founder Electronics Group was founded by Peking University in 1986 as a high-tech enterprise primarily focused on Internet-based software development and system integration for the media industry. It owns five listed public companies on the securities exchanges of Shanghai, Shenzhen, Malaysia, and Hong Kong, as well as 20 solely or jointly-owned enterprises, with a total of 20,000 employees worldwide. As a leader in Chinese software, the Founder Group diversified into the PC business in late 1995. Founder was not then among the top 20 PC vendors in China. Since late 1999, Founder has become the second-largest PC vendor in China, just behind Lenovo, and has stood firmly in second place for six consecutive years. Faced with fierce competition, Founder has moved quickly towards more value-added upstream links and stepped into the fields of breadboard and chip production. In the first quarter of 2005, Founder ranked second in sales with a 12 percent market share according to IDC, an IT industry research firm. 8.2.3
Great Wall Group
The Great Wall Group, founded in 1986, is a large state-owned enterprise with several significant subdivisions and joint ventures with IBM and Intel. It was also the first company in China to create a server series based on Intel’s Pentium Pro processor. Great Wall Group has seven wholly owned subsidiaries, 14 holding companies, four associated companies, and four listed companies, with a total of over 10,000 employees. The Great Wall Group produces IBM and other brand-name products, as well as its own brands. The business has extended to several fields, such as core computer parts, computer manufacturing, software and system integration, broadband networks, and value-added services. Great Wall Group's offering of core computer parts includes magnetic heads, disk substrates, HDDs, displays, switching power supplies, and cards. Their computer supplies include PCs, notebook computers, servers, ATMs, tax-controlling cashing machines, projectors, digital TV sets, and remote-control electric meters. As a large state-owned enterprise, the Great Wall Group has a strong R&D force, and is one of the largest domestic PC vendors in China. 8.2.4
Others
The Nanjing-based Tontru Information Industrial Group is part of the key Information Industrial Group for China’s Ministry of Electronics Industry. It has five production bases located in Nanjing, Jiangmen, Guiyang, Yunnan, and Daqing, and has the capability of producing 100,000 sets of computers a month. Tontru’s most important foreign partner in China is Intel. It also has close partnerships with HP, Sunsoft, Samsung, LG, Leo, and Daewoo. The Langchao Group is the one of the first information technology enterprises engaged in the research, development, and production of PCs. Langchao is also one of the nation’s largest suppliers of server products. In the Investigation Report of the Server Market in China in 2003 published by CCID, Langchao again ranked first in sales volume of domestic servers.16 Its products include PCs, servers, mobile telephones, broadcasting and television equipment, communications software, office machines, and management software for small and mid-size enterprises. Since 1993 Langchao has led server manufacturers in China to occupy 50 percent of the market share in China.17 Langchao has partnerships with Intel, Microsoft, and LG.
16 17
Langchao Products and Services, http://www.langchao.com.cn/english/prodserv_ls.html Ibid
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8.3
Major Foreign Competitors
Major foreign computer manufacturers operating in China include Hewlett-Packard, Dell, AST, Gateway, Apple, Sun Microsystems, and Texas Instruments of the United States; NEC, Fujitsu, Hitachi, Casio, Oki, and Toshiba of Japan; Samsung of Korea; and Siemens of Germany. In China’s market, foreign brands lag far behind domestic brands, which are led by Lenovo (see Figure 8.2). 25 20 Lenovo HP
15
Dell 10
Founder Acer
5 0 1Q 2004
2Q 2004
3Q 2004
4Q 2004
1Q 2005
2Q 2005
3Q 2005
Figure 8.2: Top Five Vendors and Their PC Market Share in the Asia-Pacific Region, Excluding Japan, for 2004 - 200518 One of the fastest growing foreign computer companies is the U.S. giant Hewlett-Packard Corporation. The merging of HP and Compaq increased the company’s market share to 9.2 percent in the third quarter of 2003. It has since been ranked second within the Asia-Pacific region (excluding Japan), following Lenovo, except for a brief time during first quarter 2005, when it ranked first, with an 11.6 percent market share. It was once again passed by Lenovo and is now ranked second, with 12.4 percent to Lenovo’s 20.4 percent for the third quarter of 2005. Lenovo also sees serious competition from Dell, which also manufactures its PCs in China. The U.S. PC maker is pushing hard into the Chinese enterprise market, and its efforts have paid off. Dell is offering compelling products at reasonable prices and, just as important, is leveraging its name with business awareness of what is going on in the West. Dell held 8.4 percent of the PC market share; however, the market share gains were at the expense of other multinational brands, not local ones. The market share battle in China is ferocious; local firms are fighting each other for top position, while multinational players are cannibalizing themselves. Despite declining profits, PC makers eager to expand their presence are expected to continue their price wars. In particular, international chip-making giant AMD’s aggressive expansion in China will enable PC makers to lower their costs further. AMD’s processors are sold at half the price of Intel’s, and those products with AMD processors are competitive in price. Consumer PC applications and their potential value are the primary factors that are determining the growth of the consumer PC market. In the next 3 to 5 years, the consumer PC market should see steady growth in China’s good economic environment. Meanwhile, a
18
Data for Lenovo includes shipments for IBM PCD including desktop and portable PCs starting in the second quarter of 2005. This represents the legal status of the companies that merged in the second quarter of 2005.
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tremendous demand has become the main driving force for the future development of the Chinese consumer PC market.
8.4
China’s Supercomputers
China’s first supercomputer, called “Yinhe” or “Galaxy,” was developed by the University of National Defense Science and Technology in 1983. The first model, “Yinhe-1,” had a peak computing speed of 100 million floating point operations per second (MFLOPS). Since then, several models with enhanced performance have been developed. Yinhe-2, released in the early 1990s, was capable of 1,000 MFLOPS, and Yinhe-3 reached a computing capability of 13,000 MFLOPS in 1996 and 30,000 MFLOPS in 1998. China also developed Yinhe Fangzhen, or Simulation System, Types I and II (YH-FZ1 and YH-FZ2) and their successor, Yinhe Super-Simulation Computer (YHSSC). The YHSSC was used to improve China’s rocket systems, design its Qinshan-2 nuclear reactor, and develop various unmanned space vehicles. China commercialized the Yinhe-series supercomputers in 2001 and developed a Yinhe super-server model for commercial business use. In 1995, the State Intelligent Machinery Research and Development Center of the Chinese Academy of Science Computer Institute developed Dawn 1000, a super-server system that reached 2,500 MFLOPS. In 1998, an enhanced model, Dawn 2000-I, became capable of operations at a speed of 20,000 MFLOPS. In 2000, its successor model, Dawn 2000-II, reached 110 billion FLOPS in peak computing speed. Dawn 3000 was released in February 2001 with the peak operational speed of 402 billion FLOPS. The latest model of the Dawn-series computer is Dawn 4000A, which was released in June 2004. It is a 2000-processor OpteronTM supercomputer with AMD chips. Its peak operational speed reached over 11 trillion FLOPS, ranking it 42nd of the top 500 supercomputers in the world.19 Other major China-developed commercial supercomputers include “Shenwei” and “Ziqiang,” which were first developed in 2000. Shenwei I has the peak operational speed of 384 billion FLOPS, ranking it forty-eighth among the world’s supercomputers for business operation. Ziqiang 2000-SUHPCS is a high-performance cluster computer system capable of operations at 300 billion FLOPS. In August 2002, China’s largest computer manufacturer, Legend Group (Lenovo), announced the development of the fastest supercomputer built by a Chinese organization, the Shenteng 1800. It achieved a peak computing speed of 1.027 TFLOPS (teraflops) and ranked twenty-fourth among the top 500 performance computers in the world. The Shenteng computer was installed at the Mathematics and System Science Research Institute of the Chinese Academy of Sciences. Among other supercomputers, the Legend Deepcom 1800 Linux Cluster reached 2 TFLOPS in 2002. The peak performance of the newly released Dawning 4000L Linux Cluster on 14 March 2003 was 3 TFLOPS. In 2003, the National Institute of Advanced Industrial Science and Technology started to combine 1,058 IBM OpteronTM servers with about 520 Intel Itanium 2 boxes to create a Linux computing cluster that would be capable of more than 11 teraflops. That level of performance should put the cluster near the front of the top 500 list. Chip giant Intel has teamed with China’s Ministry of Education (MOE) to build a national computing grid – a network of computers harnessed to work together. When the grid is completed, the MOE expects it to have performance of more than 15 teraflops, making it one of the world’s most powerful high-performance computing grids. Among other things, it will be used to help power the Digital Olympics initiative to support the 2008 Olympic Games in Beijing.
19
“TOP 500 List for November 2005,” http://www.top500.org/lists/2005/11/basic, accessed February 2006
Chapter 9 Telecommunications Industry
This chapter introduces China’s telecommunications industry and equipment market, related government agencies, market regulations, and the main telecom manufacturers and carriers. It also addresses existing challenges in the industry and development directions.
9.1
Overview of China’s Telecom Industry
In 1978, less than one percent of Chinese households had telephones after 30 years of a planned economy system. The situation has changed drastically since economic reform. By January 2006, China’s fixed-line subscribers had reached 350 million and mobile subscribers numbered 388 million.1 From 1991 to 2005, the annual growth rate in fixed line telephones was 30 percent,2 and more surprisingly, in the same period, the growth rate of mobile phone users was 105 percent annually.3 The number of telephones owned per hundred persons by November 2005 was 55, which was more than 50 times that of 1990. The total telecom revenue in 2005 was US$65.4B, with fixed assets investments (equipment market) of US$20B.4 With the growth rate of China’s telecom industry far exceeding that of the national economy, an advanced, high-quality, versatile, and functional modern communication network has developed, covering the whole country and connecting to the world. After 10 years of development, the market monopoly of the former Ministry of Post and Telecommunication (MPT) has been broken and a competitive market has evolved. In 2005, there were six major telecom operators in the market-- China Telecom, China Mobile, China Unicom, China Netcom (a merger of the north part of the former China Telecom and JITONG Communications Co., Ltd.), China Satellite, and China Railcom--and many medium and small telecom companies. Every company specializes in one or more types of telecom business. Not only is China the biggest market in the world, but it has become a producer and exporter of its own telecom equipment, playing a role in the business market. China’s domestic manufacturers, like Huawei, ZTE, and POTEVIO Group, dominate much of the switching, mobile, transmissions, and data communications equipment market. For example, Huawei alone holds more than a 15 percent market share of the Asian optical transmissions
1
Ministry of Information Industry (MII), http://www.mii.gov.cn/col/col166/index.html, accessed January 2006 MII, http://www.mii.gov.cn/art/2005/12/16/art_166_1571.html, accessed January 2006 3 MII, http://www.mii.gov.cn/art/2005/12/16/art_166_1599.html, accessed January 2006 4 Ministry of Information Industry, http://www.mii.gov.cn/art/2005/12/29/art_166_4074.html, accessed January 2006 2
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equipment market, which is greater than Alcatel’s.5 Furthermore, almost 80 percent of Lucent Technologies’ products are made by companies in China.6
9.2
Related Government Organizations and Regulations
Several government agencies are associated with China’s telecom industry. At the top level is the State Council, which issues telecom regulations and ensures that the telecom industry and the ministries are serving the interests of the nation. The State Development and Plan Commission (SDPC) provides the development plans for the telecom industry, balancing telecom needs against the development of the nation’s economy as a whole. The Ministry of Information Industry (MII) is the branch of the State Council that directly leads China’s telecommunications and information industry. The major functions of MII include formulating strategies and policies, drafting telecom market laws and rules, making development plans and setting technology standards, supervising the telecom market, and formulating prices. To fulfill these functions, MII has set up several departments, including the MII Office, the Department of Policies and Laws, the Department of Integrated Planning, the Department of Science and Technology, the Department of Economic System Reform and Operation, the Bureau of Telecom Administration, the Department of Economy Adjustment and Telecom Clearance, and the Department of Electronic and Information Products Administration. In September 2000, the State Council adopted “Telecommunications Regulations of the People’s Republic of China,” drafted by MII. It was China’s first administrative ordinance in the field of telecommunications. On the same day, the State Council also approved “Management Methods for Internet Information Services.” These regulations and methods were designed to promote and guarantee the development of China’s telecom industry. The provincial telecom administrations were then generally restructured in line with the principle of separating government and enterprise functions. 9.2.1
Telecom Equipment Market Policy: Buy Local
China wants Chinese companies to control and reap the benefits of telecom development, and that underlies its basic policy toward the telecom equipment market. The strategy of the Chinese government entails a three-step process: (1) importing technologies; (2) establishing joint ventures (JVs) with companies that are leading the world in specific areas; and (3) developing telecommunications products with Chinese intellectual property rights. The goal is to make China less dependent on imported telecom products and able to cultivate its own telecom equipment manufacturers. China also hopes to export its own telecom products while meeting domestic demand. The Chinese government believes that it can leverage access to its market in exchange for advanced technology transfer. The first two steps have been achieved. To fulfill the last step, MII has been enforcing a “buy local” policy that demands that telecom carriers like China Telecom and China Unicom give priority to domestic products when purchasing. This has supported the development of China’s telecom equipment manufacturing industry and burdened foreign telecom vendors hoping to export their products to China. The effect of this policy is apparent, with about 98 percent of the local exchanges being domestically manufactured products.7
5
Xiong, H., “Competition in the Optical Communications Market: Huawei vs. Alcatel in Asia,” http://www.cndata.com/tech/jsmessage/news/marketmessage/article20654.asp 6 Roberts, B., “Beyond the China Mystique,” Electronic Business, 1 March 2006 7 Advanced International, “Telecommunications Equipment Market in China,” http://www.ai-china.com/free/download/fr21.pdf
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Telecom and Internet Regulations
According to the “Telecommunication Regulations of the People’s Republic of China,” licenses are required for all types of telecom equipment, including wired and wireless, hardware and software. MII has authorized its Bureau of Telecommunications Administration to issue telecom equipment licenses. The telecommunications equipment licensing system is officially called the “Telecom Equipment Network Access Approval Management Method.” The Telecommunications Administration publishes a catalogue of all licensed telecom equipment, including information about its quality. Telecom operators such as China Telecom and China Unicom are prohibited from purchasing equipment that is not in the catalogue. Selling, using, or advertising unlicensed telecom products in China is prohibited. Warnings and fines are levied for any violations. Access to the Internet is widely available and almost all information can be obtained. However, the government does not want anyone to write, send, or read any information on the Internet that criticizes its policies or that may threaten the national interest. Furthermore, the Chinese government maintains information about users’ access to the Internet. The “Internet Information Services Management Rules” issued in September 2000 require that all Internet information service providers who are engaged in news, publication, and bulletin board services (BBS) must record the information content they provide, the time of access, and the Internet address or domain name. Internet access service providers must record such information as the net users’ access time, accounts, IP addresses or domain names, and telephone numbers. These content and access records are to be kept for at least 60 days and must be presented to authorities on demand.8 Before China joined the World Trade Organization (WTO), the Chinese government tightly controlled the operation of telecom services. Direct investment in telecom service areas from overseas companies was strictly forbidden. In accordance with the rules of the WTO, the service market must eventually be opened to overseas companies. So on 11 December 2001, the same day China joined the WTO, the State Council released “Provisions on the Administration of Foreign-invested Telecommunications Enterprises,” which gives foreign telecom investors clear guidance for development in China. The provisions, which came into force on 1 January 2002, were the first set of stipulations for overseas investment in China’s telecom industry. The provisions provide information for overseas companies wishing to invest in China’s telecom industry. Foreign investors can set up joint ventures with domestic partners or directly invest in a telecom operator. Yet their shares in telecom operators, which are divided by the Chinese government into basic telecom operators and value-added operators, must remain below 49 and 50 percent, respectively.9 The Provisions have provided confidence to foreign companies wishing to invest in China’s telecom market. In March 2002, the Shanghai Posts and Telecommunications Administration, Shanghai Information Investment Co., Ltd., and AT&T formed a joint venture named Shanghai Xin Tian Communications Co., Ltd., in Shanghai’s Pudong New Area. Wu Jichuan, former Minister of the Information Industry of China, said, “The telecommunications service market must open up further to the outside world and the joint venture with AT&T marks the first step in this trend.”10 However, cooperation between 8
MII, http://www.mii.gov.cn/mii/hyzw/hygl/guowuyuan12-21-01.htm (in Chinese), accessed September 2002 According to the provisions, the capital contribution ratio of a foreign investor in an enterprise operating a basic telecommunications business (other than wireless paging) cannot exceed 49 percent. The capital contribution ratio of the foreign investor in an enterprise operating a value-added telecommunications business (including the basic business of wireless paging) cannot exceed 50 percent. The capital contribution ratio between the Chinese and the foreign investor in different periods is determined by the supervisory department for the information industry under the State Council in accordance with the relevant provisions 10 “中国加入世贸组织后首家中外电信合资公司上周出世 联手中国电信 AT&T 苦守 8 年渗入中国,” People’s Daily, 25 March 2002 http://past.people.com.cn/GB/it/306/1973/2975/20020325/694086.html 9
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overseas companies and local operators is not always achievable. On 30 June 2004, a joint venture basic telecom operator, Shenda Telephone Co., Ltd., founded in 1983, was divided into district companies and merged into Shenzhen Telecom Co., Ltd., which is a local telecom company. The foreign investor of Shenda Telephone, Britain Cable and Wireless PLC (BCWC), took back all its investment and left. BCWC kept its original investment of US$5M, which was 50 percent of the original registered capital.11
9.3
Fixed-line Business
By January 2006, China’s fixed-line subscribers had reached 350 million and mobile subscribers numbered 388 million. Communications capability can serve 469 million people, and long-distance telephone lines total nearly 18 million. The gap between rural and urban telephone subscribers has also been closing, as the ratio of urban to rural telephone subscribers dropped from 3.5 in 1996 to 2 in 200512. The increase in rural telephone subscribers has spurred the growth of township and village enterprises, and MII’s preferential policies favor the less developed regions in China. Since 2003, a local wireless telephone service, Xiao Ling Tong, spread very quickly in China. In 2004, 56 percent of newly registered fixed-line subscribers were using Xiao Ling Tong. This service is restricted by MII to supplementing the fixed-line phone service. The greatest attraction of the service is that it provides low service rates and, at the same time, the convenience of wireless communication. The cost of Xiao Ling Tong is 20 to 30 percent of that of standard mobile communications with Global System for Mobile Communications (GSM) and code division multiple access (CDMA) systems. The technology for local wireless communications is called PHS (personal handyphone system), which originated in Japan. Some experts insist that PHS is an out-of-date technology, since it is a second-generation (2G) technology and cannot evolve to third-generation (3G) communication. However, many consumers live in cities and do not travel a lot. The low-rate Xiao Ling Tong fits their needs exactly. The number of subscribers reached 85 million by December 2005. It is estimated that subscribers may surpass 200 million in the next few years.13
9.4
Mobile Communications Business
The development of fixed-line telephone services in China is striking, but more surprising is the even faster growth of mobile communications and paging services. With 388 million mobile phone users in the beginning of 2006, China has rapidly become the largest mobile telecommunications network in the world, surpassing the United States since 2002. Figure 9.1 shows China’s average annual growth rate of mobile telephony between 1991 and 2005. Through the 1990s, this phenomenon was mainly due to the underdeveloped fixed-line infrastructure, inadequate fixed-line service, and high telephone service fee under the monopoly of China Mobile (part of the former China Telecom). Also, aggressive foreign cellular sales and an initial lack of restrictive Chinese government regulations encouraged the cellular expansion. In 2005, China had three major mobile telecommunications networks: GSM, CDMA, and general packet radio service (GPRS). All of these networks were digitalized. China Mobile promoted GSM service and was upgrading gradually to GPRS (2.5G) and WCDMA
11 Economic Observation Newspaper, “How Many 3G Licenses in China Will Be Issued?” 2 September 2002. http://web.syr.edu/~ztan/news-3g.html (in Chinese) 12 MII, http://www.mii.gov.cn/art/2006/01/24/art_166_5447.html, accessed January 2006. 13 Zhou, H., http://ermyd.cnii.com.cn/20040308/ca246761.htm
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(3G). To better compete with China Mobile, Unicom applied to MII for a CDMA plan and was approved. In the following section, these two companies will be discussed in detail. Overall, China Mobile is the leading operator, with 188 million subscribers, which accounts for 60.6 percent market share, while China Unicom held the remaining 39.4 percent as of July of 2004.14 China Unicom’s market share has increased almost 10 percent since it launched the CDMA service in 2003. 450 388
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13.23 23.86 0.05 0.18 0.64 1.56 3.63 6.85
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0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Figure 9.1: Mobile Telecom Subscriber Development (1991 to 2005)15 GSM is a pan-European standard for digital cellular communications. GSM has been emerging as the dominant digital standard in Asia, and currently the dominant mobile telecommunications system in China. Both China Mobile’s and China Unicom’s networks are based on this second-generation communications standard (analog technology is the first generation). China Mobile has 15 GSM networks covering the whole country. China Unicom launched GSM service in July 1995 with its own four operational GSM networks. China Unicom’s GSM network covers 333 cities with 68 million users in 2002.16 GPRS is also a 2.5-generation communication system, a technology system between the current second-generation digital communication technologies (GSM and CDMA) and the future third-generation technologies. To compete with the development of the CDMA network of China Unicom, China Mobile launched its GPRS service in May 2002. The highlight of this service is its data communications ability. With a GPRS handset, a subscriber can stay online all the time. The multimedia message service (MMS) it provides is especially attractive to many young people. China Mobile’s strategy is to smoothly transfer from GPRS to a third-generation mobile network, WCDMA. In order to ease the strain on frequency resources, the Ministry of Information Industry allowed CDMA service to compete with GSM technology. CDMA is an American digital standard that was approved by the U.S. Telecommunications Industry Association in August 1993. It is also a second-generation digital communications system. Compared with GSM, CDMA promises to deliver greater radio frequency capacity gains, lower power
14
China Mobile, www.chinamobilehk.com/investor_relations/op_data/2004/index.php, accessed 6 September 2004 15 MII, http://www.mii.gov.cn/jcms_xxcy/jcms_files/jcms1/web1/site/art/2006/01/24/art_166_5447.html, accessed January 2006 16 Ministry of Information Industry, “China’s Information Industry 10th Five-year Development Plan,” 2002
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consumption, and better voice quality, while requiring fewer base stations to cover the same area. MII assigned this job to China Unicom. After successfully testing the CDMA system in seven major cities, China Unicom obtained a license from MII to build and operate its own CDMA system. Since 2001, Unicom has invested more than US$3B in the construction of a CDMA system that could serve more than 24 million users, cover 330 cities, and roam in over 20 countries and areas. The new CDMA network is called “Unicom New Time Space.” CDMA subscribers accounted for approximately 24 million by mid 2004. The launch of 3G service has been bumpy in the past few years. To initiate 3G service, the mobile service carriers need to obtain licenses issued by MII, and MII’s decision is based on the domestic market response for high-speed data and multimedia services. MII originally estimated that 2G subscribers would peak after increasing in 2004 and 2005 and then start to decrease; the turning point could be a good time to license carriers. While waiting for MII’s license, China’s mobile services began 3G testing during 2001 and 2002. However, the income level in China is relatively low and mobile data service charges are quite high. Besides, judging by the service popularity of China Mobile’s GPRS and China Unicom’s CDMA data services, users were not enthusiastic about these services. It is clear that domestic mobile communications demands have remained largely in the voice business, so MII postponed its schedule to issue 3G licenses several times.17 In 2003, China initiated 3G networking tests. By the end of 2005, carriers were still waiting for the licenses. At the same time, global 3G service has been developing and expanding very quickly. By September 2005, the total number of 3G subscriber had reached 200 million.18 Pushed by the development of global 3G services and the promise of the Chinese government to provide 3G service for the 2008 Olympics, all involved entities expected China would license and launch 3G service in 2006. In January 2006, the Vice Minister of MII, Xi Guohua, expressed at China Telecom’s annual meeting that it is decision time for 3G licensing. His words were an encouragement for mobile carriers.
9.5
Development of the Backbone Transfer Network
China started its backbone transfer network construction in the 1990s. This is a nationwide, extreme high-band (2.5 gigabytes per second or higher), long distance, fiber-optical network transferring both voice and data information. By the end of 1998, China Telecom had completed the construction of the eight west-to-east and eight north-to-south fiber optic cable that connected the 31 provincial regions. The total length of this backbone network is over 32,190 km and the transmission rate is 2.5 Gb/s. By the end of 2002, trunk fiber lines for long-distance and local calls in the whole country totaled 2.25 million kilometers, of which 20 percent were dedicated to long-distance lines. The backbone network was planned to be the most advanced in the world. However, optical transmission technology and the Internet are updating and developing daily, and the demands for transmission rates have increased during construction. Consequently, China Telecom has built a high-speed transmission circle on the 8-8 backbone network. The transmission technology adopted was dense wavelength division multiplexing (DWDM), with rates of 320 Gb/s and SDH 10 Gb/s. These high-speed circle networks were put into use at the beginning of 2002, and were believed to be the world’s longest transmission network. They brought China Telecom better bandwidth, an unprecedented intelligence level, and the lowest transmission cost in the industry.
Economic Observation Newspaper, “How Many 3G Licenses in China Will Be Issued?” 3G topic, C114.com, http://www.c114.net/zhuanti_simple/3g/Read_3g.asp?action=f08&articleID=218, accessed January 2006 17 18
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After that, the updating of the national backbone network has continued. In 2004 and 2005, as most carriers finished constructing their backbone network, the investment focused on metro-area and community-area networks known as “Fiber to the Home” projects.
9.6
China’s Telecommunications Operators
Before 1994, the MPT was the only telecom service provider in China’s market, as well as the government administration and execution agency. The MPT was responsible for the regulation and operation of networks, as well as for policy, equipment approval, planning, and inter-provincial network construction and operations. It simultaneously acted as the rule maker, the referee, and the athlete. Thus the MPT was considered the biggest industrial monopoly in the country. In March 1995, an independent enterprise was separated from the MPT and officially registered with the State Administration of Industry and Trade as a legal entity. This was China Telecom. It was the largest telecommunications carrier in the country at that time, responsible for operating and building a nationwide telecommunications network and providing basic and value-added telecom services. China United Telecommunications Corporation (Unicom) was established to provide telecommunications services, challenging the monopoly of China Telecom. China Unicom is a consortium authorized by the Chinese government to compete in all spheres of telecommunications operations. Formed by the Ministry of the Electronics Industry (MEI),19 the Ministry of Railways (MOR), and the Ministry of the Power Industry (MPI), China Unicom also received financial support from 13 other influential Chinese investors, including China International Trade and Investment Corporation. To prepare for China’s accession to the WTO, more players were allowed to enter the telecommunications service market. China’s third-largest telecom corporation, China Netcom, was established in August 1999, with an investment of US$50M from such state investors as the Chinese Academy of Sciences (CAS), the State Administration for Radio, Film and TV (SARFT), the MOR, and the Shanghai Municipal Government.20 China Netcom is focused on broadband access and Internet protocol (IP) telephony services. In February 1999, within the scheme mapped out by the State Council, the former China Telecom was broken up into four companies. The company operating its fixed telephone and data communications business (the largest part) is still called China Telecom; the one operating its mobile telecom services is called China Mobile. The sub-company of the former China Telecom operating paging communication services, Guoxin Paging Co., was incorporated into China Unicom with US$1.5B in assets. The one remaining original satellite operation, China Satellite Telecommunication Group (China Satcom), comprised of five companies, was approved by the State Council in June 2000. Two other telecom carriers have joined the market competition: Jitong Communications Co. was formed by a consortium of 30 state-owned enterprises and research institutes and is allied with the former MEI. Its focus is the domestic information service market. JITONG runs a data network that provides Internet protocol telephony and has spurred China Telecom to answer with its own IP service. China Railcom, from the Ministry of Railways, provides basic fixed telephone services, competing with China Telecom. In May 2002, the State Council approved a new decomposition plan for China Telecom. China Telecom’s provincial companies from 10 provinces in north China (including Beijing Telecom, Shandong Telecom, and JITONG Communications) were incorporated into China 19
In March 1998, the Ministry of Information Industry (MII) was established to replace the former MEI and the MPT, and to take over network management functions from the Ministry of Radio, Film, and Television. The MII’s main function is to plan, regulate, and control the development of the information and telecommunications industry. 20 China Netcom, 2000, http://www.chinanetcom.com.cn/en/index.asp
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Netcom. The south China part, which has 70 percent of the fiber lines and telecom capacities, is still called China Telecom. The new China Netcom and China Telecom can mutually build local fixed-line networks and provide fixed telephone services. 9.6.1
China Telecommunication Corporation
China Telecommunication Corporation (China Telecom) is the leading provider of wire-line telephone, data, and Internet and leased-line services in China. It formally commenced operations in May 2002. The telecom services it provides include domestic and international wired-line telephone services; multimedia communications and information services; leasing of network elements like circuits, fiber optics and channels; website hosting; Internet protocol telephony; ISDN services; IC card payphone service; and teleconferencing. In November 2002, China Telecom was listed on the New York and Hong Kong stock markets. China Telecom’s wire-line telephone business revenue from local telephone services, its principal business, reached nearly US$10B in 2004, an increase of 5.8 percent over 2003.21 Local telephone service revenue represented about 50 percent of the total operating revenue of the company. China Telecom holds a dominant market position in local telephone services with a market share of 95 percent in terms of the number of access lines by December 2004. In 2004, the total domestic long distance usage was 82.0 billion minutes, an increase of 21.8 percent over 2003. The revenue of long distance services reached US$3.2B, and the market share accounted for 45.8 percent in 2004. China Telecom is a traditional fixed-line communication service provider, but entering the highly profitable mobile communications market has always been its long-term plan. From the establishment of local wireless telephone service (Xiao Ling Tong), China Telecom set foot in the wireless communication area. Because of its low rates (the same as local telephone charges), the local wireless telephone service has expanded very quickly. China Telecom may obtain a 3G license in the first half of 2006 and then will be able to join the wireless communications competition. In the Internet and managed data services areas, the company is the leading provider of Internet services in its service regions. In 2004, revenue from Internet services reached US$1.7B, an increase of 41 percent over 2003, representing 8.8 percent of the total operating revenue of the company. As a result of the strong demand for broadband services, the total number of broadband subscribers reached 13.8 million in 2004, an increase of 91.4 percent over 2003. Broadband subscribers only represented 7.4 percent of total local telephone subscribers at the end of 2004, which presents great potential for further growth. The company fully leveraged its dominant position in local access networks, extensive distribution networks, and high-quality customer services in promoting various broadband access services, especially ADSL. As a result, the company strengthened its leading position in the market. According to China Telecom, in the first half of 2005, its operating revenue was about US$10B, an increase of 6.1 percent over the same period of 2004. Broadband Internet services and value-added services became the key drivers of revenue growth. Revenue generated by non-voice services, such as Internet access and value-added services, accounted for 23.6 percent of its operating revenue, which increased 3.3 percent over the same period of 2004. This is due to rapid growth in broadband Internet services and value-added services. By the end of June 2005, the total number of local telephone subscribers reached 202 million, a growth rate of 8.4 percent from the end of 2004. Wireless local access service (Xiao Ling Tong) experienced stable growth and investment return continuously increased. In the first half of 2005, value-added services generated US$568M in revenue, representing an increase of 56 percent over the same period of 2004. New
21
China Telecom, http://www.chinatelecom-h.com/gb/business/overview.htm, accessed February 2006
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value-added services, such as short message service (SMS) over PAS and color ring tones, grew vigorously. The net addition of broadband subscribers in the first half of 2005 was 3.53 million, and revenue from Internet access was over US$1B, an increase of 29.3 percent from the same period of 2004. 9.6.2
China Mobile Communication Corporation
China Mobile Communication (China Mobile) has the largest network capacity and subscriber base in China and in the world. 22 Mobile communications development in China is essentially the story of China Mobile and its predecessor, the mobile communication department under China Telecom. Because of construction and expansion since 1987, China Mobile has established an integrated communications network covering almost all counties in China. The network capacity reached over 400 million and subscribers reached 246 million by the end of 2005. Its international roaming service covers more than 193 countries with 242 mobile telecom carriers in 2005. China Mobile mainly supplies mobile telephony, data, IP telephony, and multimedia services; it has obtained the right to operate as an international Internet interconnection unit and provide fax, data, Quan Qiu Tong (global communication) IP telephony, information on demand, handset banking, global access wireless application protocol (WAP), and a host of other value-added services, in addition to basic voice service. Its Quan Qiu Tong, Shen Zhou Xing (domestic communications), and Monternet (mobile Internet) have become famous service brands. China Mobile entered the international capital market in 1997, absorbing more than US$16B from foreign shareholders. In 2005, China Mobile ranked 224th of the top 500 enterprises worldwide according to Fortune. It first entered the top 500 as 336th in 2001. Its operating revenue was US$23B in 2004. In 2004, China Mobile had registered capital of US$6.24B and its fixed assets were more than US$50B. It has more than 128 thousand employees, and has set up exclusively self-funded subsidiaries in 18 provinces (autonomous regions and municipalities). It owns China Mobile Group (Hong Kong) Co., which has established exclusively self-funded subsidiaries in 21 provinces and is listed on the Hong Kong and New York stock markets. China Mobile sped up wireless data services and built an industry chain through the development of its SMS, incorporating Internet content and service providers. Its next step is to initiate real mobile multimedia services. In new business services like GPRS, colorful MMS, and GPS service, McKinsey and Company estimated that the management system in China Mobile is 2 to 3 years ahead of the average Chinese company. 9.6.3
China United Communication Co., Ltd.
China United Communication Co., Ltd., also known as China Unicom, was founded in July 1994, introducing competition in basic telecom service and promoting the reform and development of China’s telecom industry. It has more than 300 branches and subsidiaries in 30 provinces, municipalities, and autonomous regions. In June 2000, China Unicom succeeded in being listed on the New York and Hong Kong stock exchanges. China Unicom provides a wide range of telecommunications services, including cellular, paging, long-distance and local telephone, data communications, Internet access, e-commerce, and added-value services. The company plans to expand its data services to include leased line, frame relay, ATM, and virtual private network services, as well as Internet services of access and web hosting. To support its integrated operations, Unicom relies on a nationwide broadband fiber optic transmission network using synchronous digital hierarchy (SDH) architecture and dense wave-division multiplexing (DWDM) technology.
22
China Mobile (H.K.) website, http://www.chinamobilehk.com/, accessed February 2006
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China Unicom invested more than US$3.6B to build the largest CDMA network in the world. This strategy was risky, but it is close to success: it reached the sales goal of 7 million users by the end of 2002. Unicom’s CDMA network is based on the IS95 version – a second-generation standard without data services. In 2003, China Unicom launched the CDMA 1X network. This enabled China Unicom to provide versatile wireless data services like email, Internet surfing, and WVPN at 144 kbps. China Unicom continues to learn CDMA operation from South Korea. In 2004, China Unicom’s revenue was US$8.9B, an increase of 8.9 percent from 2003. Mobile subscribers increased by over 21 million and the total number reached 113 million, including 85 million GSM subscribers and 28 million CDMA subscribers. Internet users reached 13 million. Its CDMA network capacity reached 70 million; the counterpart GSM was 85 million. The total optical backbone has reached km. In August 2004, Unicom launched “Wind of World” dual-mode (GSM/CDMA) mobile services.23 In 2005, Unicom reached its target in building the CDMA network and the equipment investment on CDMA slowed down. Network capability had reached more than 70 million subscribers. In the future, Unicom plans to focus more on optimizing and increasing the efficiency of the current network. In the first half of 2005, Unicom received revenue of US$4.6B, an increase of 7.2 percent over the same period of 2004. The average increase rate of China’s telecom operation industry at that time was more than 10 percent. China Unicom did not perform as well in 2005. In this period, its profit was US$170M, a decrease of about 12 percent from the same period of 2004. This was partly due to heavy competition in the mobile communication market. There were five mobile networks at the same time: China Unicom and China Mobile’s GSM networks, Unicom’s CDMA network, and China Telecom and China Netcom’s Xiao Ling Tong networks. The cell phone penetration rate was 28 per hundred persons, a substantial figure. Since Xiao Ling Tong local wireless service is more attractive to new subscribers, the increase in the rate of new mobile subscriptions was slowing down. CDMA subscriptions per month decreased from 560,000 in January to 400,000 in June, with a total of about 31 million. China Unicom still runs its CDMA network under deficit. It has been estimated that without 50 to 60 million users, Unicom cannot make a profit. That target might not be achieved for another 1 or 2 years. 9.6.4
China Network Communications Co., Ltd.
China Network Communications Co., Ltd., also called China Netcom or CNC, is a broadband telecommunications operator. Its core business includes providing Internet broadband access and integrated telecom services to residential and corporate customers. Its comprehensive array of telecom licenses, including the license to operate international gateways out of China, puts CNC on a level with China Telecom. In August 1999, China Netcom was founded by four entities affiliated with the Chinese government: the Chinese Academy of Sciences (CAS); the State Administration of Radio, Film and Television (SARFT); the Ministry of Railways (MOR); and the Shanghai Municipal Government. In May 2002, the new China Netcom Corporation (CNC) came into being. It incorporated the north China parts of the former China Telecom, including Beijing, Tianjin, Hebei, Shanxi, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Henai, and Shandong, and JITONG Communication Co., Ltd. In 2004, China Netcom received revenue of US$10.3B, an increase of 8.5 percent over 2003. Subscribers increased 16 million to a total of 110 million. Xiao Ling Tong subscribers reached 12.5 million and broadband users increased to 8.6 million. In November, China Netcom listed on the New York and Hong Kong stock markets, obtaining US$1.3B from investors.
23
China Unicom website, www.chinaunicom.com.cn, accessed February 2006
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China Railway Communication Co., Ltd.
China Railway Communication Co., Ltd., or China Railcom, was established in December 2000. It is a large state-owned telecommunications operator, with the approval of the State Council and the Ministry of Information Technology and Telecom Industries. The registered capital of China Railcom is US$1.2B, contributed by the Ministry of Railways and its subsidiary Railway Bureau and Railway (Group) Corporation. China Railcom was established on 26 December 2000. For over 50 years the company provided communications services as a division of the Ministry of Railways along the extensive rail transportation system. China Railcom was formed as an independent entity, taking advantage of the deregulation and development of the Chinese telecommunications market. Still administered by the Ministry of Railways, the company is now regulated by the telecom authority of the State Council. It is an independent legal entity operated by its own management and responsible for its own profits and losses. China Railcom has the second largest fixed communications network in China (after China Telecom), covering over 500 cities and 700 counties with more than 1,100 switching centers. As a new entrant to the market, China Railcom had to differentiate itself from the incumbent carrier and prepare itself for the fierce international competition that would ensue once China entered the WTO and opened its doors to foreign carriers. To address these challenges and maximize the potential of its existing network, China Railcom developed high-profile services with compelling pricing models targeted at enterprise customers. These services include local and long distance telephone, high-speed Internet access, video communications, data networking, wireless paging, and additional telecommunications services. China Railcom has now set up a long distance communications network, a local switching network, a data network, and a paging network; all of this is of considerable scale and is cutting edge in network integrity, coverage, and technical facilities. China Railcom also boasts a management force with rich experience in telecommunications operation, strong technical support, a complete maintenance system, and a high level of unanimity in decision-making. In 2004, Railcom earned revenue of US$1.3B, an increase of 50 percent over 2003, including a profit of US$160M. Fixed-line subscribers reached 11.8 million, an increase of 80 percent over 2003. Internet users reached 1.4 million. Long distance switching capacity reached 1.17 million lines, and local switching capacity reached 18.9 million. 9.6.6
China Satellite Communication Corporation
China Satellite Communications Corporation (China Satcom) was founded in December 2001, under the communications industry management of the Ministry of Information Industry. It is essentially a state-owned enterprise, newly built according to the arrangements and requirements of the national telecom restructuring. The member enterprises of China Satcom include the China Telecommunications Broadcast Satellite Company, China Orient Telecomm Satellite Company, China Spacecom Company, China Post-Telecom Interpretation Service Company, and China Telecom (Hong Kong) ChinaSat Company. The main services of China Satcom are satellite services in communications, broadcast, and other fields; satellite mobile communications services; Internet services; and VSAT services. China Satcom offers audio, data, and multimedia services based on satellite transmit technology; engages in some technical services and some import and export services relative to the satellite communications services; and offers some other services authorized by the state. Compared to other telecom carriers, China Satcom is much smaller in scale and size. In 2004, its revenue was US$119M, an increase of 97 percent over 2003. IP phone minutes
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accumulated to 920 million. In December 2004, Satcom and China Space Group signed an agreement to launch a satellite live TV company.
9.7
China’s Telecom Equipment Manufacturers
The major providers in China’s telecom equipment industry include the Datang Telecommunications Co. (Xi'an); China Great Dragon Telecommunication Co., Ltd., (Beijing); ZTE Zhongxing Telecom, Ltd. (Shenzhen); POTEVIO Information Group (Beijing); Fenghuo Communication Co., Ltd. (Wuhan); and Huawei Technologies Co., Ltd. (Shenzhen). 9.7.1
PuTian Information Group (POTEVIO)
China PuTian (POTEVIO) is an IT products and service provider in the telecommunications industry. The corporation’s predecessor was the China Post and Telecommunication Industry Corporation, which was founded in 1980 and affiliated first with the Ministry of Posts and Telecommunications, then with the Ministry of Information Industry. At the end of 1998, it became a large enterprise directly under the leadership of the central government. The company consists of seven companies: POTEVIO Capitel, POTEVIO Eastcom, Ningbo Electronics, Beijing Ericsson POTEVIO, Nanjing Ericsson Panda, POTEVIO Taili, and POTEVIO Designing and Planning Institute for Engineering. Besides that, POTEVIO also owns over 40 companies directly invested in by the headquarters, which include five listed companies--Shanghai P&T, Chengdu Cable, and Nanjing POTEVIO are directly invested in by headquarters; POTEVIO Eastcom and Ningbo Bird are indirectly invested in by headquarters. POTEVIO is a leader among the top 100 enterprises in China’s IT industry, and was ranked No. 1 of the Top Hundred Chinese Electronic and Information Enterprises in 2001 and 2002. In 2003, POTEVIO ranked No. 1 among China’s largest enterprise groups in the manufacturing sector of electronic and communications equipment. It ranks No. 5 in the listings of 500 largest import and export companies and 200 largest export enterprises issued by the Ministry of Commerce of China. POTEVIO’s business scope covers both fixed and mobile communications. Its available communications equipment and terminal products include mobile communications network equipment and handsets, optical transmission equipment and communications cables, PDF and connectors, power supplies, microwave communication equipment, telecommunications network operation support systems (OSS), SPC switches, videophones and IC card payphones, PHS handsets, logistics information systems and equipment for industries, ITS series products, and office information equipment, as well as project contracting both home and abroad, technology transfer, and import and export products. It enjoys international cooperation. Mobile communications is the core impetus for the PTIG’s development. Through technology introduction, adaptation, and research, POTEVIO has established its mobile communication system industrial base, headed by its subsidiaries POTEVIO Capitel and POTEVIO Eastcom. With the cooperative Total Access Communication system (TACS), GSM, and POTEVIO’s own GSM, GPRS, CDMA, and CDMA 1x, POTEVIO has become the biggest mobile communications equipment manufacturer in China. In the meantime, POTEVIO has established its powerful mobile communications terminal production base. It has over 10 exclusively funded or jointly funded mobile phone production enterprises, including PuTian Capital, PuTian Eastcom, Ningbo Bird, Beijing Capital Nokia Mobile Telecommunications, Hangzhou Motorola, Beijing Ericsson PuTian Mobile, Beijing Matsushita PuTian Communication Equipment, Tianjin Sanyo, Nanjing Postal Wong Zhi
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Telecommunications, and PuTian Shenzhen Lingyun. They produce various mobile phones: GSM, GPRS, and CDMA. In 2002, PuTian maintained its position as China’s biggest mobile phone producer, with a mobile phone production volume of 39.04 million handsets. POTEVIO promotes technical innovation and continually invests in R&D for its brand. It has set up its own central research institute, POTEVIO Institute of Technology. This institute is responsible for the comprehensive management and planning of over 80 of POTEVIO’s research institutions. The institute’s main function is to make development plans for new technologies, to organize R&D of new products, to create new technologies and new products, and to support the group’s transition from telecom equipment vendor to system and service provider. POTEVIO has assumed the responsibility of development of new products of national importance, such as a mobile communications system and terminals. In 2002, POTEVIO developed 210 new projects, including two popularization projects of the Ministry of Information Industry, four National Torch Plan programs, two National Key New Products, and nine National Key Technological Innovation projects. Its key R&D programs, such as WCDMA, are also on the way. In addition, POTEVIO has established COMMIT Incorporated and Beijing POTEVIO Founder Communications, Inc., which participate separately in the R&D of Time Division - Synchronous Code Division Multiple Access (TD-SCDMA) and Large Area Synchronized Code Division Multiple Access (LAS-CDMA). POTEVIO is keen on developing international markets. In 2003, the company’s total import and export volume was US$4.63B. Its export volume is US$2.16B. Its products are sold in the U.S., Japan, Finland, Sweden, the U.K., Turkey, United Arab Emirates, India, Nepal, Indonesia, South Africa, Nigeria, Cuba, Columbia, and so on.24 9.7.2
Huawei Technologies Co., Ltd.
Established in 1988, Huawei Technologies is a high-tech enterprise specializing in R&D, production and marketing of communications equipment, and providing customized network solutions for telecom carriers in optical, fixed, mobile, and data communications networks. Huawei’s customers include China Telecom, China Mobile, China Unicom, and China Netcom, as well as Britain Telecom (BT), France Telecom, German Telecom, KPN, Thai AIS, South Korea Telecom, Singapore Telecom, Hutchison Global Crossing, PCCW, HKT, Telemar (Brazil), Rostelecom (Russia), and others. Huawei’s products can be categorized as fixed network, mobile network, data communications, and optical network – ranging from switching, optical transmissions, intelligent networks, support networks, GSM, GPRS, W-CDMA, CDMA20001X, and videoconferencing to other key telecom technology fields. Most importantly, Huawei products are based on its independently designed ASIC chips. Its ASIC designing capability is among the most advanced in this field worldwide. This allows Huawei to consider the needs of its customers from start to finish, from the chip to the network. Since 1997, Towers Perrin, Hay Group, PWC, IBM, and FhG have been acting as Huawei’s consultants on the employee stock option plan, human resource management, financial management, corporate management, and quality control. In order to support its global operations, Huawei has set up 32 branch offices worldwide. Eight regional headquarters and a host of customer support and training centers have been established (Figure 9.2). Several research institutes have been set up in a variety of locations, including Dallas (USA), Bangalore (India), Stockholm (Sweden), Moscow (Russia), Beijing, and Shanghai. A joint venture in Russia is operating successfully. Huawei’s products are in application in over 100 countries, including Britain, Germany, Spain, Russia, Brazil, Thailand, Singapore, Egypt, and South Korea.
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POTEVIO Corporation, http://www.potevio.com/en_new/index.asp, accessed February 2006
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Among Huawei’s 35,000 employees, 46 percent are engaged in R&D. Each year, Huawei invests no less than 10 percent of its sales revenue in R&D. To ensure steady and sustainable growth and to sharpen its competitive edge, Huawei emphasizes the importance of partnering with leading global players in the industry on both product development and marketing. Huawei has been cooperating with Texas Instruments, IBM, Motorola, Lucent Technologies, Intel, Sun Microsystems, and others. For example, 3Com helped to deliver an enterprise data network to the world market, certified as ISO 14001 compliant. Huawei also launched a nationwide Universal Mobile Telecommunications System (UMTS) service for Emirates Telecommunications Corporation (Etisalat), enabling it to become the first organization in the Middle East and the Arab World to introduce a third-generation network.
Figure 9.2: Huawei Research and Manufacturing Center (Shenzhen)25 In 2003, Cisco Systems alleged that Huawei Technologies had infringed some of Cisco’s technology patents. However, Cisco withdrew the lawsuit and both companies resolved all patent litigation, with each party paying for its own legal fees. In 2004, the company established a joint venture with Siemens to develop TD-SCDMA mobile communications technology targeted for the China market. In the domestic market, it won China Telecom’s national backbone optimizing contract. According to the contract, its high-end router, NE5000, won 100 percent market share of the TSR procurement contract and successfully entered into two super nodes of the national backbone. Meanwhile, it signed a contract with China Telecom to build more than 1.2 million ADSL lines, which further consolidated the company’s position as the biggest strategic partner of China Telecom. In 2004, Huawei also won the “Most Promising Vendor of the Year, Asia Pacific, 2004” and “Asia Pacific Broadband Equipment Vendor of the Year, 2004” awards by Frost and Sullivan, a global market research company that provides consulting information and intelligence on emerging high-technology and industrial markets. In Africa, Huawei was commissioned by Emtel to provide the first African UMTS commercial network. In Europe,
25
Huawei website, http://www.huawei.com/about/AboutIndex.do, accessed February 2006
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it rolled out a UMTS network for Dutch operator Telfort. To expedite the company’s global development plans, Huawei secured a loan of US$360M with 29 banks over a 3-year term. In 2005, Huawei signed a mutual distribution agreement with Marconi in the United Kingdom. The agreement, which followed an earlier memorandum of understanding, allows the two companies to resell parts of each other’s product portfolio. Marconi will resell Huawei’s carrier-class data communications products to telecom service providers under the Marconi brand, while Huawei will resell Marconi’s microwave radio, including next-generation microwave radio equipment, and associated network services for Huawei’s wireless network projects. In 2005, Huawei also won the bid to construct a nationwide CDMA2000 3G network for CAT in Thailand, worth about US$187M. In Australia, it was selected by Optus as a DSL partner to provide DSL-based access equipment capable of supporting high-speed data, voice (including voiceover IP), video multicasting, and business services. Huawei was also selected as a preferred 21 Century network (21CN) supplier by British Telecom to provide multi-service network access components and transmission equipment for BT’s 21CN network. 9.7.3
Zhongxing Telecommunications
Zhongxing Telecommunications (ZTE) (Figure 9.3) is China’s largest listed telecommunications manufacturer with publicly traded shares on both the Hong Kong Stock Exchange and the Shenzhen Stock Exchange. Founded in 1985, ZTE Corporation has been listed as an A-Share company on the Shenzhen Exchange since 1997. ZTE recorded contract sales of approximately US$4.1B in 2004. In December 2004, ZTE was successfully listed on the main board of the Stock Exchange in Hong Kong.
Figure 9.3: The Headquarters of ZTE (Shenzhen)26 ZTE Corporation is the pioneer of China’s telecommunications equipment manufacturing industry, and a comprehensive provider of telecommunications equipment, mobile terminals, and services. With its three product series--that is, wireless, network, and terminal (mobile phone)--ZTE is capable of providing global customers with diversified integrated telecommunications networking solutions and a wide range of professional
26
ZTE, www.zte.com.cn.
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services around the clock, and can also deliver international telecommunications operation services. In the field of wireless products, ZTE is capable of providing total network solutions for CDMA, GSM, and PHS products. ZTE has definitely become the top wireless brand in China. For China Unicom’s CDMA network construction project, ZTE’s products were used in 18 provinces. To date, ZTE has been the only Chinese vendor with a complete package of independently developed base stations and switching systems with self-owned brands. By the end of 2004, the wireless capacity of ZTE CDMA equipment exceeded 20 million lines, and accordingly ZTE has become the biggest telecommunications equipment exporter in China. Since 2003, ZTE GSM equipment has scored historical breakthroughs and its market shares steadily have risen at home and abroad. Currently, ZTE’s GSM equipment has successfully entered the market with over 20 countries around the world, and ZTE ranks among the leading GSM equipment providers in the world. On the basis of its strong CDMA technology and brand, in 2004 ZTE released the first global digital backbone architecture standard proposed by a Chinese enterprise – GoTa. ZTE has become the first to achieve the patent authorization of Chinese telecommunications enterprises to other internationally renowned vendors. The GoTa products have been introduced into dozens of countries, including Malaysia, Norway, and Russia. GoTa is expected to become one of the leading technologies that could change the pattern of the international digital backbone market. ZTE continued to consolidate its position as China’s largest homegrown PHS system supplier,with a good understanding of the 3G market in China and the world. In 2004, ZTE introduced 3G technologies covering three modes, WCDMA, CDMA2000, and TD-SCDMA. ZTE has become one of the few successful telecommunications equipment vendors in the world that are capable of delivering all three kinds of 3G technologies. ZTE’s network products cover data, optical transport, switching, videoconferencing, power supply, and monitoring. In the field of data products, ZTE can provide total solutions in narrowband, broadband, wired, and wireless products. ZTE’s Softswitch products have been put into commercial applications in the networks of all operators in China and the markets of many countries and regions, including Hong Kong SAR, the Philippines, Romania, and Pakistan. ZTE successfully undertook the ADSL broadband access projects of 16 venues and press centers for the Olympic Games in Athens. ZTE’s optical transmission products have been used in several national and provincial backbone transmission networks in China, and has entered the markets of over 20 countries and regions abroad, thanks to its leading high-end optical communications technologies and customized solutions in MAN OADM, large-capacity DWDM, and MSTP. ZTE has become a leading provider in this field. Mobile phones are the extension of ZTE’s operations. ZTE is the only Chinese mobile phone manufacturer that provides products for all three systems--GSM, CDMA, and PHS. In a bid to grasp key technologies in mobile phone R&D, ZTE has independent intellectual property rights for all the core software, hardware circuits, core chips, and overall design and integration. In September 2003, ZTE was awarded the title “China Top Brand” for its CDMA mobile phone. The total sales of handsets for the year 2004 exceeded 10 million, an increase of 100 percent over the previous year. In 2003, the CDMA mobile phone, a new source of revenue for ZTE, was successfully brought to the international market. ZTE won a US$100M mobile phone order from VIVO (a Brazil telecom carrier) in May 2004, which was the most valuable mobile phone contract, ever won by a Chinese mobile phone manufacturer. In the 3G handset area, ZTE rolled out the smallest and lightest foldable WCDMA handset in the world. ZTE is one of the major high-tech enterprises involved in the China Torch Program. In addition, as the high-tech achievement transfer base for China’s 863 Program, ZTE has undertaken several important projects, including a 3G, high-performance IPv6 routing platform and 3Tnet (a demonstration network for China’s information transition). ZTE
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invests nearly 10 percent of its annual sales income in research and development. It has set up a complete human resources management system embracing recruitment, training ,and incentive advancement. ZTE has 21,000 employees, of whom 70 percent have at least a bachelor’s degree. In recent years, ZTE has been focusing on customers’ needs and has successfully recorded sustainable growth by implementing appropriate marketing and product differentiation strategies. ZTE Corporation was cited as one of China’s top 10 listed companies and was listed among the “Top 50 Listed Companies with the Greatest Growth Potential in China Securities and Asia Business” for the last 4 years. ZTE’s respected position as a forward-looking global organization is also reflected by its participation in a variety of international standardization organizations. ZTE was the first Chinese individual manufacturer member of the 3GPP2 (3rd Generation Partnership 2) and has become a sector member of the International Telecommunications Union (ITU). 9.7.4
Alcatel Shanghai Bell Company
Alcatel Shanghai Bell is the first foreign-invested company limited by shares in China’s telecommunications industry. It was born through the integration of the former Shanghai Bell and Alcatel’s key business units in China. Alcatel Shanghai Bell delivers end-to-end solutions, covering fixed, mobile, and private communications markets. With strong integration capability and global resources, Alcatel Shanghai Bell is moving forward to deliver user-centric broadband network solutions, to help service providers match the unique needs of individuals, and to provide personalized services no matter the device and place. China-based research and development, aligned with global advanced technologies, contributes to the core competencies of Alcatel Shanghai Bell. The company plays a leading role in Alcatel’s global R&D projects in broadband access, next-generation network (NGN), 3G, and optical. Meanwhile, it also focuses on leading-edge research and innovation to step into the future telecom market. Alcatel Shanghai Bell is fully integrated with Alcatel’s global manufacturing system. 9.7.5
Datang Telecom Technology Co., Ltd.
Datang Telecom Technology Co., Ltd., is a large-scale high-tech and high-science enterprise engaged in information communications equipment, systems development, production, sales, and integrated services. Datang’s mainstream products include high-capacity digital switching series, optical communication series, mobile communication series, data communication series, digital microwave communication series, and software and system integration series. Datang was founded through investment capital and mainly initiated by the China Academy of Te1ecommunications Technology (CATT) of the Ministry of Information Industry (MII); all the initiators are modern enterprises with solid economic power. The company began as the Xi’an Datang Telephone Corporation, a joint venture between CATT, the Tenth Research Institute of the MPT, International Telephone and Teledata, Inc. (ITTl), and a company begun by a group of Chinese scholars in the United States. On August 7, l998, Datang Telecom issued a total of US$12M A-share stocks on the Shanghai Stock Exchange. Datang Telecom attaches great importance to R&D. It uses the majority of its investment capital as funding for key projects and 10 percent of its revenues for R&D. In addition to the R&D departments in all of its subsidiary companies, Datang Telecom has established R&D centers in Beijing and Shanghai. Employees engaged in R&D account for 41 percent of the company’s total staff. Datang Telecom has created a series of state- and world-level products in such fields as large-capacity SPC switches, optical communication solutions, wireless communication
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solutions, full-service access network equipment, telecommunications software, full-series communications cables (including optical fiber cable, communication copper cable, radio frequency cable) and microelectronics products. During the first 2 years after the company was listed on the Stock Exchange, it obtained 41 network entry certificates from the Ministry of Information Industry, nine from the Broadcasting and Television Ministry, and 13 from the military. The company, which currently comprises aspects of all the major communications products, has made great efforts to explore overseas as well as domestic markets, and has exported its products to Europe, Southeast Asia, and North America. In Xi’an City, Datang Telecom Science and Technology Industrial Park, with approximately 20 hectares of land, has been put into operation. After completion, the Park will be able to annually manufacture 6 million equivalent-line switches, 0.25 million-channel mobile communications systems, and transmission and wireless communications products, and will become the largest research and production base of communications equipment in Northwest China. In Chengdu City, Datang Optical Communication Branch includes a telecom equipment factory, an optical fiber cable factory, and a copper cable factory, the three fundamental industry bases of Datang Telecom. Datang achieved 200 scientific research advances in optical fiber communications technology,making Datang a major R&D base in the field. In Beijing, Datang’s software subsidiary has established a modern software production and testing environment, and is the leading telecommunications software provider in China. Its products cover all the major fields and specialties of telecommunications networking. The company attaches great importance to quality control and takes ISO9001 quality system certification as its guideline. The company and all its subsidiaries have passed ISO9001 certification. 9.7.6
FiberHome Telecommunication Technologies Co., Ltd.
FiberHome Telecommunication Technologies Co., Ltd., (FiberHome Telecom) is a listed telecommunications equipment manufacturing company in China. It is located in Wuhan, China Optical Valley. The principal sponsor, Wuhan Research Institute of Post and Telecommunications, is the National Engineering Research Center for Fiber-Optic Communication Technologies and the cradle of China’s fiber-optic communications. It incorporates the research, development, and marketing of three strategic technologies in the optical communications field: optical communications systems, optical fibers and cables, and photoelectronic devices. It was here that the first piece of optical fiber in China was drawn, the first optical communications project was accomplished, and a series of major scientific and technological advances were achieved. This is an example of the success of the national 863 plan in optical communications supported by the Ministry of Science and Technology. FiberHome Telecom has significant core technologies in the field of optical communications. Its research foundation and strength ranks it among the best in the industry in China. It has participated in formulating over 200 national standards and industrial standards, covering various areas of optical communications. The main products of FiberHome include high-speed broadband optical transmission systems, fiber-optic broadband access systems, IP network routing and switch systems, wireless communications and power supply, fiber and cable products, and photo-electronic devices. In 2003, it undertook in large scale the national first-level trunk lines of China Telecom and China Netcom, and its market share of system equipment and fiber and cable products was in the forefront of domestic suppliers. Also, its passive device products have further increased their market position to 22 percent. Its active device products still have fairly good domestic market shares of over 25 percent.
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In regard to IP products, FiberHome Telecom has developed EOS (Ethernet over SDH) products with fully independent intellectual property rights, which have been widely applied by the major operators at home and abroad, involving more than 40 lines in over 10 provinces or cities in China. The ITU-T X.86 standard has also been applied in the U.S. and Japan. These products have been included in the National Torch Plan and have acquired huge financial support from the State Planning Commission. An X.85/X.86-standards-based broadband IP access equipment high-tech industrialization demonstrative project has been carried out, initiating the industrialization of China-owned IP technology. In the world market, the group has put great importance on global market competition, exploring the world market in an all-around way through product export, project contracting, joint venture production, and cooperative operation, and exerted itself to establish the FiberHome brand globally. With the establishment of a world market system, its series products have been exported to such countries or regions as the U.S., Italy, Australia, Switzerland, UAE, South Korea, the Netherlands, Indonesia, Cyprus, Vietnam, Myanmar, India, Iran, Pakistan, Qatar, South Africa, Canada, Hong Kong, and Taiwan. By 2004, it had set up a marketing and service network covering China with 33 domestic offices and provincial service centers in 7 regions and 23 provinces. Its service system is graded into three levels--agencies, large regions, and the headquarters. Its engineering service groups are ready to offer individualized service around the clock. All this has brought FiberHome Technologies into solid partnership with the large communications operators in the country and even with some international telecommunications operators.27 9.7.7
Great Dragon Telecom Group
Great Dragon Information Technology Co., Ltd., (GDT), is one of the 520 major state-owned key enterprises and a member of APEC enterprises. GDT is among the first to be designated as a prioritized employer of “three-high” talents (high-tech, high reputation, and high standards) by the Ministry of Education. As a high-tech company in Beijing, it is also the industrial manufacturing base for the national program 863. With a registered capital of US$66M, its total assets come to US$362M. To become world class in information technology, GDT invests 10 percent of its sales revenue in R&D each year. GDT strives to be self-sufficient in technology, but also works on system integration and international cooperation. The Great Dragon Information Science and Technology Research Institute, based at the National Digital Switching System Engineering and Technological Research Center (NDSC), has set up a three-grade R&D system consisting of the central R&D institute, local management centers, and manufacturers’ R&D departments, dealing with leading-edge technology and application technology development separately. GDT has an R&D staff of nearly 1,000 with 85 percent holding professional titles, masters degrees or above. With one R&D center, one totally invested subsidiary, two holding companies and two overseas joint companies, GDT has adopted modern scientific corporate management and established a modern enterprise system. GDT focuses on new technology and new products, such as Gb/Tb high-speed routers, large-capacity optical transmission systems, wideband access systems, large capacity operator-level IP phone systems, large-capacity operator-level Internet access servers, Ethernet switches and multi-layer switches, mediumand low-end routers, various application software based on IP, a new generation of IP network platforms, calling servers, third-generation mobile communications, wireless access systems, and network servers.
27
FiberHome Technologies, http://www.fiberhomegroup.com/, accessed February 2006
188
9.8
China’s Electronics Industry
Challenges and Prospects
China’s telecom industry has made significant progress in the past decade, but there are some challenges. The main existing challenges include the lag in exploration and utilization of information resources, lack of telecommunications law, unreasonable network structures and distribution, and the low management and R&D level. Even though MII has made considerable strides in the area of telecom market regulations, the industry still has many problems, such as complicated market rules and a disordered price policy. Carriers, manufacturers, and consumers are eagerly looking forward to a telecom law that is widely expected to promote the development of the telecommunications market reasonably and fairly. Even by 2002, the first year after China joined the WTO, China had not made a set of laws for the industry, and the current administration of the MII is based on regulations published in 2000. The development of the industry has brought some problems because of a lack of law enforcement. Some networks have not been fully utilized, while the construction of unnecessary redundant networks continues. Some telecom resources, such as frequencies and code numbers, have not been distributed and used reasonably because the market mechanism for payment for use has not been formulated. The charges for telecom services have been quite high and the general public’s complaints about them have restrained market development. In July 2004, the draft of a telecom law survived the deliberations of every subdivision of MII, leading to its submission to the State Council for evaluation. In the draft, a new chapter was added mentioning the national telecom regulation institution and defining its hierarchy levels, responsibilities, rights, and limitations in detail. The draft also addresses the goals, manner, and responsibilities of telecom general service. However, by 2006, the draft of telecom law was still under discussion. The construction of telecommunications support networks has lagged behind the development of communications services, while the development of telecom equipment and products has lagged behind network construction. In the telecom equipment industry, most state-owned enterprises have not adapted to the requirements of marketing mechanisms, lacking the specialized skills. The plant distribution is more concentrated than necessary, and a low level of redundant construction still exists. Moreover, exports by state-owned enterprises are relatively small. The management level and efficiency of both telecom operators and manufacturers is still not world-class. Compared with developed countries, the average revenue per person, the administrative expertise, the labor productivity, and the profits of China’s telecom operators have been low. In the telecom manufacturing industry, the key and core technologies come from developed countries, making the Chinese industry’s profits far less than those of companies in the contributing nations. Lacking appropriate financing channels, the investment of manufacturing companies in R&D is not sufficient for the key technologies and bottleneck industries like microprocessor design and production. More importantly, some related core industries, like the software and IC industries, are still undeveloped, which adds difficulties for telecom industry development. However, all of these areas are being addressed by the central government. Government support has come in the form of state-funded research, cheap credit, and implicit encouragement of operators to buy domestic infrastructure equipment and services. However, vendors have had to sell to a highly fragmented and decentralized customer base. Unlike telecom carriers, sheltered from foreign competition by regulatory barriers, domestic telecom equipment manufacturers have not enjoyed government protection.
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Clearly there is much room for continued growth in China, which had telephone penetration at only 27 percent by the end of 2005.28 However, the income profile of the next 100 or 200 million customers will be lower than that of existing users, requiring cheaper products and resulting in thinner margins. China’s domestic telecom equipment makers are increasingly looking overseas for market growth. A natural first step has been entry into the developing markets of South Asia and Southeast Asia. ZTE’s first major international contract was in Pakistan, and Huawei operates a research and design facility in Bangalore, India. Chinese operators are targeting the major industrialized economies, too. ZTE has established a joint venture with a Newcastle-based partner, and is opening R&D facilities in Sweden. Mainland handset manufacturers are also gearing up to target European mobile operators and consumers.
28
MII statistics (December 2005), http://www.mii.gov.cn/art/2006/01/24/art_166_5447.html, accessed February 2006
Chapter 10 Other Electronics Industries
This chapter highlights eight specific electronics application industries in China: televisions, DVDs, cellular phones, automotive electronics, avionics, medical electronics, military electronics, and space electronics.
10.1 China’s TV Industry On 17 March 1958, China Television and Radio Center succeeded in broadcasting TV programs for the first time on a trial basis in Beijing. The Beijing-brand 35-cm electronic-tube black-and-white TV set, called “Huaxia,” or “China’s First Screen,” was developed by the Tianjin Radio Factory, later renamed the Tianjin Telecommunication Broadcasting Company.1 In the early 1980s, while Western and Japanese TV makers were producing integrated circuit color TVs, China just started to learn how to produce 9-inch black and white tube TVs. Consumers had no choices and had to obtain a ticket to purchase a TV because of limited availability. Each TV factory’s production volume was assigned and distributed by the Ministry of Electronic Industry (MEI) (now Ministry of Information Industry). In 1979, the Shanghai Gold Star TV factory imported the first TV production line from Japan’s Hitachi. Later, the Tianjin and Beijing TV factories purchased production lines from Toshiba and Panasonic separately. By 1985, when Shenzhen Konka purchased its production line from a Hong Kong company, it was the 147th production line imported.2 The color TV industry was the fastest developing field in China’s electronics industry, and it initiated the development of the whole electronics industry. At the early stage of color TV manufacturing, the major function of TV factories was to assemble TVs with imported components. The quota of imported components was assigned by the government. Thus, in the beginning of every year, the representatives of 147 TV factories met in Beijing to discuss and implement ways to increase the quotas for their factories. To solve this problem, MEI made plans to import the production lines to manufacture the TV components. This promoted the rapid development of the component industry in China. In 1984, MEI decided to speed up the nationalization of color TV production, and formed a special team to lead this process. In 1985, the National Economy Committee listed this project as a nationally supported project, and provided favorable policies and funds to aid in import, study, and R&D of new technology. MEI met with other Ministries, including 1 “First Television Set,” People’s Daily Online, September 1999, http://english.peopledaily.com.cn/50years/development/19990910A105.html 2 ESM China, Tao, X., Special Topic, September 2005, http://www.esmchina.com/ART_8800063823_617671.HTM, accessed February 2006
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Metallurgy, Chemistry, Light Industry, Textile, and Construction Industry, to coordinate the nationalization work. Japan was chosen because it had the most advanced color TV and IC technology and it was easier to purchase goods from Japan compared with the Western countries. By 1990, there was significant domestic color TV production; in addition, thousands of private companies and factories in Guangdong, Jiangsu, and Zhejiang were producing all kinds of electronic components, including ICs, transistors, and passive devices. Interestingly, the domestic IC industry was dragged forward by the TV industry. The first Japan IC line was at the Wuxi 742 Factory, based on Toshiba’s wafer fabrication equipment and technology. After that, 742 was renamed Huajing Group. Because the ICs were very good for 14-inch to 21-inch color TVs, 80 percent of TV manufacturers were using Huajing’s IC products. By 1995, annual sales were hundreds of millions of USD, but Huajing had no motive to develop its own IC products. In late 1990s, when foreign competitors announced more advanced IC for next- generation TVs, Huajing teetered on the edge of bankruptcy and was purchased by a Hong Kong company. It was then reconstructed as Wuxi China Resource Microelectronics (see Chapter 5 on China’s Semiconductor Industry). China has now become the world’s leading producer of TVs, with 90 or so manufacturers producing color sets and several hundred manufacturers making TV components. In terms of export value, by August 2004, nearly 19 million sets were exported, valued at over US$2B.3 In 2006, nearly 95 percent of the components of a color TV are made domestically. With a population of 1.3 billion, China boasts 370 million TV sets and 1.2 billion viewers, the largest number in the world.4 On average, Chinese viewers all over the country watch 3 hours of TV per day. Television advertising is worth several billion U.S. dollars, and sales generated by promotion are estimated at several hundred billion U.S. dollars.5 Competition in the domestic color TV market is extremely stiff. At present, the market is dominated by major domestic companies: Changhong, Konka, TCL, Chuangwei, Kangjia, Haixin, Xiahua, Panda, and Haier. Table 10.1 illustrates the market shares of these top companies. The enormous color TV market, combined with inexpensive labor and a favorable investment climate, has also attracted many foreign companies, especially from Japan and Korea. Table 10.1: Domestic Market Share of the Top Eight Color TV Companies6 TV Company
Chang Hong
TCL
Chuang Wei
Konka
Hai Xin
Xia Hua
Panda
Haier
Share (%)
21.7
15.5
13.0
11.7
7.7
4.1
3.5
3.5
In terms of export, China has been accused of “dumping,” especially on the U.S. market. In April 2004, anti-dumping duties of between 28 and 46 percent were announced to offset the effects of dumping products in the U.S. markets by selling them below cost or market value. The U.S. Department of Commerce slapped import duties of 24.48 percent on Sichuan Changhong, China’s largest TV maker; 22.36 percent on TCL; 11.36 percent on Konka; and 4.35 percent on Xiamen Overseas, as reported by the China Chamber of Commerce for Import and Export of Machinery and Electronics Products. The United States International Trade Commission determined that U.S. TV manufacturers had been materially injured by imports of certain TVs from China.7, 8 3
Ibid “China’s Digital TV Industry to Unveil Bright Picture,” People’s Daily Online, 14 August 2003, http://english.peopledaily.com.cn/200308/14/eng20030814_122327.shtml 5 Friedlnet.com – China Business & Professional Information, http://www.friedlnet.com 6 Ibid 7 “US Finalizes Penalties on Chinese TV Imports,” Xinhua News Agency, 15 April 2004, http://www.china.org.cn/ 8 People’s Daily Online, “China-made HDTVs Sold to US Army,” June 2003, http://english.peopledaily.com.cn/200306/19/eng20030619_118542.shtml 4
Other Electronics Industries
10.1.1
193
High Definition TV (HDTV)
The Chinese State Science and Technology Commission has included HDTV as a major development project. The Ministry of Radio, Film and Television has also been working with the European Union (EU) in the digital audio broadcasting area, while the MII has been working with industry giants Changhong and Panda Electronics to develop digital satellite TV reception equipment. The terrestrial broadcast trial of a prototype high-definition TV (HDTV) system from the government’s Central Television Tower in Beijing was completed in September 1998. In addition to making China the fourth nation to develop a working HDTV system, the two-stage HDTV initiative spawned 26 Chinese patent applications. This could boost China’s TV industry considerably and allow it to lay the foundation for the protection of intellectual property related to emerging digital technologies. 10.1.2
Digital TV
The present cable network in major cities in China is only capable of transmitting 40 to 50 channels simultaneously, whereas digital TV offers 400 to 500 channels. Therefore, in September 2003 Chinese television stations began launching digital broadcasting and pay-per-view service. This marked the beginning of China’s ambitious digitization plan announced by the State Administration of Radio, Film and Television (SARFT) in June 2003. The document is a clear sign that digital TV will soon become a reality, and related industries will play a major role in creating development opportunities.9 China has announced that they will broadcast the Beijing Olympic Games on digital TV in 2008; digitalize the production and broadcasting of radio and TV programs, satellite, and cable transmission; popularize the use of digital TV sets in 2010; and achieve digitalization by completing the transition from analog to digital and ceasing transmission of analog signals in 2015. In other words, the 370 million analog TV sets currently in use will gradually be replaced, resulting in a huge new market valued at over US$10B within the next 12 years.10, 11 Furthermore, conservative estimates suggest that China’s broadband cable TV network is likely to have 200 million users by 2010. At an average investment of around US$1,205 per user, the total value will be around US$241B. If China completes the transition from analog TV to digital TV by 2010, the value of all hardware required for domestic use could be as high as US$482B. In short, digital TV could have the same impact in China as did the automobile, and set off an economic boom.
10.2 China’s DVD Industry DVD-Video made its foray into China in 1997 with the importation of approximately 10,000 DVD-Video players. China began producing its own DVD players in 1998; at that time, 35 manufacturers produced DVD players.12 The output of DVD players was US$57M in 2003. The strategy of Chinese DVD manufacturers has been to produce a quality product at the lowest possible price. Conscious of international concerns with regard to intellectual property, they have striven to keep costs low by developing new domestic technologies and licensing some key components from foreign manufacturers. However, the high licensing fees charged 9 People’s Daily Online, “China’s Digital TV Industry to Unveil Bright Picture,” August 2003, http://english.people.com.cn/200308/14/eng20030814_122327.shtml, accessed November 2005 10 Economic Information and Agency, “Digital TV Expected to grow Rapidly,” 11 August 2003, http://www.tdctrade.com/report/indprof/indprof_030802.htm 11 People’s Daily Online, “China’s Digital TV Industry to Unveil Bright Picture” 12 CEInet, “China’s DVD Sector Promising,” China Economy Network, October 1998, http://www.chinaeco.com/ecit/c5210k14.htm
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by overseas DVD technology owners has spurred Chinese DVD player manufacturers to expand their search for alternative technologies. In a bid to beat high royalties, Shanghai’s SVA has developed a new patented DVD-like technology, called enhanced video discs (EVD). EVD promises five times the clarity of conventional digital video discs as well as enhanced sound quality. China considered EVD a technological breakthrough and hoped it would replace the current DVD standard. In February 2005, China’s government presented the recommended national high-definition DVD standard, EVD. For Chinese disc player manufacturers, such good news could help them stand up to the high pressure of license fees. However, within less than a month, in March 2005, Changhong and Amoisonic announced that they would support the HD-DVD standard group led by Toshiba. Not long after that, in October, the National Disc Engineering Center (NDEC) of Tsinghua University (Beijing) proposed to the international DVD forum group that they would develop another high-definition standard based on Toshiba’s format only for China’s market. The proposal was approved. Moreover, the announced advantages of EVD and NDEC’s HD-DVD were found to be exaggerated. For example, EVD had only 30 percent of all patents involved, and the core IC was dependent on foreign companies. To incorporate DVD function, EVD player manufacturers still had to pay license fees.13 DVD players manufactured in China have become increasingly loaded with special features. In addition to an abundant selection, buyers saw more 5.1-channel players. Progressive scanning is also likely to become a mainstream feature. Some makers are still interested in developing products supporting the new Blu-ray standard or the local EVD format, but the hottest developments will occur in the area of portable players. Manufacturers have launched portable players with T Flat-Panel screens and in-car DVD models. DVD players with recording capabilities, especially in the DVD plus read/write (RW) format, are also becoming more common.
10.3 China’s Cellular Phone Industry Chinese cellular phone networks began in 1987 when the first 900 MHz analog cellular phone system was installed in Guangzhou. At the time, the price of a handset, plus connection fee, was roughly US$5,400, a cost far from affordable for the average consumer.14 However, as prices gradually fell and incomes rose, cellular phones became the most popular means of communication in China. By 2005, China ranked first in the world in the number of telephone subscribers, with 350 million fixed-line telephone users and nearly 400 million cell phone users.15 China is now the world’s largest cell phone market. The mobile communications sector, especially GSM (Global System for Mobile Communication) is the most profitable sub-sector, accounting for almost half of all the revenues in China’s telecom industry. The high profit margin of cellular phones makes the Chinese market attractive to both domestic manufacturers and foreign suppliers who compete for market share. With the rapid growth of Chinese domestic cellular phone production, foreign suppliers began to lose their edge, even though Motorola, Nokia, and Siemens have significant market presence. On the other hand, according to the figures released by the Ministry of Information Industry (MII), China’s 37 mobile phone manufacturers produced a total of 166 million units of mobile phones from January to September in 2004, with nearly 60 percent of them being exported. In an effort to limit foreign control of the local cellular phone market and to promote the domestic cellular phone industry, China’s MII froze the number of new foreign-controlled 13
Wang, C., China Newsweek, October 2005, http://www.chinanews.com.cn//news/2005/2005-10-24/8/642064. shtml, accessed February 2006. Hong Kong Trade Development Council, “Mobile Phone Networks in China Ring the Changes,” September 1998, http://www.tdctrade.com/imn/imn159/feature1.htm 15 MII statistics, Dec. 2005, http://www.mii.gov.cn/art/2006/01/24/art_166_5447.html, accessed January 2006 14
Other Electronics Industries
195
companies in November 2000. For existing joint ventures, the domestic value of cellular phones must exceed 50 percent while 60 percent of production must be for export.16 In 2003, Ningbo Bird Co., Ltd., overtook Motorola, Inc., to become the largest handset supplier domestically. The Zhejiang Province-based company controlled 15.01 percent of the market, followed by Motorola at 14 percent and TCL at 12 percent, according to the MII. A second MII initiative consisted of trying to curb illegal imports. For example, much of Ericsson’s equipment was reportedly smuggled into China in an attempt to evade mandatory tariffs and taxes. 17 Now all telecom equipment sold in China must be stamped with a government-issued seal for which all telecom equipment makers, whether local or foreign, must apply. This policy effectively gives MII control over foreign telecom products. Compared with foreign manufacturers, Chinese producers are relative latecomers to the cellular phone arena. Spurred by market potential and large profit margins, more domestic companies announced their intention to join the competition. Industry insiders and analysts predict that overproduction will lead to a price war that could push many companies out of the market. Numerous manufacturers are concerned that an oversupply will affect prices and spur even more competition among handset makers. In order to limit competition among Chinese manufacturers, the Chinese government selected specific local cell phone makers and imposed output quotas on them. 18, 19 • •
•
•
•
•
16
Eastern Communication Co. Ltd., Zhejiang Province, manufactures and sells mobile communications equipment in addition to cell phones. Shenzhen ZTE. Co., Ltd., Guangdong Province, a leading manufacturer, is one of 300 enterprises recognized by the State Council. Operations include production of digital PBX systems, mobile communications, data network products, transmission systems, satellites, and microwave equipment. Xiamen Overseas Chinese Electronics Co., Ltd., Fujian Province, established in 1984, is headquartered in Xiamen, on the southeast coast of China. Xoceco’s production facilities consist of 20 factories staffed by over 7000 employees. Product lines include pure flat and HDTV- ready televisions, computer monitors, and communication products. Haier Group, Shandong Province, founded in 1984, produces 86 categories of household electrical appliances. Total sales are over US$10B, including overseas sales of over US$1B. Haier has 18 design institutes, 10 industrial complexes, 58,800 sales agents, and 11,976 after-sales services throughout the world. The domestic market share of Haier refrigerators, freezers, air-conditioners, and washing machines is 30 percent. TCL Mobile Communication Co., Ltd., Guangdong Province, a member of TCL communication industrial group, was created in March 1999 and is a joint venture committed to R & D, manufacturing, and sales of mobile terminal products. Konka Group Company, Ltd., Guangdong Province, one of China’s 100 top enterprises, holds 25 percent of the Chinese TV market share. Its primary products in the U.S. include analog and digital TVs, digital set-top boxes, and digital videodisk players. Konka is the country’s No. 1 in terms of TV market share. Cellular handsets
Duo Wei News, “China Freezes Approval for Foreign Entry in the Cellular Phone Industry,” November 2000, http://www3.chinesenewsnet.com/cgi-bin/newsfetch.cgi?unidoc=gb2312&src=SocDigest/Economy/Mon_Nov_6_1 7_33_08_2000.html (in Chinese). 17 Wang, M. and D., Lyon, “Cellular Telecommunications Equipment,” U.S. and Foreign Commercial Service and U.S. Department of State, September 1998 http://www.corporateinformation.com/data/statusa/china/chinacellphone.html 18 ChinaOnline, “To Sidestep ‘Vicious Competition’ Beijing Anoints 9 Official Cell Phone Makers,” November 1999, http://www.chinaonline.com/industry/infotech/NewsArchive/Secure/1999/november/B2-99110102.asp 19 ChinaOnline, “China to Impose Quotas on Foreign-Funded Mobile Phone Manufacturing,” 6 November 2000, http://www.chinaonline.com/topstories/001106/1/C00110619.asp
196
•
•
China’s Electronics Industry
are Konka’s second major line. Other products are audio and video equipment, telecommunications products, and home appliances. Guangzhou Southern High-Tech Co., Ltd., (SOUTEC) Guangdong Province, was set up in May 1999 as a state-owned high-tech enterprise and specializes in R&D, manufacturing, and marketing of mobile phones and other portable products. Located in the Guangzhou Science Park, it has produced over 3 million mobile phones per year since June 2001. It ranks fourth among Chinese handset manufacturers in terms of sales volume. SOUTEC developed the first GSM phone in China with its own intellectual property. Ningbo Bird Corporation, Ltd., located in Fenghua, Zhejiang province, and founded in 1992, is a state enterprise. It primarily develops and manufactures electronic communications products like mobile phones, system equipment, handheld PCs, and mobile phone accessories and pagers. In June 2000, it was listed on the Shanghai Stock Exchange and began issuing A shares.
The Chinese government strongly supports research and development of cellular phones and has allocated more than US$200M to help domestic manufacturers set up production facilities and develop their own products. You Xiaohu, an expert in charge of the telecommunications sector of China’s High and New Technology Research and Development Program (program 863), predicts that the market value of 3G systems will total US$120B by 2010. China has also placed the development of 4G on its Plan 863 agenda.20 In 2004, domestic cell phone manufacturers explored more international opportunities and increased exports by more than 350 percent over the same period in 2003. Ningbo Bird had exported over 3 million handsets in 2004. However, the domestic share of Chinese cell phone producers decreased 5 percent to 49 percent. The foreign competitors have learned the characteristics of China’s market and have built more sales channels, which used to be the domestic manufacturers’ advantage. The fast rise of Xiao Ling Tong (PHS), a wireless local phone service, has bitten off a large share of low-end users. Its low service fee, versatile functions, improved signal quality, and carrier’s favorable selling policy are attracting more and more subscribers. In high-end products, domestic manufacturers lack the core technology, are generally weak in R&D capabilities, and are highly dependent on key components imported from foreign suppliers.21 With growing opportunities in China’s cell phone market, international companies have been restructuring. For example, in May 2004, NEC restructured its cell phone department in China and founded a global business center. Sony-Ericsson changed the former Beijing manufacturing center to a global manufacturing base. Its China Research Center became one of four research centers worldwide. Nokia separated the Chinese market from the Asian market in January 2004, and reassigned its global market into six sub-markets: Europe, the Middle East and Arabian district, the North America district, the South America district, the Asia-Pacific district, and the China district. China’s entry into the World Trade Organization (WTO) is having an impact on the growing domestic cellular phone industry. China plans to phase out all geographical restrictions for cellular and fixed-line services around 2007. China will also allow foreigners to hold up to a 35 percent stake in local operators. However, China is only gradually opening the domestic market, because it wants to allow domestic manufacturers ample time to prepare for foreign competition, and to improve their design capability and service delivery. Once that occurs, the Chinese cellular phone industry is expected to dominate the domestic market, as did the personal computer and TV industries, especially given the Chinese government’s strong support. People’s Daily, “China Becomes World’s Leading Mobile Phone Market,” 22 December 2002, http://english.peopledaily.com.cn/200212/22/eng20021222_108890.shtml 21 MII, part of “2004-2005 Electronic & Information Industry Operation Status and Developing Trends,” http://www.chinaecnet.com/mkt/qs053911.asp, accessed February 2006 20
Other Electronics Industries
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10.4 China’s Automotive Electronics Industry The automobile industry may become another one of China’s leading industries. The reason is simple: there are over 40 million Chinese with current driving licenses, and this will continue to grow dramatically. With a large population and swift economic development, demand for personal cars in China is strong and growing. Furthermore, tariffs are being lowered to about 25 percent, down from levels once as high as 130 percent. Early in the 1980s, the government began selecting foreign manufacturers for cooperative partnerships to manufacture personal cars. Amongst numerous candidates, Volkswagen, currently the fourth-largest car manufacturer in the world, gained prominence (Table 10.2). Volkswagen has been the most successful multi-national automobile manufacturer in China until now. Many other global companies such as General Motors, the world’s largest car manufacturer, have been active in entering the Chinese market. GM today has a total of US$2B investment in China, including three joint ventures and an R&D center. Table 10.2: Share of Sedan Market by Automotive Manufacturer in China22,23 Percent of Market Share in First Half 2004
Joint Venture
Local Partner
Foreign Partner
Shanghai-Volkswagen
Shanghai Automotive Industry Group (SAIG)
Volkswagen
15
Shanghai GM
SAIC
General Motors
11
FAW-VW
First Auto Works (FAW)
Volkswagen
11
Guangzhou Honda
Guangzhou Auto Group
Honda
5
TAIC
Tianjin Automotive Industry Group (TAIG)
Diahatsu, Toyota
5
Chang’an Suzuki
Chang’an Automobile
Suzuki
5
Dongfeng-Citroen
Dongfeng Motor
Citroen
4
Beijing Hyundai
Beijing Automotive Industry Group
Hyundai
4
China’s Tenth FYP (2000 – 2005) included ambitious goals for organizational and production restructuring: The establishment of two to three large, internationally competitive automobile enterprise groups by 2005. These large enterprise groups will have over 70 percent of market share and sales and after-sales service systems will be in conformity with international practice. Five to ten large automobile parts enterprise groups with primary competitive ability will be built, with the top three producers of key parts obtaining 70 percent of the domestic market. Parts exports should account for 20 percent of these companies’ total sales. Three to four motorcycle enterprise groups with comparatively strong international competitiveness will be established as well. China’s car production surged ahead of the U.K., France, and Italy in 2002, and in 2003 exceeded that of Germany. In 2005, the domestic car sales volume in China was 5.72 million Source: China Auto Monthly, July 2004 KPMG, “China Automotive and Component Report,” http://www.kpmg.com.au/Portals/0/ChinaAutoComponentReport04.pdf, accessed 11 November 2005 22 23
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vehicles. The Japanese output figure was 5.85 million vehicles. In 2006, Japan will lose its long-prized second place in terms of the world’s biggest sales volume behind the U.S. At this time, Chinese domestic sales are projected to reach 6.4 million vehicles. The China Association of Auto Manufacturers (CAAM) predicts that China’s annual output will reach 8 million by 2010. Table 10.3 gives an overview of the development of the automotive industry in China. Table 10.3: Vehicle Production by Type24
2004
Auto 2,600,000
Bus 1,300,000
Truck 1,310,000
Total 5,210,000
2005
2,770,000
1,160,000
1,770,000
5,700,000
The balance of Chinese car imports and exports has also shifted. Imported car volume in 2005 was about 160,000, versus exported units of 173,000 – the first time that exports have exceeded imports. Part of the reason is that tariffs on the import of complete vehicles dropped on 1 January 2004 to 34.2-37.6 percent, down from 2003 tariff range of 38.2-43.0 percent. The total amount of the import quota for autos and auto parts for 2004 was US$10.49B (15 percent higher than in 2003).25 Exports, however, are centered on trucks and commercial vehicles; currently, passenger cars account for less than 20 percent of exports, and these tend to be exported to developing countries in the Middle East, North Africa, South East Asia, South America, and Russia. Imported cars are mainly luxury passenger cars and sports-utility vehicles (SUVs) from Japan, Germany, and the U.S., which account for 90 percent of imports. According to statistics from China’s Ministry of Commerce, in October 2005 exported cars were predominantly low-priced vehicles with an average price of US$8,336; in contrast, the average price of imported cars of US$29,180. China has a cost advantage in the lower-end car market, primarily due to lower labor, product, and processing costs, plus the added benefit that the automobile industry is one of China’s “pillar” industries, receiving significant government support. In addition, China now makes most car materials and parts, including adaptors, adjusters, air filters, battery monitors, bearings, belts, cables, camshafts, chassis, and others required to manufacture a car. The long-term market potential and the spin-off demand for automotive electronics are considerable. 10.4.1
Recent Developments in China’s Automobile Industry
China has 5,742 automobile enterprises, according to statistics from CAAM. Among them, 129 are motor vehicle manufacturing companies, 502 refit vehicles, 1,005 produce motorcycles, 50 supply auto engines, and 4,056 manufacture auto parts and components. Table 10.4 lists the car sales by manufacturers in China in 2004 and 2005.26 While GM, Volkswagen, Hyundai, Honda, Nissan, and Toyota may top the list, year-on-year sales and market share show that domestic manufacturers, such as Geely, Chery, Chang’an, Harbin Aircraft, and Great Wall, have grown rapidly. Moreover, the home-grown carmakers are listed as major export players. The only major foreign exporter is Honda, because 3,500 Jazz cars were transported from its Guangzhou plant for exclusive export to Germany.
24 China Association of Automobile Manufacturers, http://www.auto-stats.org.cn/ReadArticle.asp?NewsID=3883, accessed February 2006 25 Walton, J., “WTO: China Enters Year Three,” The China Business Review, January-February 2004, http://www.chinabusinessreview.com/public/0401/01.html 26 Lee, C., “China Targets Detroit,” World Business, pp 29-32, April 2006
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Table 10.4: Car Sales by Manufacturer in China (Thousands of Units)27 2004
2005
Year-on-Year Rate (%)
2005 Market Share
Manufacturer
Major Models
Shanghai, GM
Excelle, Buick Regal, Chevrolet Sail
252
325
29.0
8.2
Shanghai, VW
Santana, Polo, Gol
355
287
-19.2
7.2
FAW-VW
Jetta, Bora, Audi A6
300
277
-7.7
7.0
Beijing-Hyundai
Elantra, Sonata, Tucson
144
233
61.8
5.9
Guangzhou Honda
Accord, Fit( Jazz), Odyssey
202
230
13.9
5.8
Tianjin FAW Charade
Charade, Platz/Vela, Vitz(Yaris)
127
200
57.5
5.0
Chery Auto
QQ, Fulwin, Easter
87
185
113.9
4.7
Dongfeng Nissan
Sunny, Tiida, Teana
61
158
159
4.0
Tianjin Toyota
Corolla, Vios, Crown
82
155
89.5
3.9
Dongfeng Citroen
ZX, Elysee, Picasso
89
140
57.3
3.5
Geely
Haoqing, Merrie, Freedom Slip
96
140
46.6
3.5
Changan Suzuki
Alto, Cultus, Swift
110
90
-18.2
2.3
Geely has been making headway in Europe and the U.S. since the fall of 2005. The company showed its small cars at the International Motor Show in Frankfurt and the North American International Auto Show in Detroit in 2005 for the first time. In addition, Li Shufu, Chairman of Geely, announced an export plan to the U.S., to start in 2008, and exhibited the CK, a small sedan (Chinese name: Freedom Ship) that will be launched in Detroit. The Freedom Ship was launched into the Chinese market in April 2005 and retails at about US$7,500-US$8,700. When it starts selling in the US, assuming the plan goes ahead, the model will be one of the cheapest cars on the market. Geely is not the only company that has plans on the U.S. market. In January 2005, Chery announced plans to sell five-passenger models in 2007 through the U.S. imported car-dealer, Visionary Vehicles in New York. Chery was established in 1997 under the umbrella of the Anhui province government. The business started out by purchasing Ford’s used engine lines in the U.K. and Volkswagen’s Spanish subsidiary SEAT’s used car-assembly lines. Yin Tongyao, Chairman and President, worked with Volkswagen in its joint venture with First Automotive Works Corp (FAW) in Changchun. Tongyao recruited Xu Min – who had studied in the U.S. and was an experienced development engineer at GM and Ford – to be the head of the R&D center. Currently, Chery has a production capacity of 350,000 units per year. The doubling of sales in 2005 has promoted the company to be the seventh-largest
27
Lee, C., “China Targets Detroit,” World Business, pp 29-32, April 2006
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passenger-car manufacturer in the Chinese market – some achievement considering it is in a market where the world automotive giants compete against each other. At present, more than 120 passenger car models are produced in China from approximately 30 manufacturers. The entire auto parts industry employs between 650,000 and 750,000 people and is valued at approximately US$86B per year. Growth has been estimated at approximately 10 percent per year recently. Auto parts and component manufacturers account for 65 percent of China’s automotive industry enterprises. To put that into perspective, car and motorcycle manufacturers account for 5 and 6 percent, respectively. Chinese exports of automotive products were around US$11B in 2004. In recent years, the Chinese government has encouraged companies to advance overseas as another step in foreign capital inducement – a policy that has been running since the 1980s (it is known as the ‘Go Global’ strategy). According to statistics from China’s Ministry of Commerce, at the end of 2003, direct overseas investment amounted to US$33.2B and had increased to US$50B by the end of 2005. As one example, China is working on buying one of the world’s most sophisticated engine plants. A major Chinese motorcycle company, Lifan Group, is bidding to buy a car engine plant in Brazil from Daimler-Chrysler and BMW. The plant is very sophisticated, and Lifan prefers to buy it and move it half-way around the world to China, rather than developing its own engine technology. If Lifan can make it, and it seems it is moving in the right direction in the early stages, it hopes to build some of the most fuel-efficient and comfortable cars available, similar to the Honda Civic and Toyota Corolla. Lifan also aims to catch up with Japan, Germany, and the U.S. in producing low-end cars.28 The Chinese government is formulating a policy that will make it easier for consumers to purchase vehicles. It consists of four elements: a unified fuel tax, development of urban mass transportation systems, facilitation of financing, and a consumption tax based on engine displacement in order to promote fuel efficiency. In addition, some provinces, municipalities, and autonomous regions have abolished certain local charges on motor vehicles. China’s entry into the WTO may also have a major impact on the Automotive Policy in a number of areas: •
•
Tariffs for automobiles will be reduced to 25 percent by 2006. Currently, the tariff on automotive vehicles is either 43.8 percent or 50.7 percent, depending on the cylinder capacity and ignition features of the vehicle. Fourteen passenger vehicles, vans, and minibuses with a tariff rate of 43.8 percent decreased to a rate of 38.2 percent in 2003, and 34.2 percent in 2004. Tariff rates for these vehicles will reach 30 percent by 2005, 28 percent by the beginning of 2006, and finally, by 1 July 2006, reach a tariff rate plateau of 25 percent. Prior to the WTO accession, foreign-invested enterprises were not permitted to sell or distribute products they did not manufacture themselves or, in the case of holding companies, products that were not manufactured by companies in which they had invested. This prevented foreign-invested companies from distributing imported products in China and prevented the development of efficient distributor networks. Since gaining WTO status, China has removed some of these impediments to foreign enterprises.
10.4.2
U.S. Auto Parts Trade with China
Total imports of automotive vehicles and auto parts into China were worth US$7B during the first 5 months of 2004, according to the Ministry of Commerce. China imported US$1.5B worth of key automotive parts during this period and US$3B worth of other
28 Bradsher, K., “China Looks to Build Car Industry Bit by Bit – Firm Bid to Buy and Move Brazil Plant,” International Herald Tribune, 18 February 2006
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automotive parts, up 48 percent and 27.6 percent, respectively. Germany was the biggest exporter of parts to China, followed by Japan. In compliance with its WTO accession, tariffs on auto parts and components imported into China will be reduced from the current average of 23.4 percent to an average of 10 percent by 2006. These reductions should help the price competitiveness of U.S. automotive parts, which already have a good reputation in China for high quality. In addition, the tariff reductions will help decrease the automakers’ costs in China, since they are importing essential components that cannot currently be produced domestically at a lower cost. Approximately 40 percent of the components used in GM’s Chinese assembly plants are imported from North America, including electronics, axles, and exhaust systems. However, it is unclear how long these types of parts will continue to be imported. GM’s Chairman recently stated that China provides a great opportunity for the auto industry to develop a new supplier base and that auto electronics, in particular, is a growth area. In fact, GM’s largest electronics supplier already is producing in China, and several international automotive electronics makers have established international purchasing offices in China. Other labor-intensive components, such as wiring harnesses and brake parts, also will be price-competitive items produced in China. China was the fifth-largest exporter of auto parts to the U.S. in 2003, following Mexico, Canada, Japan, and Germany. The most popular U.S. auto parts imports from China in 2003 included motor vehicle radio/CD players or recorders, brake drums and rotors, aluminum wheels, miscellaneous parts, ignition wiring sets, child safety seats, auto body parts, and radial tires. Additional import items from China that saw exceptional growth over the past year include wheel covers and hubcaps, CB radio transceivers (except hand-held), brake linings and pads, seat belts, windshield wipers, seats, ignition coils, air conditioner parts, and radial tires. As an example of the shift of electronics to China, GM has moved its global electronics purchasing department from Michigan to Shanghai, a hub of China’s electronics industry. The shift is intended to keep GM abreast of trends in automotive electronics and facilitate buying electronic components in China. It is predicted that by 2009, GM’s annual purchases will reach US$6B worth of Chinese-made auto parts for its manufacturing in China, and US$4B for GM plants outside of China. Headquarters in Shanghai will also help GM export more components to Europe and North America. The shift to China indicates the importance of electronics. 29 Besides GM, Visteon Corp. announced in early 2006 that its global electronics group will also be headquartered in Shanghai. TRW has more than 40 people on a purchasing team in Shanghai. At TRW’s R&D center in Shanghai, four of 80 engineers were devoted to automotive electronics, eight more were added recently, and more are coming. According to Kevin Elgood, engineering director at TRW’s Shanghai R&D center, the plan is to have 25 by the end of 2005.30 According to Asimco Technologies Ltd., China exported US$1.5B worth of automotive electronics and instruments in 2005, an increase of 49 percent from 2004.31 The electronics include navigational radios, speedometers, and the like, but not tiny electrical motors, lighting, or many other components. The majority of the automotive electronics exports are coming from foreign-invested companies rather than fully domestic firms, for most of the domestic companies lack the necessary advanced technology. There is not a lot of core design experience in China but foreign firms’ engineering centers, such as Delphi’s 350-engineer technology center in Shanghai, are helping local engineers gain that experience.
Sherefkin, R., and LaReau, J., “GM Picks China for Electronics,” Automotive News, 2006 Webb, A., “China is Becoming Key Player in Global Auto Electronics,” Automotive News, 6 March 2006, http://www.autonews.com/apps/pbcs.dll/article?AID=/20060306/SUB/60302026/1003 31 Ibid 29 30
China’s Electronics Industry
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10.5 China’s Avionics Electronics Industry Aviation is considered key to China’s continued economic progress. Increased freight traffic resulting from its entry into the WTO, combined with policies intended to develop its poorer western region, will undoubtedly increase resources allotted to civil aviation. In 2004, China’s civil aviation had finished total cargo and mail transportation of 2.7 million tons and 120 million passengers. By the end of 2004, the total air routes were 1200, including 975 domestic routes and 225 international ones. On the mainland, there were 133 airports, centered around Beijing, Shanghai, and Guangzhou, and connecting 127 cities in China and 80 cities worldwide. The total number of airplanes was 754, including 680 large airplanes. China’s air transportation capability ranked third in 2004, according to the International Civil Aviation Organization.32 Over the next 20 years, air travel is expected to expand by 8.1 percent a year in China, compared with 4.1 percent in Europe and 6.1 percent across the Pacific. Airbus and Boeing have predicted that China may need over 3,500 aircraft worth US$230B from them by 2023, making it the world’s fastest growing market. The key weaknesses in the Chinese sector are engines and avionics. Although China can manufacture some parts, avionics production remains in the primitive stage. However, Airbus SAS, the world’s largest maker of commercial aircraft, said it will make its A320 aircraft in China by the end of 2008 as it seeks to boost capacity for single-aisle planes. As many as four A320s per month could be built in China by 2010. Furthermore, in China’s National Congress Meeting on March 2006, Premier Wen Jiabao announced that China will launch a national project developing its own large commercial airplane and follow the same road as China’s space program. 10.5.1
Regulatory Agencies
China’s aviation sector is dominated by several organizations, with a sometimes confusing division of responsibility. In 1993, the Ministry of Aerospace Industry, responsible for both aviation and aeronautics, was split into two separate ministry-level economic entities: the Aviation Industries Corporation of China (AVIC), responsible for aircraft and parts manufacturing, and the China Aerospace Industry Corporation (CAIC), charged with coordinating the space industry. In 1999, with the approval of the State Council, the former China Aerospace Corporation, with about 270,000 employees, was divided into the China Aerospace Science and Technology Corporation (CASC) and the China Aerospace Machinery and Electronics Corporation (CAMEC). In September 2001, CAMEC was renamed the China Aerospace Science and Industry Corporation (CASIC). 10.5.2
Aviation Industries Corporation of China I and II
AVIC was created as a holding company for the aircraft, engine, and avionics industry.33,34 AVIC is responsible for managing and allotting state-owned assets, developing new technologies, promoting exports, contracting state projects, and aligning planning for the overall industry with the State Council and the Central Military Commission. China’s aircraft and aircraft component manufacturers are under the auspices of AVIC, which oversees civil and military production by the Xian Aircraft Industrial Group of China (XAIG), the Shanghai Aviation Industrial Group of China (SAIC), the China National Guizhou Aviation Industry Group (GAIG), and the China National South Aero-engine and Machinery Group (SAMG). In September 2002, AVIC I launched a new company, AVIC I Commercial Aircraft, Ltd. (ACAC), to develop the country’s own regional passenger jet. The ARJ21 (Figure 10.1), 32 CAAC website, http://www.caac.gov.cn/E_PubWebApp/WebCommon/index.aspx?strMenuId=0013, accessed February 2006 33 www.tradeport.org, 2002 34 www.english.peopledaily.com.cn, 2002
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China’s first modern passenger jet, will cater to the fast-growing domestic market, and is slated to fly in late 2006. ACAC is a joint investment of 15 investors from aviation industrial institutes and enterprises, headquartered in Shanghai. ARJ21 is the first medium- and short-range regional jet designed by China with completely independent intellectual properties. 35 In the process of developing ARJ21, ACAC is mainly based on China's existing research and development resources and capabilities, while maintaining intellectual property rights. The project is driven by market demand and principally serves China’s domestic market as well as the international market.
Figure 10.1 ARJ21 Passenger Jet Plane by China36 The ARJ21 aircraft series has four models. ARJ21B is the business jet of the ARJ21 series, developed for the fast-growing business travel aviation market. ARJ21F is the freighter model of the ARJ21 series for cargo transportation. Its maximum payload is 10,150 kg. ARJ21-700 is the baseline model of the ARJ21 series, powered by two of GEAE’s CF34-10A high-bypass-ratio turbofan engines. It can provide 78 seats in mixed class configuration or 90 seats in economy class configuration. The ARJ21-900 is the stretched version of the ARJ21 series, powered by two of GEAE’s CF34-10A high-bypass-ratio turbofan engines. It can provide 98 seats in mixed class configuration or 105 seats in economy class configuration. 10.5.3
The China Aerospace Science and Technology Corporation
CASC specializes in developing, manufacturing, and supplying spacecraft launch vehicles and various types of strategic and tactical missiles.37,38 Over 130 organizations are subordinate to CASC, including five research academies, two research and manufacturing bases, and a number of factories and research institutes. As a main contractor for Chinese space programs, CASC constitutes a government-authorized investment organization under the direct supervision of the State Council, with a registered capital of US$1.1B and around 110,000 employees, of whom more than 40,000 are technical staff. The corporation has the ability to design, develop, and 35
AVIC I Commercial Aircraft Co. Ltd., www.acac.com.cn http://www.aerospace-technology.com/projects/arj21/arj211.html, accessed March 2006 37 Company introduction and information, http://www.fas.org/nuke/guide/china/contractor/casc.htm 38 Yearbook of the Chinese Electronics Industry, 2002 36
China’s Electronics Industry
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manufacture a variety of spacecraft, launch vehicles, strategic and tactical missile systems, and ground equipment. It is also the only company in China providing commercial satellite launching service to the international market through its sub-company, China Great Wall Industry Corporation. In addition, CASC also supplies civilian products, including machinery, chemicals, communications equipment, automobiles, computers, medical equipment, and environmental protection equipment. It is also engaged in purchase bids, contracting for overseas projects, technical consultation, and labor export. In 2001, CASC contributed over US$1B to the gross domestic product, and recorded profits of about US$16M. In 2001, CASC exports totaled US$655M, while imports came to US$322M. In recent years, CASC has also begun manufacturing civil products, including ground satellite antennas, medical equipment, TVs, and parts for photocopiers. 10.5.4
China Aerospace Science and Industry Corporation
CASIC, previously known as China Aerospace Machinery and Electronics Corporation (CAMEC), evolved from the former China Aerospace Corporation (CASC) and encompasses many of the latter's organizations.39 With the approval of the State Council, in July 1999, the Chinese government reformed the top 10 defense and technology corporations. The former CASC was divided into CASC and CAMEC, with about 150,000 employees. Having integrated the second and third Aerospace Academies and several production complexes from the former CASC, CAMEC mainly focuses on short-range missile systems and aerospace components and equipment, while the new CASC focuses more on long-range strategic missiles, space launch vehicles, and spacecraft. CAMEC, which was renamed CASIC in 2001, has registered capital of US$8.9 billion. Its business scope includes missile and weapons systems, as well as aerospace products. In addition, CASIC also supplies civilian products such as machinery, electronics, chemicals, communications, and computers. CASIC’s business scope includes all kinds of missile and weapons systems. 40 , 41 In addition, CASIC supplies civilian products such as machinery, electronics, chemicals, communications, and computer products. 10.5.5
The Civil Aviation Administration of China
As the regulatory body of the airline industry, the Civil Aviation Administration of China (CAAC) exercises significant control, although this is gradually loosening as individual airlines become more autonomous. 42,43 CAAC continues to influence major expansion plans and personnel decisions, and is also responsible for procuring aircraft for state-run airlines. It is eventually expected to play a role similar to that of the FAA in the U.S., assuming responsibility for safety, airworthiness certification, and route approvals. In October 2002, in a move to optimize the industry’s structure and improve quality and efficiency, existing airlines under the CAAC were reorganized into six large groups: Air China Group, China Eastern Airline Group, China Southern Airline Group, China Travel Sky Holding Company, China Air Oil Holding Company, and China Aviation Supplies Import and Export Group. The six companies were separated from CAAC and are operated by the state directly.
39
Sino-defense, http://www.sinodefence.com/space/facility/casic.asp, accessed February 2006. Ibid. 41 Company introduction and information, [Online], http://www.fas.org/nuke/guide/china/contractor/camec.htm 42 www.caac.gov.cn, www.caac.cn.net, 2002. 43 www.english.peopledaily.com.cn, 2002. 40
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10.6 The Medical Electronics Industry in China China is considered the largest medical device market in Asia (over US$4B in 2002), excluding Japan, and the third largest in the world for high-end medical electronics equipment. Its growing economy, aging population, and rising living standard are the driving forces behind research, production, and new technology in medical electronics. Table 10.5 gives an idea of the size and growth of the medical market. China’s almost 300,000 health institutions included over 18,000 hospitals in 2004. 44 Total health expenditures came to over US$80B in 2003. In the first 6 months of 2003, trade in medicine and medical equipment in China amounted to over US$100M.45 Table 10.5: Numbers of Health Institutes, Hospitals, Beds, and Medical Personnel Categories Health institutions Hospitals Beds Medical personnel
1950
1980
1990
2000
2004
8,915 2,803 119,119
180,553 9,902 2,184,423
208,734 14,377 2,925,390
324,771 296,492 16,318 18,396 3,177,000 3,268,374
555,040
2,798,241
3,897,921
4,490,803 4,389,998
China’s 1995 Hospital Grade System is used to evaluate hospitals on the basis of medical, educational, and research capacity; service; and equipment standards (both software and hardware), with Grade III being the highest level. Major cities in China may have several Grade III hospitals. For example, Sichuan Province has nine Grade III hospitals and around 300 Grade II hospitals. Grade II and Grade III hospitals are the main purchasers of expensive medical electronics equipment, but Grade I hospitals consume 80 percent of medical products. With recent changes in treatment and available medical services, as well as population growth, specialized hospitals for tumors, stomatology, orthopedics, psychiatry, and recovery are developing rapidly. Hospitals for maternity patients and children also represent potential buyers of expensive medical electronics. Table 10.6 shows the percentage of key medical equipment in Chinese hospitals. Suppliers of medical electronics equipment include foreign companies, joint ventures, and local firms. Over 200 foreign medical device companies operate in China; they are major suppliers of high-end medical electronic equipment, especially in Grade II and III hospitals. Local suppliers, on the other hand, focus on the low-end and intermediate market. They provide over 3,000 products covering 47 categories, including medium- and small-sized ultrasonic systems, X-ray diagnostic systems, optical medical resuscitation equipment, ventilation and anesthesia equipment, low-temperature refrigeration units, clinical laboratory instruments, and biochemical instruments. Imports of medical equipment account for 40 to 50 percent of market share, with the U.S. controlling about 38 percent of the total imported product market, followed by Japan and Germany. Statistics show that the major sources of imported medical devices include GE and HP in the U.S., Shimadzu and Toshiba in Japan, Siemens in Germany, and firms in Singapore, Sweden, and Denmark. Some large U.S. companies, including GE, HP, Omeda, Varian, and
44
Ministry of Health, Statistics, http://www.moh.gov.cn/news/sub_index.aspx?tp_class=C3, accessed February 2006. 45 National Bureau of Statistics of China Online, “Major Indexes for Merchandise Exchange Markets traded over 100 M Yuan,” January-June 2003, http://www.stats.gov.cn/tjsj/jdsj/1200308180136.htm
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Kodak, have operated in China for many years; however, U.S. companies are not considered very aggressive in the field of medical electronics. Table 10.6: Percentage of Medical Instruments in China’s Hospitals46
Electrocardiograph Ultrasound cardiograph Brightness modulation ultrasonoscope Color Dopple ultrasonoscope X-Ray unit (10mA-800mA) X-Ray (800mA and Above) CT MRI Cardiac monitor Hemodialysis machine Ophthalmic unit Operating microscope Electric dental chair Delivery monitor
1996(%) 1998(%) 2000(%) 2001(%) 88 90 93 94 9 9 10 10 87 89 92 93 15 22 29 33 91 92 92 92 11 12 14 15 18 23 28 31 3 3 4 5 39 43 48 50 9 11 14 15 47 50 52 52 26 28 32 34 47 51 56 58 16 19 22 24
In the late 1980s and early 1990s, Japanese companies such as Toshiba, Hitachi, Sakura, Olympus, and Sanyo entered China’s medical electronics market with a wide variety of products. Japanese companies have quickly taken a larger market share than other countries in certain product categories, but other countries are catching up. For example, Siemens provides X-ray machines, CT, ECT, MRI and linear accelerators to China’s medical electronics market.47 Siemens has now set up two joint ventures and one wholly owned subsidiary in China for producing high-tech medical electronic equipment.
10.7 China’s Military Electronics Industry The Chinese military electronics complex has grown in conjunction with the commercial electronics industries. While most immediate military system capabilities involve purchases from foreign countries, many recent advances in electronic systems have focused on the development and utilization of internal capabilities. Major areas of advancement include military airborne attack systems, anti-airborne attack systems, advanced tactical electronics, and the development of high-volume state-of-the-art microelectronics foundries. China’s efforts to develop, acquire, and gain access to advanced technologies that would enhance military capabilities include modernizing weapons facilities and emphasizing production of both military and civilian goods throughout its defense industrial base. Initiatives include conducting research and importing advanced electronic and optical manufacturing processes from large international companies.48 China’s goal is to achieve long-term self-sufficiency through the acquisition of key foreign dual-use technologies. Once such technology is acquired, defense-affiliated institutes and factories apply them to the design and production of Chinese military end items. China’s military is also turning out civilian products, including ships, aircraft and automobiles, on a large scale and making increasing profit. The military sector has reported 46
Ministry of Health, Statistics 2005, http://www.moh.gov.cn/statistics/digest05/s14.htm, accessed February 2006. Homepage for medical sector in Siemens, http://www.siemensmedical.com 48 Aviation Week and Space Technology, 28 October 2002. 47
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an average annual increase of 20 percent in production of civilian goods since 2000. Jin Zhuanglong, spokesperson for the Commission of Science, Technology and Industry for National Defense, said the nation’s 11 defense industrial groups posted a 15 percent growth in combined profits, generating US$21.6B worth of civilian goods in 2006. Jin said China will put in place a new framework that combines its military research and development capability with civilian sectors. This will allow the military and civilian sectors to interact with each other to ensure fast progress in the military sector. On major tasks to be conducted prior to 2010, Jin cited development of nuclear energy, a manned space program, a lunar probe program, civilian planes, and shipbuilding. China will also seek R&D breakthroughs in key technologies for the shipbuilding sector while giving priority to the three shipbuilding bases along the Pan-Bohai Rim in north China, the Yangtze River Delta, and the Pearl River Delta.49 10.7.1
Overview of Government Policy on Defense and Military Market
While recognizing the primacy of economic power, Chinese leaders continue to view the military as a necessity in order to protect important national interests and support China’s emergence as a preeminent power. That said, Chinese leaders since Deng Xiaoping have placed military modernization behind other priorities such as agriculture, industry, science, and technology. This policy assumes that broad-based modernization will raise overall levels of industry, technology, and human resources and ultimately sustain long-term military modernization. In other words, tomorrow’s war will be a war of economics. For historical reasons, self-reliance is of great concern and importance to China, 50 especially in the highly sensitive area of military technology and development. With defense research, development, and production becoming a global phenomenon and military technology growing more costly and complex, China is also evolving its traditional principles to be serious about modernization. In 2004, the Chinese military budget amounted to US$25B,51 with actual spending estimated as high as US$50B. In January 2006, China accredited its first group of 121 national defense laboratories for standardized measures and tests for aerospace, aeronautics, and nuclear technologies as well as dual technologies. These accredited labs include those from the China Aerospace Science and Technology Corporation, China National Nuclear Corporation, and China State Shipping Building Corporation, according to the Science and Technology Daily. The move is aimed to strengthen the national defense industry and develop dual technologies for both military and civilian use, said Wu Weiren, a senior official with China’s State Commission of Science and Technology for National Defense Industry.52 10.7.2
Domestic Military Industry
China’s defense industrial base, also known as National Defense Science, Technology and Industry, is a well-organized yet complex structure, consisting of factories, institutes, and academies that are subordinate to organizations representing the nuclear industry, aeronautics, electronics, ordnance, shipbuilding, and astronautics. The current structure includes the following organizations: • •
Ministry of Information Technology and Telecom Industry (MTTI) China State Shipbuilding Corporation (CSSC)
49 “Army Promotes High-tech, Serves Civil Economy,” Shanghai Daily, 6 January 2006, http://www.shanghaidaily.com 50 Reports on arm trading in China, [Online], http://www.caat.org.uk/research/China_Body.html 51 ChinaNews.com, Ministry of Foreign Affairs, www.chinanews.com.cn/news/2005/2005-06-07/26/583733.shtml, accessed February 2006 52 “China Accredits 121 National Defense Labs,” People’s Daily Online, 6 January 2006, http://english.people.com.cn/200601/06/eng20060106_233418.html
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• • • • • • • • •
China State Shipbuilding Industry Corporation (CSIC) China Aviation Industry Corporation I (AVIC I) China Aviation Industry Corporation II (AVIC II) China National Nuclear Corporation (CNNC) China National Engineering Construction Corporation (CNEC) China North Industries Group Corporation (CNIGC) China South Industries Group Corporation (CSIGC) China Aerospace Science and Industry Corporation (CASIC) China Aerospace Science and Technology Corporation (CASC)
Each of these corporations in turn oversees import/export corporations. These sub-corporations facilitate the import of technology and the export of commercial and military goods for profit. The import/export corporations include: • • • • • • •
China Nuclear Energy Industry Corporation China Aero-Technology Import/Export Corporation China North Industries Corporation China National Electronics Import/Export Corporation China Shipbuilding Trading Corporation China Great Wall Industries Corporation China Precision Machinery Import/Export Corporation
The Chinese Academy of Sciences (CAS), under direct supervision of the State Council, is China’s highest academic institution for comprehensive research in the natural and applied sciences. CAS often works closely with the military in applied research, with products funded or developed for use by the military. In the area of electronic warfare (EW), China is developing radio-frequency (RF) warheads and is moving ahead in the development of RF weapons that could disable electronic systems. These devices will most likely be able to disrupt the guidance systems and other electronic components on missiles and military aircraft attacking a target. According to the Pentagon, “China is working closely with foreign scientists and is seeking foreign technology associated with high-power RF generation.” The Pentagon also suggests that on the directed-energy front, China could eventually field a laser capable of destroying a spacecraft and may also be working with Russia to support research and development on a high-powered microwave system, referred to as Ranets-E.53 A report from the Government Accounting Office in Washington warned that China’s new chip plants provide China’s military with an important source of custom-made integrated circuits not subject to foreign export controls. These new chip plants could reportedly make China’s communications, surveillance, and missile guidance equipment “less vulnerable to foreign disruption during a protracted conflict.” Interestingly, much of this technology has come from U.S. manufacturers such as Motorola and Intel. China’s advancing chip industry will have direct applications in future military systems, including advanced phased-array radar used to track missiles.54 Furthermore, Chinese government institutes have bought some of the most sensitive equipment (notably from Germany) that could conceivably be used to manufacture radiation-hardened electronic and solar cells for satellites, high-power radio-frequency weapons, and infrared sensors and imaging equipment. Indeed, it is becoming more difficult to separate China’s military electronics industry from its commercial electronics industry. Many Chinese OEMs have also acquired advanced electro-optic technology and have made significant breakthroughs in the last decade developing active electro-optic components. Products include laser diodes, active/passive mode-lock ring lasers, fiber optics grating lasers, 53 54
Aviation Week and Space Technology, 28 October 2002 The New York Times, 6 May 2002
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and erbium-doped fiber amplifiers (EDFAs). The OEMs are also in the forefront of research on quantum-well materials and components, opto-electronic ICs, and photonic chips.55 10.7.3
Export of Military Products
China’s military exports are primarily to third world countries such as Pakistan, Saudi Arabia, Syria, and South America. The two corporations most involved in arranging sales are Polytechnologies Incorporated, known as POLY, and NORINCO, the China North Industries Group. Polytechnologies Incorporated is a defense firm mostly owned by and under the control of the People's Liberation Army (PLA). It is well known as China's most aggressive arms dealer.56 NORINCO’s operations are overseen by the State Council of the People's Republic of China.57 There has been ongoing interaction between China and Western countries (mostly the U.S.) with respect to China’s exports of military products. For example, in August 2002, the State Council of China issued new regulations related to export control of missiles and missile-related products and technologies, which limit the spread of weapons of mass destruction from China. 10.7.4
Import of Military Products
Imports of military products play an important role in China’s military modernization. In fact, the country’s modern military industry is based on products and technologies imported from the Soviet Union in the 1950s and 1960s. Since China opened up in the late 1970s, economic and technological exchanges between China and developed countries have greatly increased. In the late 1990s, high-tech imports boosted the modernization of China’s military through technology transfer. Today, major providers of military products to China include Russia, Middle Eastern countries (especially Israel), the U.S., the U.K., France, and Italy. A 1989 embargo following the Tiananmen Square shootings reduced military imports from Western countries. 58 , 59 However, limited EU and U.S. military sales to China since 1989 have been overshadowed by much larger amounts of military equipment provided by Russia and Israel, who have either sold or agreed to sell to China products far more lethal than those sold by other countries. For example, agreements with Russia contain provisions for two Sovremenniy destroyers, about 50 Su-27 fighter aircraft, about 25 Mi-17 transport assault helicopters, and four Kilo diesel electric submarines. In 2004, there was a 7 percent increase in arms agreement values. Significant agreements include two Russian contracts: US$1B for 24 Su-30 fighter aircraft and US$500M for SA-20 surface-to-air missile systems. For its part, Israel has helped China develop the F-10 fighter aircraft by providing technology used in the aborted Israeli Lavi fighter project. Chinese semiconductor foundries had been restricted by U.S. technology transfer rules aimed at preventing cutting-edge equipment (i.e., design rules below 0.25 micron) made in the United States from reaching China’s shores, thereby preventing the Chinese military from using the most advanced electronics for its weapons systems. However, export controls intended to restrict the sale of chip-making technology to China are vague, and the U.S. Electronic News, 17 June 2002 Russell, R.L., “China's WMD Foot in The Greater Middle East's Door,” The Middle East Review of International Affairs, Vol. 9, No. 3, Sep. 2005, http://meria.idc.ac.il/journal/2005/issue3/Russell%20pdf.pdf, accessed February 2006 57 Senator Abraham, S., “Punish the Chinese Government, Not the Chinese People,” Speech for Heritage Foundation Lecture, June 1997, http://new.heritage.org/Research/AsiaandthePacific/HL592.cfm, accessed February 2006 58 Reports on military electronics imports since 1989, http://www.fas.org/spp/starwars/gao/nsiad-98-176.pdf 59 Annual report on the military power of the people’s republic of China from US army, http://www.defenselink.mil/news/Jul2002/d20020712china.pdf, accessed July 2002. 55 56
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Commerce Department evaluates export applications on a case-by-case basis. For example, in 2002, Motorola sold China a state-of-the-art semiconductor fabrication facility to manufacture 12-inch wafer with 0.13-micro technology, copper interconnects, and low-k dielectrics. Furthermore, the United States does not have a monopoly on any of the roughly 250 computer chip manufacturing processes. Japan took over several critical areas of the market in the 1980s and has emerged as the leading supplier of key pieces of equipment, such as lithography machines that miniaturize circuitry designs using light waves to transfer them onto thin silicon wafers. European companies also make and sell much of the equipment, chemicals, gases, film, and other material needed to make integrated circuits.60 In recent years, nations in Europe and Asia have streamlined their export license regulations, allowing more advanced technology to be exported to China. It is increasingly evident that national security and economic factors are closely intertwined in the post-Cold War era. One area in which they are clearly interconnected is technology, notably dual-use technologies. Because most technologies designed to enhance a country’s well being can also be converted to military uses, attempting to control exports of sensitive high-technology items for national security purposes will be a never-ending challenge. Self-sufficiency will continue to be China’s long-term defense industrial goal, with plans to achieve weapons-quality levels approaching those of the industrialized world within the next 5 to 10 years. 10.7.5
Air Force Technology
The bulk of China’s air force fleet is technologically obsolete.61 Most of its 4,000 fighters, 400 ground-attack aircraft, and 120 bombers are based on 1950s and 1960s technology. The majority of these are well over a decade old, and many will reach the end of their service lives over the next 10 years. Development of avionics for military airplanes in China depends heavily on imported technology and products.62 The Soviet Union first allowed China to build its F-7 (a variation of the MiG-21) in 1961. China later developed the M and MP versions for export to other nations, such as Pakistan. Since 1989, Russia has provided over 70 percent of the total imported military items to China, including 2-dozen Russian-made Su-27 advanced tactical fighters. According to public sources, the United Kingdom provided China with heads-up displays, weapon-aiming computers, and fire control radars for the F-TM, while Italy provided the new fire control radar for the F-TM and MP. Russia and the Middle East, specifically Israel, provide most of China’s modern military items. In December 1992, U.S. President Bush issued a waiver declaring it in the national interest to allow exports of military equipment in order to close out four government-to-government military assistance programs. A program named “Peace Pearl” provided modern avionics for China’s F-8 fighters, including F-8 fuselages, four avionics kits, and related equipment.
10.8 China’s Space Electronics Industry Since the founding of the People’s Republic in 1949, China has been engaged in its own space research. During its early stages, Chinese space R&D capabilities mainly comprised Western-educated Chinese professionals that returned to China after the establishing of the People's Republic in 1949, and young engineering students trained by the Soviet Union. From the 1960s, China began to educate and train their own aerospace engineers and technicians.
The New York Times, 6 May 2002. Overview on Air Force in China, [Online], http://www.rand.org/publications/RB/RB32.html 62 Reports on military electronics imports since 1989, http://www.fas.org/spp/starwars/gao/nsiad-98-176.pdf 60 61
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Since the 1980s thousands of professionals in the field of aerospace have been sent to the United States and other Western countries as research students or exchange scholars. China’s space research and development institutes and factories were established on the basis of the Soviet Union’s model in the 1950s, but with a strong Chinese character after five decades of development. All space launch and tracking facilities are controlled by the General Armament Department (GAD) of the PLA. R&D academies and institutes and factories belong to the civilian sector, but receive directions from the GAD in military-related and manned space flight programs. China’s first satellite, the “Dong Fang Hong-I,” was successfully developed and launched in April 1970, making China the fifth country in the world with such capability. In 2004, China succeeded in launching 10 satellites into orbit, making it the country with the largest annual number of launched satellites. China hopes that, by 2010, it can have 100 satellites running in space, and by 2020, another 100.63 According to the 2000 white paper “China’s Space Activities,” published by the Chinese state council in November 2000, China is going to establish an independently operated space-based network for earth observation, broadcasting and telecommunications, navigation and positioning, and remote sensing by 2010. In 2017, China’s scheme is to visit the moon. Today, China is one of the world’s major players in the field of space technology, along with the United States, Russia, and Europe. China has also established a comprehensive space infrastructure for launch, command and control, tracking, research and development, and education and training, with over half a million employees from civilian and military sectors. China is one of a few countries in the world capable of designing, developing, testing, launching, tracking, controlling, and recollecting various spacecraft wholly independently. China is the third country in the world to have mastered the technology of satellite recovery and the fifth capable of developing and launching geostationary telecommunications satellites independently. China runs one of the world’s largest infrastructures of space institutions, which comprises three space launch complexes, two space command and control centers, and a global space tracking network covering the China mainland, the South Pacific, South Asia, Africa, and the Atlantic. China has independently developed the Long March rocket family, consisting of 12 types of vehicles capable of launching satellites from near-earth to geo-stationary and sun-synchronous orbits. Since 1985, when the Chinese government announced that it was putting the Long March rockets on the international commercial market, China has launched 27 foreign-made satellites into space and garnered a share of the international commercial launching market, including many of Motorola’s communications satellites for the Iridium Project. China’s first human-rated experimental spacecraft (ShenZhou series) was successfully launched and recovered in November 1999, marking a breakthrough in the basic technologies of manned spacecraft and a significant step toward manned space flight. ShenZhou–4, believed to be the last unmanned flight before China’s first crewed space mission, was successfully launched in December 2002 and recovered 5 days later. ShenZhou-5. China’s first manned spaceflight mission, was launched in October 2003. The spaceship carried astronaut Liwei Yang into earth orbit and made China one of only three countries (after Russia and the U.S.) to independently launch a human into space. Two years after making its first manned spaceflight, China successfully sent its second manned spacecraft, ShenZhou-6, into space in October 2005. ShenZhou-6 had two astronauts. The spacecraft stayed in space for five days before returning to earth. The launch was broadcast to the whole nation on live television. Four corporations share primary responsibility for China’s space industry: • China Aviation Industry Corporation I (AVIC I)
63
Office of the Secretary of Defense, Annual Report to Congress, “The Military Power of the People’s Republic of China 2005.”
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• • •
China Aviation Industry Corporation II (AVIC II) China Aerospace Science and Industry Corporation (CASIC) China Aerospace Science and Technology Corporation (CASC)
AVIC I mainly oversees development, manufacturing, sales, and after-sales services of military and civil aircraft, aircraft engines, airborne equipment, weaponry systems, and various non-aero products. AVIC II primarily develops and produces military and civil aerial vehicles, such as helicopters, trainers, general aircraft, and related engines and airborne equipment. CASIC’s core activity consists of assorted missiles, other space-related products, and IT products. Finally, CASC specializes in developing launch vehicles, spacecraft, manned spaceships, and various types of strategic and tactical missiles, and also handles imports and exports of space-related products and international cooperation. China is drafting a space development strategy and making plans based on 21st century demands, as well as long-term national goals related to the space industry. Short-term development targets for the next decade include building a long-term, stable earth observation system, setting up an independently operated satellite broadcasting and telecommunications system, and establishing an independent satellite navigation and positioning system. Objectives for the next 20 years include: • •
•
• • •
Industrializing and marketing space technology and space applications. Establishing a multi-function, multi-orbit space infrastructure made up of various satellite systems, and setting up a satellite ground application system that brings together spacecraft and ground equipment in an integrated and sustainable network in keeping with overall national goals. Solidifying China’s own manned spaceflight system and carrying out scientific research and technological experiments on a significant scale, with the aim of gaining international recognition, contributing to the field, and carrying out explorations and studies of outer space. Upgrading the overall level and capacity of China’s launching vehicles. Establishing a coordinated and complete national satellite remote-sensing application system. Developing space science and exploring outer space by developing a next-generation research and technological experiment satellite group; contributing to studies of micro-gravity, space material science, space life science, space environment and space astronomy; and focusing on exploration of the moon.
China has developed environmental remote sensing capabilities from geostationary as well as sun-synchronous polar orbits. These satellites represent a valuable contribution to the Global Observing System coordinated by the World Meteorological Organization. China has also been actively seeking cooperation with Russia, Europe, and other countries in the field of spaceflight and spacecraft technology. For example, China has taken part in the EU’s Galileo Satellite Network, which is currently under development as an alternative to the U.S. Global Position System (GPS). The FY-1 series of polar orbiting satellites dating back to the late 1980s has evolved into a 10-channel imager with 1-kilometer nadir resolution in visible, near-infrared, and infrared spectral bands. The most recent polar orbiting meteorological satellite, FY-1D, was launched on 15 May 2002, from the TAIYUAN Satellite Launch Center, and broadcasts imagery to anyone with a direct readout antenna at 1700.40 MHz. The FY-2 series of geostationary satellites has been positioned at 105°E since the first launch in June 1997. FY-2B, the second Chinese geostationary meteorological satellite, was launched on 25 June 2000, from Xichang Satellite Launch Center using a Long March 3 vehicle. The satellite is spin-stabilized and provides full images of earth every 30 minutes in the visible (at 1 km resolution) and infrared (at 5 km resolution) spectral bands. FY-2C, launched in October 2004, expands the number of infrared spectral bands to four. The FY-2
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series mission is designed to monitor the space environment and to provide images of the earth’s surface, water vapor, and clouds. The FY-3 series (the second generation of Chinese polar orbiting meteorological satellites), consisting of seven satellites, will operate from 2005 to 2020. The FY-3 series will add a sounding (vertical atmospheric temperature and moisture profiling) capability to the current imaging capability and will also feature a microwave remote sensing capability. The FY-3A is being manufactured and was planned for launch in 2007, followed by FY-3B and five more FY-3 series. These satellites were designed to work 2 to 3 years in space.64 The mission objectives of FY-3 include: • • •
64
Providing global three-dimensional atmospheric thermal and moisture structures, and cloud and precipitation parameters to support global numerical weather prediction. Providing global imagery for monitoring large-scale meteorological and hydrological disasters and biosphere and environment anomalies. Deriving geophysical parameters to support research activities in the area of global and regional climate change.
China Spacecrafts, http://www.spacetoday.org/China/ChinaSatellites.html, accessed February 2006
Chapter 11 Software
The software industry in China has been rapidly developing as a result of the government’s efforts and the huge market for Chinese-based application software. This chapter discusses China’s software development, government policies, and software companies and organizations, as well as China’s development and use of software licensing.
11.1 Overview of Software Industry Development in China The development of China’s software industry began coincident with the development of the hardware industry. Growth has sped up since economic reform began in 1979. The legislation and enforcement to protect intellectual software property rights began in 1991. The first hurdle to the Chinese software industry was the language barrier. China had to develop its own processing systems that were competent in handling multilingual computing, especially with simplified Chinese. These systems now excel in language processing, including information input, archiving, retrieval, and publishing. Some of these systems have been encapsulated in business processing, such as financial, banking, trading, and industrial systems. The Chinese have also used developed software, especially public domain software, and expanded it with additional features. Red Flag Linux is a typical example. The Chinese government made public its “No. 18 Document” – Policies on encouraging the development of software and integrated circuit industries – in June of 2001; it emphasizes the training of personnel and development of software to meet the needs of the domestic and world markets.1 By 2002, the revenue generated from software and system integration had climbed to US$14.1B.2 Local companies are expected to hold more than 50 percent of the Chinese market. In 2005, the sales for the software industry were expected to be US$30B with exports at US$100B. 3 Now, the software industry is developing at a rate of 30 percent a year in China. The sales volume of software in China is forecast to be US$748M by 2007. China is now the second largest market in the world for personal computers. Sales of personal computers were expected to reach US$80M, with over 100 million Internet-enabled people in 2005.4 The major factors in the computer industry’s boom are 1 People's Daily Online, “China’s Software Industry to Reach 250 Billion-yuan by 2005,” 5 August 2002, http://english.people.com.cn/200208/05/eng20020805_100929.shtml 2 China Software Industry Development Report 2002, MII Department of Economic Operations, http://www.usito.org 3 People’s Daily Sci-Edu, “China’s Information Industry by 2005,” http://english.peopledaily.com.cn/200102/19/eng20010219_62770.html 4 “PM Makes Strong Pitch for Indian IT in China,” India Infoline, 26 June 2003, http://www.indiainfoline.com/nevi/vate.html
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the construction of the Internet, the development of e-commerce, and the growing online trend for government sectors, enterprises, and households. The Chinese government is keen on developing software that can support the domestic operating system, based on Linux. The major advantage is that users can make adaptable modifications quite freely. China is also considering using this new software in the domestic operation system for the e-government. China’s global competitive edge in the software business is its large market potential. Many factors, including government spending on a nationwide information infrastructure, increasing company IT users, increase of personal computer owners with Web/cyber-based consumer services, development of western China, and China’s entry into the World Trade Organization (WTO) provide a large potential market for software manufacturers. The challenges that China faces include the following: •
•
•
China is new to the software market. In terms of its technical capabilities, it is still at the stage of imitation or modification. In key applications, such as database management systems and operating systems, China has not yet developed complete domestic intellectual property rights products. Small size Chinese software companies are still lacking core technology and their staff are less skilled. For example, in 2002, 157,000 research and development professionals worked for 4,700 software companies in China, 67 percent of which employed 50, or fewer, employees. Also, companies such as Huawei must employ hundreds of software engineers from India to develop their telecommunications software. Chinese software companies’ export capability is still weak, due to a lack of owned intellectual-property products. Lack of a complete quality assurance system and effective management approach for software also hinders China’s software development.
11.2 Policy of China’s Software Industry China’s open policy provides a favorable external environment for the development of the software industry. There is a huge amount of domestic and foreign investment in China. As part of the policy, the Chinese government is actively trying to improve the software business environment by: • • • • •
•
Reducing central and local taxes, reducing import and export duties, improving infrastructure services and financial support Protecting intellectual property Improving education and training to maintain an adequate intellectual manpower supply and establishing a policy to attract Chinese talent overseas back to China Continuing support of IT research and development Improving software quality by encouraging and supporting software companies to pass the GB/T19000-ISO9000 quality assurance system and Capability Maturity Model (CMM);5 software engineers as well as Chinese government officials refer to the CMM license as their “software passport” to the U.S. market6 Setting up regulations to use domestic software for all central government agencies
Nevertheless, the Chinese government has many restrictions. For example, in order to operate in China, Google has agreed to exclude from search results any links to content the 5 “Shanghai Software Export Needs Fuels,” 21 February 2002, http://www.china.org.cn/english/investment/27277.htm 6 Huilin, Z., China Daily, 22 February 2002, “New Fears over Exports of Software,” http://www.chinadaily.com.cn/en/doc/2002-02/22/content_107666.htm
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Chinese government deems politically unacceptable. Google also continues to operate an uncensored Chinese-language version of its service on Google.com.7
11.3 Central Government Preferential Policies for the Software Industry in the Areas of Finance and Tax For the purpose of promoting the development of China’s software industry and increasing the competitive edge of the Chinese information industry in June 2000, the State Council said that the software industry shall enjoy the central government’s preferential policies. These preferential policies cover investment and financing, taxation, export, revenue allocation, accreditation of software enterprises, and protection of intellectual property rights.8 However, this is changing with China’s entry to the WTO. 11.3.1
Investment and Financing
The government provides support by setting up venture capital investment firms to launch venture capital funds. The budget for capital construction is earmarked for infrastructure construction and industrialization projects in software industries. Government agencies responsible for promoting the software industry include the State Planning and Development Commission, the Ministry of Finance (MOF), the Ministry of Information Industry, and the Ministry of Science and Technology (MOST). These agencies provide funds for setting up software enterprises and software development. Software enterprises are also allowed to raise funds through domestic and overseas listings. Special fast-track approval procedures are set up to facilitate these capital-raising activities. In June 2000, MOST and MOF announced their jointly sponsored State Fund for Small and Medium-Sized Technological Enterprises, which can support about 1,000 new projects each year. The fund makes a maximum down payment of US$120.8M for each supported company. Approved projects receive loans with a special interest rate from China’s “Big Four” banks: the Agriculture Bank of China, the Bank of China, the Industrial and Commercial Bank of China, and the China Construction Bank.9 11.3.2
Taxation
An official value-added (VAT) tax of 17 percent is levied on the general VAT payer. The real tax burden exceeding 3 percent will be rebated upon collection for enterprises to use for research and development. Start-up software enterprises are entitled to enjoy tax exemption in the first 2 years and a 50 percent tax reduction in the following 3 years, starting from the first profit-making year. Imports of certain technology and equipment will be exempted from import duty tax. Payroll and training costs are also non-taxable. 11.3.3
Exports
Software exporters enjoy credit support at a low rate and receive export credit insurance. Enterprises whose annual export of software products exceeds US$1M are granted the right to operate their export businesses independently. Export-oriented software companies are encouraged to obtain ISO9000 and CMM certification. The government’s Central Fund for Foreign Trade Development will pay the fees for the certification. Dean, J., “Beijing Completes Google Licensing Investigation,” The Wall Street Journal, p. 30, 23 February 2006. China IT News, “Specific Policies that Encourage the Software Industry,” http://www.experexchnage.com/ItinChina/news/itpolicies4.htm 9 People’s Daily, “China’s State Innovation Fund to Support 1,000 High-tech Projects,” 27 June 2000, http://english.people.com.cn/english/200006/27/eng20000627_44002.html 7 8
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11.3.4
Revenue Allocation
Software enterprises are allowed to establish incentive schemes for outstanding individual contributors. Technological patents, as well as scientific and technology development, can be used as equity stakes as a means of compensation. Annual assessment systems are carried out among software enterprises. The assessment standards are jointly set by the Ministry of Information Industry, the Ministry of Education, the Ministry of Science and Technology, and the State Bureau of Taxation. The Ministry of Information Industry and the State Bureau of Quality and Technical Supervision are responsible for the formulation of national standards for software products. It is illegal for any unit to use unauthorized software products in its computer systems. Companies are encouraged to register software copyrights. Production and/or sale of pirated software is supposed to be punished, but software can be easily found or purchased at an extremely low cost in all of the major Chinese cities.
11.4 Software Education and Training In China, IT education has been included at all levels of schooling, from basic to advanced education. Software technology education and training is well-rounded, and includes academic foundational education, trade skills training, advanced software development, and software technology research. Universities and colleges continuously enlarge enrollment for their master’s, doctoral, and post-doctoral programs of high-tech education. Distance learning programs and evening schools have been set up. Industries, institutes and other social organizations are encouraged to provide technical training to update each employee’s knowledge. In 2003, China had more than 500 universities and colleges offering specialized computer studies. In addition, there were also numerous IT associate-degree graduates across the country. The number of software engineers in China was around 600,000 in 2002. In 2004, there were around 140,000 software engineering graduates. Some 10,000 masters of software engineering students will graduate in 2 to 3 years. Of the 700,200 students who studied abroad, 172,000 have come back to work in China.10 Software researchers and designers are encouraged to study abroad, and foreign software experts are invited to teach and work in China. The ultimate goal of this global talent strategy is to provide sufficient quality talent for the software industry to attract domestic and overseas software professionals to start up software companies in China.11 It is believed that China is attempting to gain a more important position in the world IT market. 11.4.1
Basic Education
The Ministry of Education in China works diligently to widen the horizons of China’s 200 million primary and secondary students by using the Internet. IT education is to be introduced into primary and middle school programs across the country in the next 5 to 10 years. Nationwide, since 2001, senior high schools and junior high schools in large cities have listed IT education as a mandatory course. In 2005, all junior high schools in the country and primary schools in developed areas were required to offer IT courses. The Minister of Education has called on regional education administrations to prioritize IT education in their local educational development plans for the Tenth FYP (2001-2005). 10 “Why China – China Can Offer More than Expected,” Jianping MEI, Ministry of Science and Technology, 17 June 2004 11 State Council, “Article 22-24, Notice of Certain Policies to Promote the Software and Integrated Circuit Industry Development,” June 2000
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Tertiary Education
The quality of IT technology is a major concern for universities in China. Colleges and universities try to improve the quality by building links and cooperation with overseas universities. This effort also attracts Chinese software scientists to return to China. The number of students with computer and software majors is increasing in colleges and universities in China. To meet the need for software talent, 35 universities, including Tsinghua University, established software demonstrators.12 11.4.3
Software Blue Collar
As in the universities, IT has also been a major development area in vocational colleges. In addition to training for systems support, the Chinese government has initiated a new kind of vocational college since 2001 to train “software blue collar” technicians who specialize in programming. The first batch of 350,000 of these students graduated in 2003.
11.5 Software Technology Research To address the need to develop information technology, China has been funding substantial software technology projects in both theory and applications research. Most of the researchers aim to transfer and apply their research results to industry. The government also provides competitive packages to attract renowned overseas Chinese researchers back to China. Compared with the cost of research in other areas, software research needs a relatively small investment. Hence, most of the universities are expanding their teaching and research in software technology. In June 2000, for instance, the Beijing University Founder Group and China Huajian Group formed the Zhongguancun Software Group. This is one of China’s largest software companies in Zhongguancun, focusing on software applications in the finance, security, transportation, and management industries.13 Although this knowledge transfer practice remains in the early stage in China, the transfer has become a de facto mechanism of the rapid economic development of the past 10 years. At the same time, industry is encouraged to apply research results. This approach has a number of advantages. First, it provides a stable and supportive environment in which researchers can do quality research. Second, it helps the industry to improve the software technology level. Third, it helps in soliciting resources for researchers and improves their living standard. Today, many small and medium-size software enterprises have spun off from the universities under this scheme, creating substantial momentum for the software technology industry. 11.5.1
Institute of Software
Established in 1985, the Institute of Software, Chinese Academy of Science (ISCAS), is a comprehensive academic institution focused on studying fundamental theories of computer science and developing advanced software technology. Its major research areas include Chinese information processing, operating systems, information security, software engineering and middleware, computer networks and multimedia communication, Internet, intranet and related software, human-computer interaction, real-time systems, formal specification and verification, parallel algorithms and software, computer graphics and visualization, e-commerce, and e-government. ISCAS also conducts software product development in the areas of Chinese language processing, system integration, compiling and 12 China IT News, “China Will Be the Worldwide Centre for Distributing Software Engineers,” http://www.experexchange.com/ItinChina/news education 1.htm 13 Khoo, E., “Microsoft Teams up for China Software Push,” 17 January 2002, http://news.com.com/2100-1001-817097.html
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testing, and business computing. It has established extensive long-term cooperation with the international science and technology community and industries. Cooperative research ventures have been set up with companies such as IBM/Lotus, NEC-CAS Software Laboratory, and Microsoft. ISCAS has devoted enormous financial and technological resources to the Chinese software industry for many large-scale application development and system integration projects. 14 11.5.2
The National Research Center for Intelligent Computing
Founded in March 1990, the National Research Center for Intelligent Computing Systems (NCIC), is a research and development center for advanced computer technology. NCIC is supervised by the State Science and Technology Commission and administratively supported by the Institute of Computing Technology (ICT). The main objectives of the NCIC include designing and implementing marketable symmetric multi-processors and massively parallel processors; developing innovative products by integrating research results; conducting fundamental research on high-performance computers and intelligent computing systems; and promoting international cooperation and academic exchange.15 11.5.3
China National Software and Service Company Limited
The China National Software and Service Company Limited (CS&S) is a science, industry, and trade integrated high-tech enterprise specializing in high-quality system software, security software, platform software, e-government, enterprise information software, and overall IT services to the customers in China. It is a public software company and the key pillar holding enterprise of China Electronics Corporation (CEC). Its predecessor was China National Computer Software and Technology Service Corporation, established in 1990, that was merged into China Computer Technical Service Corporation (established in 1980) and China Software Technique Corporation (established in 1984). CS&S has a registered capital of US$18.7M and total assets of US$124.4M. The company also has affiliated 18 holding companies and 11 participated share holding subsidiaries and branches in the major provinces and cities of China as well as three subsidiaries abroad. It has established various kinds of cooperative relationships with multinational corporations including IBM, Novell, Microsoft, NEC, and Complex of Singapore. It was selected as the “Nation’s Key Software Enterprise” in 2003, 2004, and 2005.16 11.5.4
Macao Special Administrative Region
The United Nations University set up its International Institute of Software Technology (UNU/IIST) in Macao in 1994. The founding Director, Professor Dines Bjørner (1994-1997), and his successor, Professor Chaochen Zhou (1997-2002), are internationally renowned software engineering researchers. UNU-IIST assists developing countries to meet their needs and also to strengthen indigenous capabilities in three areas: development of their own and exportable software, university education curriculum development, and participation in international research. The institute is devoted to research in the area of rigorous software engineering. The institute has experience in applying (so-called) formal methods to domain engineering, enterprise modeling, requirements elicitation, hardware/software co-design, as well as its integration with semi-formal approaches, like unified modeling language (UML) and with system validation through testing.17 14
Institute of Software, Chinese Academy of Science (ISCAS), http://www.ios.ac.cn/int/introduction.html, 1998 National Research Center for Intelligent Computing System (NCIC), Institute of Computing Technology, and Chinese Academy of Sciences, 1998, http://www.solar.rtd.utk.edu/~china/ins/NCIC/NCIC.html 16 China National Software and Service Corporation (CS&S), 2006, http://www.css.com.cn/enhome.php 17 E-Macao Partners, 2006, http://www.emacao.gov.mo/people/partners/main.html 15
Software
11.5.5
221
Hong Kong Special Administrative Region
The Hong Kong government has funded 10 universities that offer various degree courses, including information technology. In 2003, there were more than 3,000 students graduating from different IT programs at different levels. The Hong Kong government has set up the Innovation and Technology Commission to facilitate the development and application of innovative technologies in the industry. The Applied Science and Technology Research Institute Co. Ltd. (ASTRI) was formed in 2001 to capture the promise of technological advance for Hong Kong through applied research. Its missions are to perform high quality R&D for technology transfer to industry, develop needed technical human resources, and act as a focal point that brings together industry and university R&D assets to enhance Hong Kong’s technological competitiveness on a continuous basis. In the past few years, ASTRI has built a team of excellent researchers who are already conducting world class research.18
11.6 Investment China’s open-door policy has attracted investors from all over the world. Investors are interested in all business sectors, including services such as financial and insurance services and manufacturing. Many international software companies, such as IBM and Microsoft, have set up R&D software centers in China. Many small and medium-size software companies have also settled in China. 11.6.1
Software Parks and Science Parks
The Chinese government has built many software development parks and production bases. Inside specialized economic and technology development zones, software startups enjoy special policies. These are the incubators for the software entrepreneurs and software development industries equipped with comprehensive infrastructures including transportation, data communications, and talent. Tax and rent reduction schemes are also available to investors. All these measures are very attractive to software entrepreneurs both locally and overseas. In July 2001, the State Planning Committee and the Ministry of Information Industry consolidated China’s original 40 software parks into 11 national software industry bases. The establishment of software centers is an important step to carry out a series of policies encouraging the development of software and integrating circuit industries.19 • • •
•
Beijing - covers an area of 119 hectares.20 There are 232 research institutes and 73 universities. Shanghai - has 748 registered companies. The total investment has been US$458M. There are 50 universities and 1,600 research institutes. Dailian - over 140 enterprises have resided in the park, of which 32 percent are foreign funded, including eight enterprises of the top 500. It has more than 2,000 software engineers. Chengdu - set up in 1997 and listed in the “Torch Program.” It covers 66.7 hectares.
18 “About ASTRI,” Hong Kong Applied Science and Technology Research Institute Company Limited, www.astri.org 19 “China Maps out 10 Software Industry Bases,” People’s Daily, 10 December 2001, http://english.people.com.cn/200112/10/eng20011210_86300.shtml 20 1 hectare = 10,000 m2
222
China’s Electronics Industry
•
Xian - has 500 enterprises undertaking software development, systems integration, network engineering, and electric control systems. Ninety percent of China’s software firms are located in Xian. Jinan - has 51 enterprises, 5 of which are large enterprises. It also has 53 research institutes and 3 state-level and 25 provincial-level research centers. Guangzhou - covers an area of 3.2 km2. There are 629 software enterprises. Changsha – established in 1998, it covers an area of 252 hectares. Hangzhou - established in 1997 it includes 400 software enterprises, mostly small and medium sized companies. Nanjin - has 66 software enterprises. There are also 40 universities and over 30 research institutes focused on telecommunication and automation control industries. Zhuhai – Southern National Software Industry Base located in Zhuhai. There are more than 500 software related companies and research institutes.
• • • • • •
A new development direction of software parks and science parks is to set up centers for a unique purpose, such as software testing. For example, software-testing centers have been set up in Beijing’s Zhongguancun. There are also plans for building software-testing centers in Hong Kong and Shanghai. Furthermore, a digital media center and a wireless development support center were started up in Hong Kong in 2003. These centers help the software industry to enhance product quality and strengthen their competitiveness in the international market. 11.6.2
Zhongguancun Science Park in Beijing
The Zhongguancun Science and Technology Park has 39 institutions of higher learning, 213 research institutes, 100,000 people employed in high-tech industries, and 360,000 others with high education. People with a college education make up 25 percent of the whole population. Companies investing in high-tech industry in this science park are guaranteed priority in receiving bank loans, simplified customs procedures, a 25 percent discount from its assessed value on land prices, and provisions of public utilities. Tax reduction programs are also available. 21 It is difficult to estimate the amount of funding only in software development because software is usually bound with other technologies. 11.6.3
Special Economic Zones and Coastal Cities
China has established an array of economic zones to encourage geographic concentration of investment in specific areas. Since 1979, the government has set up 5 special economic zones (SEZ) and 14 coastal cites that offer special investment incentives to enterprises. SEZs were established in Shenzhen, Zhuhai, Xiamen, Shantou, and Hainan Island. A recent National Development and Reform Commission report stated that the high-tech industrial output hit about US$400B in 2005.22 11.6.4
Shanghai Pudong Software Park
The Shanghai Pudong Software Park (SPSP) Development Company was established jointly by the former China Ministry of the Electronics Industry (MEI) and the municipal government of Shanghai. The development of the park was planned in three phases. Phase 1 covered 30,000 m2 including seven buildings and was completed in March 2000 with an investment of about US$18.7M. Phase 2 covered 90,000 m2 including 19 buildings and was 21
State Research Network, “Zhongguancun – Hot Spot on the Housing Market,” 8 May 2000 “China's High-tech Industrial Output Hits 3.2 trillion Yuan in 2005,” People’s Daily Online, 1 February 2006, http:// english.people.com.cn/200602/01/eng20060201_239615.html
22
Software
223
completed in September 2002 with an investment of US$33.6M. Phase 3 will be completed by 2007, covering an area of 580,000 m2 with an investment of US$211.5M. The objective of SPSP is to achieve a software export volume of US$300M by 2006. The park includes information processing services, software system integration, data communication, network technologies, and other software-oriented businesses.23 11.6.5
Southern Software Industrial Park
The Southern Software Industrial Park (SSIP) was jointly established by MEI and the Zhuhai Municipal Government in 1998. It covers a total area of 340,000 m2 having approximately 100 famous Chinese and international companies. The Zhuhai government provides attractive packages on taxation and office rental to attract enterprise. It has become the primary operation center with its main research in computer software development, 3D animation, information integration, and information service.24 11.6.6
Hong Kong Special Administrative Region
Hong Kong is moving towards software product exports. In addition to governmentfunded organizations such as the Hong Kong Productivity Council and the Hong Kong Trade Development Council, the Hong Kong government also set up companies, such as the Hong Kong Science and Technology Parks Corporation (HKSTP) to support software development. The HKSTP provides different kinds of support to innovative technology companies. The support includes discounted office rental in the Hong Kong Science & Technology Park and Hong Kong Technology Center services that link up the companies to local researchers and businesses. Many of the HKSTP tenants are software product developers. In addition to the HKSTP, the Hong Kong Government also developed Cyber-port, an industrial area only IT companies can occupy. Since there is relatively little hardware manufacturing in Hong Kong, all the tenants of Cyber-port are software companies. These government investments lead to many private investments in IT, and many industrial districts have changed their focus to software production. 11.6.7
Tianjin
Tianjin, a port city in north China, pledged to develop its software industry to produce top-grade IT products. To achieve this goal, Tianjin works out favorable policies of finance, taxation, talents, and science and technology to promote the development of the IT industry, hoping that it will generate an annual US$36.2B in industrial output after 5 years’ development. Tianjin has nearly 1,000 IT companies. Of them, 584 are overseas-funded businesses, including Motorola, Samsung, LG, and IBM. 11.6.8
Dalian
The software industry has seen rapid development in Dalian, in particular, in the field of developing software for Japan. The China Software Industrial Association (CSIA) hopes that the Dalian pattern can be promoted all over the country. Currently, it is quite natural for enterprises to cast their eyes on the U.S. and to seek a deeper relationship with enterprises in Europe and the U.S., since many business orders are coming from there. However, the software enterprises in Dalian are different, which has a lot to do with Japan. 23 Shanghai Pudong Software Park, http://www.spsp.com.cn/SoftparkEnglish/portal/index.jsp, accessed March 2006 24 Southern Software Park, http://www.china-ssp.com/english/overview.htm, accessed March 2006
224
China’s Electronics Industry
The strongest fields for the U.S. are operational systems and intermediary parts; its weak point lies in the software for business applications. An example is IBM’s e-government project in Beijing. At the beginning the work was to be carried out solely by IBM. However, almost all the work for applicable software was undertaken by software enterprises in Beijing. Japan, for quite a long time, has been good at applications software for large-banking corporation systems.
11.7 Legal Protection Legal protection is a very important issue for the software industry. Protection provisions include contract law, accounting law, and investment laws. The Chinese government is continuously enhancing its legal system to meet China’s development needs and also to be compatible with international business practices and laws. Before economic reform began in the early 1980s, individual property and intellectual property rights were regarded as assets of the people. Government regulations published in 1982 still claimed that all inventions and innovations belonged to the state.25 This old communist philosophy of intellectual property rights has changed with China’s economic growth. China’s first copyright law, the “Copyright Law of the People’s Republic of China,” became effective in June 1991. “Regulations for the Protection of Computer Software Products” were enacted in December 1991. China also acceded to the Berne Convention and the World Copyright Convention in October 1991.26 The Chinese software market is still struggling with the issue of software piracy. This is a problem not only for foreign companies but also for local firms. For example, Beijing Kelihua, one of the top emerging software companies in China, suffered great losses during the sales of its first-generation educational software because pirates flooded the market with clone products. Foreign multinationals also face the same problem. For example, most U.S. software, including operating systems, applications software, games and movies, regularly appears in China at the same time (or even before) it is introduced in the U.S. The Chinese government understands the importance of intellectual property protection. In the midst of anti-privatizing exercises, the first Chinese intellectual property demonstration park was put into operation in September 2001 in Wuhan. Since its establishment, the park has developed numerous high-technology businesses. The park filed 428 domestic patent applications, or 24.3 percent of the total patent applications filed by the city in 2001, along with 8 international patent applications and 350 trademark applications, or 19 percent of the city’s total that year. From 1995 to 2002, national copyright administrators seized an estimated 197 million pirated items and dealt with 18,653 piracy cases.27 In 2003, the State Copyright Bureau, the Ministry of Information Industry, the Ministry of Pubic Security, and the State Administration for Industry and Commerce issued “implementing regulations” designed to stop software piracy.28 During the Tenth FYP (2001-2005), the park was expected to establish a dedicated mechanism to coordinate intellectual property management covering patents, trademarks, software, and IC layout design and protection of new plant species, as well as to improve brokerage services for IP agencies, litigation, evaluation, information consulting, and IP trading. Ninety-five percent of the high-tech businesses, universities, and research institutions stationed in the park were expected to establish their own IP management systems.29 Zhang, J.X., and Wang, Y., The Emerging Market of China’s Computer Industry, Greenwood Publishing Group, Westport, CT, 1995 26 China IT Market Report, 1997, http://www.chinaeco.com/ecit.htm 27 Xinhua News Agency, “Local Governments to Shun Pirated Software,” 28 March 2003 28 Business Weekly, “China to Cut Throat of Software Piracy,” 18 June 2003 29 Ministry of Science and Technology, Newsletter No. 273, http://www.most.gov.cn/English/newletter/newsletter2001.htm October 2001 25
Software
225
Vice-Premier Wu Yi said that the central government would strengthen the protection of intellectual property rights after admitting the situation was still “grim.” A one-year national campaign for the protection of intellectual property rights was started in September 2004. The campaign targets the protection of trademarks, copyrights, and patents. It also cracks down on counterfeits during product processing and shipping.30 Chinese government officials say they are serious about cracking down on sales of illegal copies of Microsoft’s Windows operating system, and some computer markers are pledging to ship more computers with legitimate Windows software installed. One of those companies, Lenovo Group, has met with Microsoft officials to reaffirm Lenovo’s commitment to ship computers with genuine operating systems. Microsoft held similar meetings with Chinese computer manufacturer Founder Technology Group, also among the companies that have pledged to promote legal Windows use. For Microsoft, the move is important because it sees China as a major market in which to increase revenues. Lenovo, which last year bought IBM’s personal-computer business, is the world’s third-largest computer company. Lenovo Chairman Yang Yuanquing said 70 percent of the computers Lenovo sells in China are now loaded with licensed Windows copies, up from 10 percent six months ago.31
11.8 Outsourcing of Software and IT Services to China China has great potential to provide outsourcing services, mainly because of the nation’s massive population, a strong university system, and a central government that is determined to create a global technology powerhouse. China has been striving hard to improve its legal system in order to provide a stable business environment. A series of commercial and intellectual property rights laws has been published, and they have been enforced for two decades. It has strengthened the enforcement of penalties on copyright piracy and allows preferential treatment for companies installing licensed software. As a member of the World Trade Organization, China has followed international standards closely, which has now attracted over 200,000 foreign companies doing business in China, including multinational companies such as Microsoft, Motorola, GM, Siemens, and IBM. It has also been the largest foreign direct investment (FDI) absorber among all developing countries for 10 consecutive years. China’s realized FDI for 2005 was US$60.33B, a decrease of 0.5 percent from 2004. There were 44,001 FDI enterprises approved by the Chinese Government in 2005, an increase of 0.77 percent over the year before. 32 Contracted foreign investments reached US$167.2B, up 24 percent 33 from January to November 2005.
11.9 Accomplishments of the Chinese Software Industry In 2004, there were 7,345 companies in China with total software products sale of US$60K and 21 companies with total software products sale of US$121M. The software export value reached US$2.8B. The total software products sale was US$18M, which was 82.6 percent more than software products sale in 2003.34 South China Morning Post, “Wu Yi Promises to Strengthen the Protection of Intellectual Property Rights,” 28 August 2004 31 Sanger, D.E., “Awaiting Hu in Washington Is an Unavoidable Topic: Oil,” The New York Times, 19 April 2006 32 Wei, J., “Foreign Investment to maintain Steady Pace,” China Daily, 17 January 2006, http://www.chinadaily.com.cn/English/doc/2006-01/17/content_512835.htm 33 Wei, J., “Foreign Investment Sees Decline,” China Daily, 15 December 2005, http://www.chinadaily.com.cn/English/doc/2005-12/15/content_503492.htm 30
34
http://www.gd-emb.org/detail/id-8.html
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226
11.10 Potential of the Chinese Software Industry China is continuously expanding IT education and training at all levels including sub-degree practitioners, undergraduates, and postgraduates. This strategy aims to ensure sufficient intellectual talent to serve different levels of software development. China has encouraged companies to obtain the CMM certification, the internationally recognized software quality assurance standard. This encouragement drives the software industry to produce software to internationally accepted standards. China is also setting up a software practitioner certification system to ensure the quality of its IT practitioners. This “talentware” quality assurance system is among the important moves to aid further development of quality software for both the domestic and international markets. Major challenges facing the future development of the Chinese software industry include: • • • •
Insufficient technological infrastructure for software development Intellectual property rights enforcement Need for more software talent Difficulty developing large-scale software systems with many small or medium-sized software enterprises
China is a large developing country with a huge market. China’s move toward a full-scale market economy requires industries with modernized financial sectors. Demand for e-commerce software is growing, particularly in business centers such as Shanghai, where the Internet plays an increasingly important role in business activities. Products such as electronic payment, online shopping, and secure business-to-business (B2B) applications are expected to flourish. In addition, a number of new projects inspired by the 2008 Olympic Games, like the “digital Olympics” or “digital Beijing,” are also expected to spur investment and growth in the software and IT industries.35 The cities on the east coast of China are developing earlier and faster than those in the western part. With the launch of the West China development project and China’s new WTO membership, the entire country is focused on business development. All the provinces and cities are announcing development plans, many of which feature the software industry as a key element.
35 Trade Mission China, “Rethinking China’s Software Market - SIIA-USITO Trade Mission to China Beijing and Shanghai,” 24 June-2 July 2002
Chapter 12 Conducting Business in China
In 1978, China opened its doors to the world as Deng Xiaoping instituted economic and political reforms. Within 10 years, companies in the United States, Japan, and Western Europe began to transition much of their manufacturing to China. Since then, China has become one of the world’s leading manufacturing hubs, and “Made in China” now labels much of the world’s commercial goods. China’s growth is remarkable. China’s annual gross domestic product (GDP) growth rate has remained above 7 percent (Figure 12.11), with an average GDP growth rate of 9.9 percent over the past 13 years.2 In 2005, real disposable income in China rose 9.6 percent in urban areas and 6.2 percent in rural areas. In 2005, China’s GDP reached US$2.26T, according to preliminary estimates by China’s National Bureau of Statistics, with exports totaling US$762B and imports totaling US$660.12B.3 China’s GDP for 2004 was US$1.89T with exports of US$593B and imports totaling US$561B. Of this, China exported US$323B of mechanical and electronic products to the world. China is now a major player in the global economy. 20.0
15.0
14.0
13.1 10.9
10.0
10.0
9.3 7.8
7.6
8.4
8.3
9.1
10.0
10.1
9.9
5.0
0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Figure 12.1: China’s Annual GDP Growth Rate (%) 1 Figure 12.1 reflects China’s historical GDP revision results, showing that annual growth from 1979 to 2004 averaged 9.6 percent or 0.2 percent higher than originally estimated. This GDP revision was released in December 2005. 2 National Bureau of Statistics of China, 2005, http://www.stats.gov.cn/english/statisticaldata/yearlydata/yb2004e/indexeh.htm 3 “Economy Grew 9.9 Percent in 2005: Statistics,” Xinhua News Agency, 25 January 2006, http://china.org.cn/English/2006/Jan/156316.htm
China’s Electronics Industry
228
Today, China is renowned more for its high-level technology-based products than for its clothes, shoes, or toys (Table 12.1). For example, China has already set up 38 semiconductor fabrication facilities (fabs) including nine 8-inch fabs and one 12-inch fab, with technological capabilities to 0.11 µm and below.4 Similar advances have been made in printed circuit board manufacture and assembly. For example, China now has over 1000 circuit board manufacturing facilities. Table 12.1: Import and Export by Major Categories, 20045, 6 Value (US$B) Total import and export
Increase over 2003 (percent)
1154.8
35.7
593.4
35.4
Processing trade
328.0
35.7
Mechanical and electronic products
323.4
42.3
High and new-tech products
165.5
50.2
561.4
36.0
Processing trade
221.7
36.1
Mechanical and electronic products
301.9
34.2
High and new-tech products
161.4
35.3
Export
Import
Thanks to accumulating investment and construction, as well as to the development of education, technology, and management skills, China has become the “world’s factory.” In 2004, China produced 73 million color TV sets, 30 million household refrigerators, 66 million room air-conditioners, 21 billion integrated circuits, 233 million cell phones, and 45 million microcomputers.7 China is also becoming the design house for these products. An influx of Foreign Direct Investment (FDI) has accompanied the meteoric rise of China’s economy. In 2003, China overtook the United States as the top global destination for FDI. 8 In 2004, contracted FDI was US$153B, of which US$110B went to manufacturing.9 During the same period, the Chinese government invested US$846B in fixed assets.10 As an example of China’s attraction of international companies, Motorola has invested about US$3.4B, has purchased more than US$4B goods and services, and has been one of the largest funders of R&D in China. By 2006, its investment will reach US$10B. Motorola also built and then sold China one of the most state-of-the-art semiconductor facilities in the world. But Motorola is not alone. Other U.S. electronic companies, including Intel, AMD, 4 Chang R., “China Fast Growing IC Industry: An Opportunity for US and Taiwan,” Semiconductor Manufacturing International Corporation, December 2004, http://www.taiwan-china-outlook.com/presentations/smic.pdf 5 Ibid 6 China Statistical Year Book – 2004, National Bureau of Statistics of China, 2005 7 “Statistical Communiqué of the People’s Republic of China on the 2004 National Economic and Social Development,” National Bureau of Statistics of China, 28 February 2005, http://www.stats.gov.cn/english/newrelease/statisticalreports/t20050228_402231957.htm 8 “China Overtakes U.S. As Top Spot For Foreign Investment,” Agence France-Presse, 23 September 2004, http://www.industryweek.com/ReadArticle.aspx?ArticleID=9004 9 Statistical Communiqué of the People’s Republic of China on the 2004 National Economic and Social Development,” National Bureau of Statistics of China, 28 February 2005 10 Ibid
Conducting Business in China
229
and International Rectifier, have also invested significantly in China. For example, Intel has made tremendous investments in China, including substantial amounts in research. The company has opened a new chip assembly and test plant in Chengdu in 2005. The first phase cost US$200M and is expected to yield US$450M in total investment in 2007 and approximately 1,500 Chinese jobs.11 Intel also established a US$200M venture capital fund to invest in Chinese technological companies that develop innovative hardware, software, and services.12 Since 1990, over 200 joint R&D centers have been created in China.13 In addition to foreign investment, the Chinese government’s programs (Mega-Projects of Science Research, Climbing, 863, and the Torch programs) promote industrial R&D. So R&D is beginning to move to China, along with manufacturing. In the next decade, as the global and Chinese markets grow, more companies will conduct business in China and outsource their operations to China. Why China? What are the advantages and disadvantages?
12.1 The Advantages There are many advantages for conducting business in, and outsourcing to, China. Some of the key advantages include a low-cost, high quality labor force, a complete supply chain with world-class infrastructure, favorable tax incentives, low capital costs, a large internal market, and global acceptance as a member of the World Trade Organization. 12.1.1
A Low-Cost, High-Quality Labor Force
Since China opened up in the late 1970s, the low cost of labor has driven foreign investors there. From both the unit labor cost and the absolute labor cost, China is one of the lowest labor-cost countries in the world. In 2003, the average hourly compensation for production workers in China was US$0.80 while in the United States it was US$21.86, (see Table 12.2).14 In terms of wages per productivity, the unit labor cost was approximately US$5.34 per hour in China and US$24.3 in the United States.15 Flextronics, for example, moved Microsoft Xbox manufacturing from Hungary to China because the savings totaled over US$10 per unit; in addition, most of the components were being produced in Asia.16 It is worth mentioning that in the Beijing, Shanghai, Zhejiang, and Guangdong provinces, the most active business centers in China, the average hourly compensations are US$1.47, US$1.57, US$1.24, and US$1.16 respectively.17 Though these wages are higher than the average wages in the rest of the country, the productivity of workers in these places is also higher because of higher education, an efficient transportation system, a complete supply chain, and a policy of stimulation by the local government. The overall result is a low unit labor cost with high productivity, which has made these places the initial choice for many foreign investors. Furthermore, since 1990, the average annual growth rate of Chinese
Staff Reporter, “Intel Opens New Facility, Promises to Increase Jobs,” Shanghai Daily, 7 December 2005 Ibid 13 “Report Sheds Light on China’s Evolving R&D Centers,” EE Times, 16 June 2003, http://www.eet.com, Accessed 18 June 2003 14 “Capturing Global Advantage,” The Boston Consulting Group, April 2004, http://www.bcg.com/publications/files/bcg_kwspecialreport.pdf 15 “The Future of Manufacturing,” National Association of Manufacturers, 7 January 2004, http://www.nam.org/s_nam/bin.asp?TrackID=&SID=1&DID=227605&CID=284&VID=2 16 Sherman, R., and Jones, C., “Chinese Electronics Manufacturing and Supply Chain Concerns,” 1 February 2003, http://www.circuitree.com/CDA/ArticleInformation/ features/BNP_Features_Item/0,2133,91482,00.html, Accessed 17 October 2003 17 “Statistical Communiqué of the People’s Republic of China on the 2004 National Economic and Social Development,” National Bureau of Statistics of China 11 12
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230
workers’ average real wage has been 8.2 percent,18 but at the same time, the average annual growth of productivity has been approximately 8.5 percent.19 Thus the unit labor cost has been almost constant, which has also been a good sign for investors. Table 12.2: Average Hourly Compensation of Production Workers Country
Average Hourly Compensation (US$)
Germany
30.60
United States
21.86
Japan
20.68
Canada
18.44
United Kingdom
17.87
France
17.77
Italy
16.56
Spain
12.32
Korea
9.99
Taiwan
5.67
Hungary
3.53
Poland
2.70
Mexico
2.45
China
0.80
The cost advantages of China’s labor can be seen in the example of Dell’s 5100cn color laser printer, which was among the most advanced laser printers in late 2004. With a retail price under US$1,000, Dell’s 5100cn put a lot of pressure on competitors because, as Table 12.3 shows, the manufacturing costs in China were two-thirds cheaper than those in the United States.20 Further, factory construction for a square meter in China is typically less than half the cost it is in the West. Land is cheap, and leases run 50 to 75 years. Compared to Japan, factory-building cost is about one-third, considering auxiliary equipment, such as wastewater treatment, wiring, and piping. Drill re-sharpening costs a few cents per bit in China (35 cents per drill bit in Japan). The availability of inexpensive technical personnel and engineers makes China an attractive option for companies. Throughout the years, universities in China have intensified their R&D activities in new technology areas. They have linked up their research programs with overseas companies and universities and kept pace with the rest of the world. In 2004, 13.3 million students were studying in colleges or universities for a bachelor’s, a master’s, or a doctor’s degree. About 5 million were studying science and
18
China Statistical Yearbook 2004, National Bureau of Statistics of China “2004 International Comparison of Labor Productivity,” Japan Productivity Center for Socio-Economic Development, 19 November 2004, http://www.jpc-sed.or.jp/eng/research/2004_09.html 20 Hamilton, I., “Parsing ‘the China Price’,” EE Times, 24 January 2005 19
Conducting Business in China
231
engineering. 21 The number of graduates was 2.39 million. 22 In 2005, this number is estimated to be more than 3 million, with nearly 500 thousand engineers. Table 12.3: Manufacturing Costs for the Dell 5100cn Color Laser Printer US (US$)
China (US$)
Labor
270.93
38.02
Materials
670.61
529.38
Services
11.96
11.50
Total cost
953.50
578.90
Over the past 20 years, about 700,000 Chinese students went to other countries, such as the United States, Germany, Great Britain, and Japan, to learn the most advanced technologies. About one-fourth of them have returned to work in China. In 2003 alone, more than 20,000 students returned with advanced degrees and experience in cutting-edge technology.23 As China’s economy grows, more people who study abroad will return. Before ending the discussion on Chinese labor, it is worth mentioning minimum wage levels and social security. Since 1993 Chinese workers’ wage levels have been protected by the “Regulation on the Minimum Wages of Enterprises” and the “Notice Concerning Implementation of a Minimum Wage Assurance System,” which are promulgated by China’s Ministry of Labor and Social Security. Annually, local governments in each province and city issue their own minimum wage levels based on their local living standard and economic situation. On 1 March 2004, the new “Regulation on the Minimum Wages” stated that minimum wage levels be increased at least once every 2 years. In 2004, the minimum monthly wages for Beijing, Shanghai, Shenzhen, and Guangzhou were US$65.8, US$76.7, US$73.7, and US$82.6 respectively.24 Chinese workers are protected by a nationwide Social Security System, a compulsory insurance system used to guarantee employees and their dependents a minimum living standard upon retirement and to cover their basic needs in case of unemployment, illness, injury, or death. The contribution rate varies for each local government. Table 12.4 shows the contribution rate in Beijing and Shanghai. The basic pension is due when the employee retires. The normal retirement age in China is 55 for blue-collar workers and 60 for whitecollar workers. In some special situations, male employees may retire as early as 50 and women at 45. If an employee changes jobs, the pension funds are transferred. Medical funds are used to pay employee medical expenses. There are also unemployment benefits, housing funds, work-related injury funds, and so forth to cover workers’ needs in various areas. 12.1.2
A Complete Supply Chain with World-Class Infrastructure
During the 1980s, Chinese companies primarily took on product assembly and simple development jobs. Such consumer items as radios, calculators, and electronic toys were typical products of that era. Most components used in assembly were made elsewhere and shipped to China. Only simple components were sourced locally, such as resistors, 21
China Statistical Yearbook 2004, National Bureau of Statistics of China, 2005 “Statistical Communiqué of the People’s Republic of China on the 2004 National Economic and Social Development,” National Bureau of Statistics of China 23 Embassy of the People’s Republic of China in the United States of America, 16 February 2004, http://www.china-embassy.org/chn/gyzg/t66593.htm 24 “Comparison of the Minimum Wages in Some Cities,” China Labor Market, 3 March 2005, http://www.lm.gov.cn/gb/salary/2005-03/03/content_65399.htm 22
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capacitors, speakers, wire, magnets, and crystals. Most of the products manufactured by foreign enterprises in China were exported. Table 12.4: Contribution Rates to the Social Security System Contribution Rate in Beijing Employer (%) Basic pension Medical Unemployment Work-related injury Maternity Housing fund Total
Contribution Rate in Shanghai
Employee (%)
19
Employer (%)
Employee (%)
6
25.5
6
2.5
1
25
1
1.5
0.5
5.526
1
0.2-1.9
0
Not Applicable
1+1
Not Applicable
5
5
6
6
28.2-29.9
12.5
39
13
To stimulate growth, China slapped high taxes on imported products that would be assembled into exported products. To reduce taxes on imported parts (imported prior to China joining the WTO), companies moved their critical component manufacturing sites to China. Perhaps this is why China has replaced the United States as Japan’s biggest trading partner with US$213B in two-way trade between Japan and China.27 Companies including Microsoft, AMD, IBM, Lucent, Motorola, Nokia, Siemens, Sony, NEC, Toshiba, and Hitachi also established significant R&D facilities in China. China’s electronics industry has witnessed the creation of more than 10,000 foreigninvested enterprises. This represents more than 15 percent of the country’s total foreign investment. In the coming years, more manufacturers will move to China. Such a move is inevitable, as manufacturers move closer to their supply-chain and customer base. The result is that China will offer R&D, components, materials (plastics, chemicals, metals), manufacturing, assembly, and marketing. To support the supply chain, the Chinese central and local governments have been revamping the basic infrastructure of China, building modern and efficient highway systems, airports, and cargo harbors. Much of this was part of China’s Tenth FYP,28 which provided a solid logistics network for the electronics industry. In 2004, the investment in transportation was US$64B. In 2004, China had 4,197 coastal berths, with 37 berths of 100,000+ tons and 145 berths of 50,000 to 100,000 tons. In 2004, the ports’ throughput was 56.6 million twenty-foot equivalent units (TEUs), a 27 percent increase over the previous year. In this regard, China leads the world. “In 2010 the coastal ports’ throughput will reach 3.5 billion tons, with a handling capacity of 120 million TEUs,” according to Ren Jianhua, Vice Director of Plans Department, Ministry of Communications.29
25
1 percent of which has been allocated from the basic pension since 1 October 1998. Covers 4.5 percent of hospitalization costs and 1 percent of emergency treatment costs. “Profitability for Multinationals Now Turns On Fortunes in China,” Express China News, February 2005, Deloitte & Touche LLP – Canada, http://www.deloitte.com/dtt/newsletter/0,1012,sid%253D3636%2526cid%253D72835,00.html 28 Mackey, M., “China Integrates into Global Supply Chain,” AsiaTimes Online, 28 April 2005, http://www.atimes.com/atimes/China/GD28Ad02.html 29 “港口群建设大势所趋 千亿缺口诱发投资冲动,” Zhangjiagang Free Trade Zone Foreign Investment Service Center, http://www.zjgftz.gov.cn/zjgftz/bsqwzfw/showinfo.aspx?infoid=66a2ccd4-6cc4-4956-b3b10c026ce17f62&siteid=1&categoryNum=3305 26 27
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In 2004, Hong Kong handled 22 million TEUs and 220 million tons of cargo, 30 remaining the world’s busiest port. The Shanghai port has also become one of the major transportation hubs in Asia, reducing complete dependency on Hong Kong. Because of recent expansions, Shanghai now has 71 deep-water berths and 16 container harbors. In 2004, the throughput of the Shanghai port reached 14.55 million TEUs, ranking it the third largest container port in the world, just behind Hong Kong and Singapore. In 2004, China’s airports had 242 million passengers, 39 percent more than in 2003, and air cargo shipped 5.5 million tons, an increase of 22 percent.31 Beijing International Airport, the busiest in China, had 35 million passengers in 2004. A new airport in Beijing is expected soon. Shanghai already has two airports: Pudong International and Hongqiao International. In May 2005, Pudong put a new runway into use. In order to cope with demand from the 2010 World Expo, another one is under construction. In 2010, the passenger traffic at Shanghai airports will reach 84 million, making it the busiest airport in Asia. By 2015, Shanghai will have four runways serving 100 million passengers and moving 7 million tons of cargo.32,33 In March 2006, Liu Zhijun, the minister for railways, announced approval for highspeed rail lines. The larger is a 1,320 km link between Shanghai and Beijing. With trains expected to reach top speeds of 350 km an hour, it should cut the travel time between the mainland’s two most important cities from 13 hours to less than 5, but at a cost of US$25B. The other project is a 175 km connection between Shanghai and nearby Hangzhou, another big city in the booming Yangtze River Delta, that will allow speeds of up to 450km per hour and cost around US$4.4B.34 These two lines are showpieces in a hugely ambitious “official” plan to construct some 5,400 km of high-speed rail track to refurbish about 40,000 km of its railways by 2010 at a cost of more than US$125B. Mr. Liu said that the new high-speed rail lines will not use any foreign technology. That is a blow for the international engineering firms that have lobbied hard to sell their high-speed trains to China, including Japan’s Shinkansen, Alstom’s French TGV and the maglev (magnetic levitation) train offered by Siemens and ThyssenKrupp of Germany. Siemens is behind the 30 km maglev train service that has been running between Shanghai’s Pudong airport and the city since 2002.35 To enhance its communication network, the Chinese government in 2004 has invested US$26B in fixed telecommunication assets. Telephone customers have increased by 50 million, reaching 312 million. There were 65 million new cell phone users, making the total number of users 335 million. In 2004, 649,000 km of optical fiber cables were added, for a total length of 3.38 million km.36 In 2004, 14.5 million new Internet users brought the total number of users to 94 million, with 42 million computers connected to the Internet. As of 2004, there were about 668,900 registered www sites in China. The bandwidth of the international interface between China and other countries is 74,429 Mbit. 37 Chinese e-commerce sales in 2005 hit a record US$68.72B, an increase of 58 percent over 2004; and the momentum is set to continue. The consumer-to-consumer (C2C) market has become the new growth point, with a turnover of
30
“Port Cargo Throughput,” Hong Kong Census and Statistics Department, http://www.info.gov.hk/censtatd/chinese/hkstat/fas/transport/port_index.html China Market Information Center, 2005, http://market.ccidnet.com/pub/report/show_3842_2.html 32 “上海航空枢纽 10 年战略规划绘就 建设将分三阶段,” 2 November 2004 http://news.xinhuanet.com/newscenter/2004-11/02/content_2167208.htm 33 “香港机场地位将被超越,” 12 April 2005, http://www.wenweipo.com/GB/?www.wenweipo.com/news.phtml?news_id=AV0504120001&loc=any&cat=046A V&no_combo=1 34 “China A New Train Set,” The Economist, 25 March 2006 35 Ibid 36 Ministry of Information Industry, 2005, http://www.mii.gov.cn/mii/hyzw/tongji/tongjifenxi1-12.htm 37 “Statistics Report of China’s Internet Development,” China Internet Network Information Center, January 2005, http://www.cnnic.net.cn/download/2005/2005011801.pdf 31
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US$1.68B – triple the 2004 volume – according to a study released by the China Internet Development Research Centre (CIDRC) under the Chinese Academy of Social Sciences.38 China seeks more Internet resources due to its fast developing IT industry. For example, while every 26 Chinese share one IPv4 (Internet Protocol Version 4) address, each American has six IPv4 addresses. Because IPv4 address resources will very soon be exhausted, the government has substantially invested in research on the newest IPv6 technology. Operating in 2006, it will be the world’s largest commercial IPv6 network. Table 12.5 lists Chinese cities based on their economic strength, environmental quality, information technology infrastructure, human resources, research and development capabilities, government services, and openness to foreign investment criteria. Beijing is the seat of government and home to Peking University, Tsinghua University, and the China Academy of Science. Of the 400 design houses in China, 85 are in Beijing. Out of the 16 design houses that achieve more than US$100M in annual revenue, more than half have their headquarters in Beijing. Table 12.5: Chinese Cities Based on Economic Strengths39 City
Points Assigned
Beijing
87.33
Shanghai
84.74
Guangzhuo
77.59
Shenzhen
69.34
Chengdu
56.77
Hangzhou
54.52
Tianjin
53.51
Nanjing
53.45
Qingdao
52.17
Wuhan
50.20
Shanghai is also considered ideal for electronics facilities with its huge port, plenty of natural resources, and an established infrastructure. The world’s largest process tool vendor, Applied Materials Inc., has its headquarters in Shanghai. Shanghai Western Suburbs Production and Service Industry Zone has welcomed 56 international corporations since its completion in June 2005 and is gradually becoming one of the biggest industrial zones in Shanghai. The zone focuses on the development of international corporations’ headquarters in what is expected to be a “Silicon Valley” in Shanghai. In 2005, international companies, include Lamba Auto Parts, the Japanese based Pioneer Electronics Company, and the research center of the Swiss Nestle Company. The zone plans to be divided into four parts which will cover research centers, green lands, industrial zones, and residential communities. The research centers and the industrial zones are two key parts which cover 3,000,000 m2. Research will be carried out in the electronics sector, the automotive field, and other sectors. The government expects the zone to raise US$2.84B worth of investment over the next five years.40 Shenzhen is also a port city on the eastern edge of the Pearl River delta across the border from Hong Kong. Most of China’s electronics manufacturing takes place there and 38 Zhe, Z., “E-commerce Chalking up Strong Growth: Survey,” China Daily, Vol. 26, No. 8064, p.1, 20 February 2006. 39 Fong, W. Y., “ City Ranked as No. 2 Economic Hub,” Shanghai Daily, 5 December 2005. 40 Jinglu, Z., “Jiangqiao’s Silicon Valley,” Shanghai Daily, p. B9, 25-26 February 2006.
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the city has a strong infrastructure. It also has a seven story wholesale electronic components shopping mall, the SEC Electronic Marketplace, located in an office tower downtown with seven floors of components and finished electronic goods available wholesale.41 12.1.3
Favorable Tax Structure and Low Capital Costs
In 1991, China adopted a tax law with foreign enterprises clearly in mind. The law stated that foreign-invested manufacturers pay 30 percent in income tax, but can enjoy full exemption for the first 2 years and pay only half of the income tax rate from the third to fifth year. According to a study by the National Association of Manufacturers, the U.S. corporate tax rate average is about 60 percent higher than that of China (see Figure 12.2).42 (%)
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Figure 12.2: Comparison of the Corporate Tax Rate between Countries In China’s special economic zones--Shenzhen, Zhuhai, Shantou, Xiamen and Hainan provinces--the income tax rate for foreign-invested manufacturers is only 15 percent. In addition, the government rebates up to 15 percent of value-added taxes (VAT) on exports. If the foreign investor re-invests profits in itself or in other foreign enterprises in China, the government will refund 40 percent of the tax that is collected depending upon the amount of the investment. If the investor uses the profit for enterprises that are for hi-tech or for product export enterprises, the investor can get a full income tax refund.43 Although the government has plans to streamline the business tax structure and phase out some of the tax incentives, local cities are likely to continue to offer them to lure investors. According to Ben Lee, the Vice President of Asia Pacific Altera, a Silicon Valleybased programmable logic device manufacturer, tax exemption and access to the large profitable domestic market account for 80 percent of the reasons to build electronic plants in China.44 Many major cities in China have set up their own Hi-Tech Industry Development Zones. For example, in Beijing, any foreign enterprise registered in a Hi-Tech Industry Chappell, J., “ Moving to China: Where Should You Set Up Shop?,” Electronic News, 11 November 2005 “The Future of Manufacturing,” National Association of Manufacturers 43 “中国政府关于外商投资企业优惠政策概要简表,” http://www.chinacity.net/zgcs/henan/zhengzhou/zheng1/zheng15-1.htm 44 Moiseiwitsch, J., “Superfab,” May 2001, http://www.calce.umd.edu/general/AsianElectronics/Articles/Semiconscropped.pdf 41 42
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Development Zone can be exempted from income tax for the first 3 years and will enjoy a 7.5 percent tax rate for the second three. Starting from the seventh year, the income tax rate will be 15 percent. If the enterprise exports more than 40 percent of its yearly products, then the income tax rate will be only 10 percent from the seventh year on.45 For companies that plan to set up manufacturing operations in China, land and setup costs can also be a fraction of U.S. costs, at least in the interior provinces and outside of major cities. Moreover, in most cities, in Hi-Tech Industry Development Zones or in the special economic zones, the government can grant a large discount for renting the land and can even waive the fee for several years. The government also gives great freedom to foreign investors to use the land which can be rented for up to 70 years, at a very low fee compared to that in the United States. 12.1.4
Large Internal Market
Over the last decades, with the tremendous growth in the Chinese economy, the living standard of Chinese citizens in major cities and their surrounding areas has improved substantially, and the rise in average income has created a huge consumer market. A major reason for conducting business in China is its growing internal market. For example, in 2003 at US$138B, China surpassed Japan and became the world’s second largest electronics market, right behind the U.S.46 By 2007, this market is expected to reach US$215B and will account for 16 percent of the global market.47 Global Sources estimated that the sales of consumer electronics alone in China will reach US$94B by 2007.48 China’s internal market will continue to grow. First, China’s annual GDP growth rate is expected to remain over 8 percent through 2008, and personal income, an indicator of purchasing power, is expected to follow. For example, real disposable income in urban areas rose 9.6 percent in 2005; 6.2 percent in rural areas. Furthermore, the government will continue with its incentive policy through a private urban home ownership program and through easier access to personal credit. These factors will stimulate demand for household products, including consumer electronics. In addition, between 2004 and 2008, about 100 million young consumers (20 to 24 years old) will start to work, get married, and build their own families. 49 This new generation will have substantial disposable income and the generation between the ages of 25 and 55 will need to upgrade electronic products. The interest in China as both a producer and as a consumer can best be described by the statement from Joseph Martin, chief financial officer of Fairchild Semiconductor International. He said “China is a growing area that we need to be in quickly, but China is two markets: manufacturing and, at some point, a consumption market.” He went on to say that China’s consumer base could be stimulated not only by shifting electronics production there but also by procuring a higher percentage of raw materials locally to help bring down overall costs. Martin concluded, “I would love to make my silicon from raw materials inside China so it can be consumed inside China.”50
45 “北京市鼓励外商在亦庄工业开发区投资若干政策暂行规定,” Law Library, http://www.law-lib.com/lawhtm/1992/22396.htm 46 “Research and Markets: Average Annual Growth Rate for the Chinese Electronics Market in the Period Through 2007 is Forecast to be 13% Per Annum,” PR Newswire, 22 April 2005, http://news.corporate.findlaw.com/prnewswire/20050422/22apr2005115821.html 47 Ibid 48 “Consumer Electronics to Have Huge Market of 100B Dollars in China by 2008,” People’s Daily Online, 16 November 2004, http://english.people.com.cn/200411/16/eng20041116_164086.html 49 “1949-2003 National Population Data,” China Popin, http://www.cpirc.org.cn/tjsj/tjsj_cy_detail.asp?id=3885 50 “Fairchild to Open Shanghai Application Lab,” Electronic Business Online, 7 June 2002
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Entrance into the World Trade Organization
On 10 November 2001, after 15 years of negotiation with key trading nations, especially with the United States and the European Union, China’s entrance into the World Trade Organization (WTO) was announced. Under the WTO accession agreement, China began to dismantle its license and quota system, lower domestic subsidies, and present a more transparent economy. In the first half of 2002, more than 2,300 regulations were abolished or revised under the State Council. In 2005, China began to reduce average tariffs for agricultural commodities to 17.5 percent, for fisheries to 10.6 percent, and for industrial tariffs from an average of 24.6 percent to an average of 9.4 percent. China also began to remove non-tariff barriers for industrial products, eliminate the license and quota system, and phase out restrictions on service sectors, such as telecommunications, banking and insurance, distribution and professional services. These revisions should give foreign investors greater access to Chinese domestic markets. To meet their goals, the Ministry of Foreign Trade and Economic Cooperation has been posting its new regulations on its website at www.moftec.gov.cn as soon as they are promulgated. Regulations, available in Chinese and English, help ensure transparency. Studies by the Chinese government estimate that WTO membership will boost GDP by 3 to 5 percent, double the value of foreign trade to US$890B by 2010, and create millions of new jobs. China’s share of world exports is expected to increase to 6.3 percent by 2006 (1.8 percent higher than without WTO membership), and imports will grow much faster. China’s foreign trade dependency ratio, the total value of foreign trade to GDP, is predicted to rise to over 65 percent by 2006, close to that of the United Kingdom.51 Entrance in WTO will affect various industrial sectors in different ways. Local companies that suffer from capital shortages, obsolete technology, and poor management are likely to only export cheap industrial goods and import high value-added manufactured ones. Labor-intensive sectors like textiles, footwear, toys, consumer electronics, sporting goods and equipment, furniture, and plastics are poised for rapid growth. Firms producing high-tech products, such as computer and office equipment, will be in position to increase production and exportation. These firms should firmly establish China as a global sourcing point.
12.2 The Cons Although reforms since 1978 have made China one the world’s most dynamic economies, China has some challenges. China still lags behind the developed countries, even though the gap is dramatically reducing. Companies planning investment in China must understand: limitations in energy, natural resources, and local transportation systems; its currency and its financial system; and its practices toward the protection of intellectual property. Investors must not forget that China is a developing country. The infant mortality rate, an economic indicator, reveals that there are 5 deaths in 1,000 births in developed countries like Japan and the United States. In undeveloped countries like Nigeria, there are 75 in 1,000; in China, 25 in 1,000. The Gini coefficient, an index that measures dissimilarity, places China among societies with great disparity of income between the poor and the comfortable. Significant differences between coastal and interior provinces as well as between rural and urban areas highlight the widening gaps of inequality.52
51
Zhang, A., “China Joins the WTO: The Impact on Foreign Trade,” www.pwcglobal.com “China’s Economy: Will the Bubble Burst?,” Asia Program Special Report, Woodrow Wilson International Center for Scholars, June 2003
52
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12.2.1
Shortage of Energy and Resources
China’s energy resources have not kept up with its manufacturing industry. Since 1993 when China became a net-petroleum-import country, the volume of imported oil has increased each year. In 2004, China imported 120 million tons of petroleum, becoming the second largest importer, just behind the Unites States. It is estimated that by 2010 China will be consuming more than 300 million tons per year. The Chinese government projects that by 2020 the GDP will grow to US$4T. But, if it does, some estimate that by 2070 China will consume all of the petroleum discovered on earth.53 The growing Chinese consumption is also rapidly raising the international price per barrel.54 The escalation can affect China’s trade balance, its manufacturing industry, its cost of transportation, and its whole economy.55 China does have untapped resources; only 37 percent of the estimated 122 billion tons of oil under ground in China has been discovered and another 50 billion are under the sea. The Chinese government is also negotiating with Russia to build a pipeline to transport crude so that China can buy from its neighbor and reduce dependence on the Middle East. China is also seeking additional sources of oil and has been trying to purchase oil companies. In addition, China has more than 5,570 billion tons of coal. The shortage of electricity presents another concern. In 2005, production increased 14.3 percent, reaching 2,500 billion kW hours; consumption was expected to increase 11.4 percent to 2,422 billion kW hours.56 During the summer of 2005, a 25-million-kW hours shortage was assessed.57 The shortages are most acute in southeast China, the locale of most manufacturing. Each year these shortages cause significant losses. In addition to crude oil and electricity, some raw and processed materials are scarce. In 2003, China imported 37 million tons of steel, 5.61 million tons of aluminum, 150 million tons of ironstone, 2.86 million tons of manganese ore, 1.78 million tons of chromite, and 2.67 million tons of copper ore. In the next two decades, China will have to import 3 billion tons of iron, 500−600 million tons of copper, and 100 million tons of lead. In 2010, it is estimated that only 24 out of 45 of China’s major mineral products will meet the needs of production, and in 2020 only 6 will do so. China will have to rely heavily on imports,58 although there are plans to conduct large-scale mining in such places as China’s Tibet. China is also making deals with various Latin American and African countries. The price of the minerals will rise with the growing demand. For example, in 2003 China became the world’s largest importer of iron when it purchased 150 million tons of ironstone. In 2004, it imported 208 million tons, an increase of 39 percent. In 2005, China was expected to buy about 250 million tons. In 2005, the major ironstone exporters, CVRD in Brazil and Hamersley and BHP in Australia, united and increased their prices. After intense negotiation, China agreed to an increase of 71.5 percent over the previous year’s price. In contrast, the price only rose 18.6 percent in 2004. As a result of the increase, the cost for one ton of steel in China has increased to over US$36.59
53
Cai, J., “迫在眉睫的能源危机及可能出路,” 2005, http://www.chinainfo.gov.cn/data/200503/1_20050330_107106.html 54 Ibid 55 Takahashi, K., “Oil Price Puts Asia’s Recovery at Risk,” AsiaTimes, 24 August 2004, http://www.atimes.com/atimes/Asian_Economy/FH24Dk02.html 56 “史玉波介绍今夏用电高峰期电力安全可靠供应情况,” 2005, http://www.powerplants.com.cn/fddt/zxgz/200505130010.htm 57 “今年中国电力供应仍偏紧 最大缺口为 2500 万千瓦,” 2005, http://society.people.com.cn/GB/41158/3151059.html 58 Cai, J., “迫在眉睫的能源危机及可能出路” 59 “钢铁工业：加强宏观调控应对矿石涨价,” China Price Information Network, 2005, http://www.cpic.gov.cn/free/yaobao/M_I_0_0127_050404.htm
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Inadequate Land Transportation System
Although China invested billions of dollars in its land transportation system, the rails and the roads strain from increasing demand. In 2002, China had some 72,000 km of operating railways, ranking it first in Asia and third in the world. Impressive as they are, these numbers do not tell the whole story. Compared to China, the United States had more than triple that amount of track: 228,464 km.60 Approximately 20,000 km of railway were built before 1949 and about another 20,000 during the 1950s and 1960s.61 In 2000, one kilometer of rail in China had to carry 303 million tons of cargo--7.9 times that of France, 7.8 that of Germany, and 2.7 that of the United States. 62 Suffering from overuse, from outdated controls, and from inadequate management technologies, these railways have limited speed and capacity. For example, a 1207 km train ride from Chang-Shai to Shanghai can take 19 hours. China’s underdeveloped rail system suffers chronic bouts with bottlenecks. For example, Shanxi province, the world’s leading supplier of coke, produces one seventh of the world’s coke and exports more than 100 million tons yearly. In 2004, the government initiated priorities for the transportation of coal and food enabling more than 70 percent of the trains to transport coal. Because of insufficient transportation, China had to reduce its exports of coke. Realizing that this problem could seriously impede economic growth, the Ministry of Railways plans to increase operational mileage to 100,000 km by 2020. In the same time frame, it expects to invest in technical upgrades, in double-tracking, and in the electrification of half of its network--an upgrade projected to cost US$241B, according to AsiaTimes Online.63 In 2004, China’s 1.87 million km of highways ranked it third in the world.64 However, India, which ranks second, had 2.53 million km, and the United States had 6.39 million, more than triple that of China.65 Only about 50 percent of the highways are paved.51 Highquality roads (expressways and class 1 and class 2 roads) comprise 20 percent in the northern and eastern regions, but less than 6 percent of the network in southwest China.66 Although China invested US$57B in highways in 2004, the system still fails to meet the needs of the economy. Serious congestion stalls traffic in many regions. In addition, the State Domestic Trade Bureau, the State and Economic Trade Commission, and the State Development Planning Commission--all sharing regulatory authority--have issued complicated and unclear rules.67 12.2.3
Currency Revaluation and Financial System
In 2004, China enjoyed a global trade surplus of US$32B.68 China has become the United States’ third leading trading partner after Canada and Mexico. By the end of 2004, China’s State Foreign Exchange Reserves (SFER) reached US$610B, ranking it second in 60
The World Fact Book 2005, Central Intelligence Agency, http://www.cia.gov/cia/publications/factbook/geos/us.html#Trans 61 Cheng, G., Zhou, W., “人均铁轨不到 1 支烟长 铁路难承中国发展之重,” 2004, http://www.people.com.cn/GB/paper2836/12612/1133537.html 62 Ibid 63 Mackey, M., “China Integrates into Global Supply Chain,” 28 April 2005, http://www.atimes.com/atimes/China/GD28Ado2.html 64 Ministry of Communications of the People’s Republic of China, 15 April 2005, http://www.moc.gov.cn/tongji/tongjifx/P020050415342069681844.doc 65 The World Fact Book 2005, Central Intelligence Agency, http://www.cia.gov/cia/publications/factbook/ 66 Shenggen, F., and Can-Kang, C., “Road Development, Economic Growth, and Poverty Reduction in China,” August 2004 67 Easton, R., “Supply Chain Management in China: Assessments and Directions,” Accenture Industry Perspective 68 “Statistical Communiqué of the People’s Republic of China on the 2004 National Economic and Social Development,” National Bureau of Statistics of China
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the world. On the other hand, the United States had a debt of US$7.379T in 2004.69 The Chinese government alone funded 20 percent. 70 With China alone, it is approximately US$10B per month, about twice the imbalance with Japan, Mexico, and Canada.71 Even though China’s rising exports should have increased the value of its currency, the RMB has actually fallen along with the U.S. dollar, giving China a huge export advantage over other foreign producers who, of course, are discontented. Asian countries that have wished to appreciate their currencies have hesitated to do so because they want to keep export prices in line with those of China. For European countries, the depreciating RMB makes Chinese products cheaper, causing these countries to lose world trade shares as well as their own internal markets. For the United States, as more customers prefer the lower prices of imports and as more U.S. companies depend on China for inexpensive manufacturing, the trade imbalance and account deficit can become an issue that may discourage foreign investments and may drive the U.S. dollar to depreciate faster. The U.S., Japan, and EU countries are pushing China to adjust the value of its currency. China seriously debates this issue in the context of the complexities of the global economy. Nevertheless, on 21 July 2005, the Chinese government started to revalue its currency and appreciated the RMB 2 percent, and promised to peg the RMB against a “market basket” of numerous currencies.72 However, this was mostly a political token given to President Bush and has had little actual impact. Pressures on the U.S. government, due to the impact of the apparent imbalance of trade and the resulting loss of jobs to China, might tempt the U.S. to adopt a strategy of deflation and a weaker dollar to compete with China’s lower costs. In fact, this strategy appears to be underway already. However, the strategy will likely backfire, at least with respect to Chinese trade. The Chinese currency, the Yuan, is linked to the dollar, and the Hong Kong dollar is formally tied to the dollar. The trade imbalance with China appears to be insensitive to the dollar, and the goods deficit in June of 2004 with China (US$14.2B) is larger than the imbalance with Japan (US$6.3B) or the European Union (US$6.3B), according to statistics from the U.S. Census Bureau. For companies exporting from China, whether domestic or multi-national, revaluation could lead to higher export prices and, possibly, a lower demand for exports from China. In some cases companies could shift outsourcing to another emerging market, like India. The overall effect will depend on the degree to which the revaluation increases the price of exports. Revaluation will have the greatest impact on labor intensive products that have minimal imported content. Products such as apparel, textiles, toys, and footwear would be most affected. High-tech products would be less affected because much of their production cost is related to imported components. The lower import prices can offset the higher export prices. The state of the Chinese financial system is another area of fiscal concern, because, for many years, banks have been lending to money-losing state-owned enterprises (SOEs). Instead of lending on the basis of creditworthiness, banks have yielded to political pressure and extended credit to keep unprofitable operations afloat. This lack of control has deteriorated the quality of the bank’s assets and led to the fast growth of non-performing loans. This situation may be disclosed and resolved in November 2006 under a WTO open banking deadline.
69
“The Debt to the Penny,” Bureau of the Public Debt, 2005, http://www.publicdebt.treas.gov/opd/opdpenny.htm “China at a Crossroads,” Deloitte, 2004 http://www.deloitte.com/dtt/cda/doc/content/DR_ChinaCrossRd_Sept2004a.pdf 71 U.S. Trade Balance with China, US Census, 29 July 2003, http://www.census.gov/foreign-trade/balance/c5700.html 72 Isidore, C., “China Revalues Yuan,” CNN Money, 2005, http://money.cnn.com/2005/07/21/news/international/china_yuan/index.htm?cnn=yes 70
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241
Deficiency of Enforcement in Intellectual Property Protection
As China’s manufacturing ability has advanced, private investors, companies, and foreign governments have become increasingly concerned about China’s legal protection of intellectual property (IP), its laws, and its administration and enforcement of intellectual property rights (IPR). According to an investigation conducted by the Office of the United States Trade Representative (USTR), the U.S. loses US$2.5B to US$3.8B annually due to piracy of copyrighted materials alone. In 2004, the value of Chinese counterfeits coming into U.S. markets seized by the United States increased 47 percent from US$94M to US$134M. In 2004, these seizures accounted for 67 percent of all U.S. Customs’ IPR seizures. It is also estimated that increased counterfeiting deprived foreign pharmaceutical companies of 10 to 15 percent of annual revenues in China.73 Until the mid-1980s, very few counterfeit products were made or sold in China. A turning point occurred in the mid-1990s when foreign companies aggressively outsourced their manufacturing processes to China in order to cut costs. The advanced technology and sophisticated machinery made it easy to counterfeit products on a massive scale. The increasing spending power of Chinese consumers, the extended access of Chinese manufacturers to global markets, the loose control of exports, and the insufficient protection of intellectual property led to the dramatic increase in the production and sale of counterfeited products. Alongside the increase in the production of fakes, their quality so improved that it has become more difficult to identify the genuine from the counterfeit.74 The protection of IP is not easy to solve. For thousands of years in feudal China, the nation’s rights resided in the hands of the emperors and a few high-level officials. Personal and private rights, deemed less important, were often neglected. As a result of the founding of the People’s Republic of China (1949-1978), China placed its entire economy in the hands of the government and, in effect, private ownership did not officially exist. In the 1980s, a series of economic reforms transformed China from a centralized and governmentcontrolled economy to a market-oriented one, encouraging the development of private business with the consequent recognition of rights to intellectual property. In 2001, upon joining the WTO, China chose to cooperate with companies worldwide and to become a major trustworthy partner in international business. In 2004, China’s constitution clearly defined private property rights, a milestone on the road to IP protection. China now has administrative and judicial enforcement systems, with agencies that govern the enforcement of patents, trademarks, and copyrights, and judicial courts that rule on civil, economic, criminal, and administrative decisions. This includes an Intellectual Property Trial Office.75 In its current stage, administrative rather than judicial enforcement prevails in the resolution of most IP issues. Although the government’s raids and investigations are more frequent and effective than they were, they have not been very successful in deterring piracy from occurring in the first place. 76 According to the U.S. document “2005 Special 301 Report,” “… China, under the leadership of Vice Premier Wu Yi, has expended significant effort to improve the protection of IPR in China. Indeed, these efforts have resulted in progress in some areas. The United States remains gravely concerned, however, that China has not resolved critical deficiencies in IPR protection and enforcement and, as a result, infringements remain at epidemic levels.”77 As a result, the USTR decided to “elevate China 73 “2005 Special 301 Report,” Office of the United States Trade Representative, 2005, http://www.ustr.gov/assets/Document_Library/Reports_Publications/2005/2005_Special_301/asset_upload_file195 _7636.pdf 74 Clark, D., “IP Rights Protection Will Improve in China – Eventually,” The China Business Review, 2000, http://www.chinabusinessreview.com/public/0005/clark.html 75 Zhang, N., “Intellectual Property Law in China: Basic Policy and New Development,” Annual Survey of International & ComPtive Law, Fall 1997 76 Bejesky, R., “Investing in the Dragon: Managing the Patent versus Trade Secret Protection Decision for the Multifunctional Cooperation in China,” Tulsa Journal of Comparative and International Law, Spring 2004 77 “2005 Special 301 Report,” Office of the United States Trade Representative
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China’s Electronics Industry
to the Priority Watch List on the basis of serious concerns about China’s compliance with its WTO TRIPS (the Trade-Related Aspects of Intellectual Property Rights) obligations and commitments.” These serious determinations could enable foreign governments to add higher tariffs on imports from China if they choose to do so.
12.3 Summary Because manufacturing has guided its economy, China has moved smoothly and steadily from a low-technology and a low-cost industry to a high-technology and a valueadded one. China provides not only low costs for labor, a huge internal market, incentives in taxes, and an improving infrastructure, but also a high-quality labor force. China now graduates more engineers than any other country, and more than three times as many as the U.S. Thanks to foreign companies, China now has its own R&D labs. For example, Motorola and Intel have made tremendous investments in developing research centers in China. In 2005, Intel opened a test and assembly plant in Chengdu at the cost of US$375M.78 Ford, Emerson, Motorola, IBM, and Microsoft also have expansive research centers in China. Now IT has become one of China's fastest growing industries. The increasing computerization in both private and public sectors makes China a market with huge potential for development of software and security services. Software exports from China are estimated to reach US$28B in 2006, catching up with India, the world’s largest IT outsourcing destination. In 2001, China’s software exports were about US$1B, only one sixth of India’s. China has now started to buy and develop its own companies. For example, in May 2005, the Chinese company Lenovo successfully bought IBM’s PC unit. The new Lenovo, with US$13B in sales and 8 percent of the world-wide PC market, “boasts a rare combination of management savvy, technical expertise, low costs, and a proven track record in the developing world,” according to Business Week.79 China has also developed its own version of Wi-Fi encryption standard—WLAN Authentication and Privacy Infrastructure (WAPI). This standard was made to be incompatible with other standards and technologies, and the Chinese government requires all wireless computing gear sold in China to incorporate this data encryption technology. China is also developing its own Hi-Definition video standards and 3G mobile standards. According to Shanghai Daily, “Affluent online gamers from Seoul to San Francisco who lack the time and patience to work their way up to the higher levels of gamedom pay Chinese about $250 a month to play early rounds for them. Young people glued to their computer screens, pound away at their keyboards every day in 12-hour shifts, killing onscreen monsters and winning battles, harvesting artificial gold coins and other virtual goods as rewards that, as it turns out, can be transformed into the real cash.”80 China, the world’s fastest growing economy, is ideal for outsourcing and for initiating businesses because of its inexpensive and high-quality labor force, its complete supply chain, its world class infrastructure, its progressive tax system, and its huge internal market. There are risks-- shortages in energy and resources, the lack of reliable land transportation, the probability of currency revaluation, and the weak protection of intellectual property. But the healthy development of its economy and politics can make investment in China well worth the risk.
78
“China Commercial Brief,” U.S. Commercial Service, Vol. 2, No. 155, American Embassy, Beijing, http://www.buyusa.gov/china/en/ccb040416.html 79 “East Meets West, Big-Time,” Business Week, 9 May 2005 80 Barboza, D., “Ogre to Slay? Outsource It to Chinese,” The New York Times, 9 December 2005
Index
909 project, 84 863 program, 61, 64, 66, 184 ACER, 141, 152, 155 Apple, 135, 141, 154, 166 Application specific integrated circuit (ASIC), 104-107, 111, 118, 126, 181 AST, 160, 166 ATM, 29, 83, 143, 177 Ball-grid arrays (BGAs), 123, 125, 126, 128, 133 Beijing, 2, 9, 12, 17, 28, 48, 49, 51-59, 61, 63, 64, 68, 69, 72, 73, 79, 81-86, 88, 89, 95, 102, 104-111, 113, 114, 116-118, 124, 126, 127, 129, 152-154, 160, 162-164, 167, 186, 175, 178, 180, 181, 185-187, 191, 193-197, 199, 202, 217, 219, 221, 222, 224, 226, 229, 231-235, 242 Beijing Electronic Tube and Transistor Institute, 72 Beijing Radio Components and Materials Institute, 72 Canada, 1, 19, 71, 112 Capacity maturity model (CMM), 216, 217, 226 Cathode ray tube (CRT), 29 Central Military Commission, 8, 10, 55, 202 Chengdu, 9, 58, 72, 89, 105, 110, 116, 125, 163, 180, 186, 221, 229, 234, 242 Chengdu Radio Communication Institute, 72 China Association of Automobile Manufacturers, 198 China IC Design Center (CIDC), 105, 106 China International Trade and Investment Corporation, 175 China National Computer Software and Technology Service Corporation, 220 China National Electronics Import and Export Corporation (CEIEC), 80 China Net, 78, 154, 169, 175, 176, 178,
181, 186 China Semiconductor Industry Association, 95, 96 Chinese Academy of Science (CAS), 48, 49, 51, 54-58, 60, 62, 63, 66-68, 107, 112, 163, 167, 175, 178, 208, 219, 220 Chinese Communist Party (CCP), 8, 11, 12, 15, 27, 71 Chongquing, 9 COB packaging, 115 Code division multiple access (CDMA), 155, 172, 173, 181 Computer aided design (CAD), 73, 88, 94, 106 Complementary metal oxide semiconductor (CMOS), 95, 104, 106, 109, 114, 115, 117 Compound annual growth rate (CAGR), 126, 128, 161, 163 Connectors, 127, 139-150, 152, 153, 156, 180 Coordinating Committee on Export Controls (CoCom), 119 Customs General Administration (CGA), 25 Deep-submicron integrated circuits, 107 Dell, 78, 141, 142, 154, 155, 163 Deng Xiaoping, 11, 12, 15, 27, 30, 48, 51, 207, 227 Dense wavelength division multiplexing (DWDM), 143, 174, 177, 184 Digital microwave communication series, 185 Digital mobile communications network (GSM), 88, 95, 155, 172, 173, 178, 180, 181, 184, 194, 196 Domestic currency, 26 DRAM, 94, 98, 104, 109 Economic and technological development zones (ETDZs), 27, 28, 41 Economic, conditions, 15, 16
244
policy, 37 reform, 2, 4, 8, 10-13, 15, 23, 27, 49, 159, 169, 215, 224, 241 Education, expenditures, 7 system, 1, 7, 59, 161 Electronic companies, 153, 228 Electronic components, 19, 28, 62, 73, 89, 136, 159, 192, 201, 208, 235 Electronic Computer and LSI Lead Group, 72 Electronics manufacturing services, 123, 126, 135, 137, 140, 142, 154-156 Electronic warfare (EW), 208 Electro-optic technology, 208 Enterprise income tax, 41 Ericsson, 67, 135, 136, 141, 153, 155, 180, 195, 196 Ethnic groups, 1, 2, 4 Export, 20-28, 30, 37, 38, 42, 50, 73, 76, 80, 81, 83, 84, 86, 97, 119, 120, 125, 130, 134, 152, 153, 170, 179-181, 187, 192, 195, 198, 199, 201, 202, 204, 205, 208-210, 212, 215-217, 223, 225, 228, 235, 237, 240 Financial, indicator, 38 system, 38, 237, 240 Fiscal structure, 40 Five Year Plan (FYP), 15, 48, 52, 60, 61, 63, 68, 71-77, 85, 94, 106, 110, 114, 121, 124, 126, 159 Foreign currency receipt, 35 Foreign direct investment (FDI), 16, 3032, 37, 43, 49, 78, 79, 225, 228 Foreign invested enterprises, 34, 44 Foreign investment policy, 28 Foreign trade, 17, 21-26, 28, 38, 71, 75, 78, 80, 81, 83, 162, 217, 237 Free trade zone, 28 Fujitsu, 106, 117, 124, 127, 141, 155, 166 Fudan University, 58, 59, 104, 111 General Electric, 71, 141 General Packed Radio Service (GPRS), 95, 172-174, 177, 180, 181 Global System for Mobile Communications (GSM Networks), 172, 173, 178, 196, 198 Golden Bridge Project, 81-83, 162 Golden Card Project, 81-83, 162 Golden Customs Project, 81, 83, 162 Golden Project, 73, 74, 81, 162
China’s Electronics Industry
Golden Taxation Project, 81, 84 Great Wall, 86, 159, 163, 165, 198, 204, 208 Great Wall Group, 163, 165 Gross domestic product (GDP), 7, 15, 16, 18, 22, 23, 30, 40, 51-53, 61, 69, 76, 204, 206, 227, 236-238 Gross national product, 3, 7, 17, 24 Guangdong, 27, 28, 79, 83, 84, 86-90, 101, 129, 131, 132, 137, 152, 163, 192, 195, 196, 229 HDTV, 29, 73, 86, 87, 193, 195 Hitachi, 68, 141, 155, 166, 191, 206, 232 Hong Kong, 2, 3, 12, 21, 23, 27, 30, 32, 36, 39, 42, 50, 58, 79, 84, 95, 101, 106, 115, 126, 127, 130-132, 134-137, 165, 176-179, 183, 184, 187, 191, 192, 194, 221-223, 233, 234, 240 Hua Jing Electronics Group Corporation, 114 IBM, 66, 79, 84, 124, 125, 141, 154, 155, 160, 164-167, 181, 182, 220, 221, 223225, 232, 242 IC cards, 75, 83, 85, 87, 89, 90, 93-99, 101, 102, 104-118, 120, 121, 224, 228 Import tax, 24, 25, 124 India, 1, 6, 31, 59, 78, 181, 187, 189, 215, 216, 239, 240, 242 Information industry, 75, 77, 111, 134, 162, 171, 194, 215, 217, 218, 224 Information technology (IT), 21, 58, 60, 62-64, 67, 73-77, 81, 84, 111, 161, 165, 179, 187, 207, 212, 219, 221, 234 Integrated circuit (IC), 28, 50, 59, 62, 63, 66, 70, 74, 97, 116, 124, 126, 127, 133, 136, 148, 176, 180, 188, 192, 194 Integrated device manufacturer (IDM), 93, 99 Intel, 79, 94, 98, 105, 106, 114, 115, 124, 125, 127, 135, 154-167, 182, 208, 228, 229, 242 Intellectual property (IP), 19, 21, 33, 34, 50, 64, 69, 75, 78, 105, 106, 119-121, 170, 184, 187, 192, 196, 203, 216, 217, 224-226, 237, 241, 242 International Telecommunication Union (ITU), 185, 187 Investment approval process, 33, 45 ISO9002, 127, 130-132, 136 ISP, 82, 162 Japan, 1, 15, 19, 22, 30-32, 38, 39, 41, 47, 48, 50, 52, 53, 60, 63, 67, 68, 71, 80, 82, 85, 94, 96, 101, 104, 106, 110-
Index
114, 118, 119, 128, 129, 133, 135, 137, 140, 149, 150, 160, 161, 166, 172, 181, 187, 191, 192, 198, 200, 201, 205, 210, 223, 224, 227, 230-233, 236, 237, 240 Jiangsu, 84, 87, 88, 90, 104, 114, 124, 126, 127, 130, 135, 192 JiTong Communications Co., 81 Joint venture, 13, 20, 25, 33-36, 41, 50, 66, 67, 78, 80, 81, 85, 87, 94, 95, 110114, 116, 118, 126, 129, 131, 132, 135, 152, 153, 164, 165, 170, 171, 181, 182, 185, 187, 189, 195, 197, 199, 205, 206, 220 Judicial organization, 10 Kazakhstan, 1 Korea, 1, 22, 30, 31, 101, 118, 126, 133, 140, 149, 150, 166, 178, 181, 187, 192, 230 Kyrgyzstan, 1 Labor cost, 22, 134, 150, 229 Labor regulation, 34 Labor-intensive sector, 21, 237 Language, 1, 4, 5, 7, 215, 217, 219, 220 Laos, 1 Large-scale integration (LSI), 72, 73, 113 Legend, 58, 67, 86, 160, 163, 164, 167 Light emitting diodes (LEDs), 26, 89, 106, 144 Liquid crystal display (LCD), 86, 88, 90, 106, 124, 136, 144, 147, 159 Lotus, 220 Low-noise devices, 127 LSIC, 28 Lucent Technologies Microelectronics Group, 59, 93, 114, 135, 155, 170, 182, 232 Macao, 2, 21, 27, 220 Mao Zedong, 11 Matsushita, 127, 129, 153, 180 Medical electronics, 141, 191, 205, 206 MEI, 73, 81, 82, 111, 175, 191, 218, 222, 223 Metal-ceramic packages, 127 MFN, 25, 26, 42, 43 Micro-controller unit (MOU), 26, 27, 95 Microsoft, 59, 135, 165, 219-221, 225, 229, 232, 242 Ministry of Finance (MOF), 18, 120, 217 Ministry of Posts and Telecommunications, 60, 67, 82, 169, 175, 180, 185 Ministry of Power Industry (MOPI), 175
245
Ministry of Science and Technology (MOST), 50-54, 60-63, 76, 96, 107, 186, 217, 218, 220, 224 Ministry of the Information Industry (MII), 67, 68, 74, 76-78, 80, 81, 83, 86, 100, 111, 119, 121, 169-175, 185, 188, 189, 193-196, 215 Mitsubishi, 39, 68, 93, 101, 118, 124, 126, 133 Mobile communications, 28, 29, 50, 76, 98, 99, 111, 120, 121, 172, 174, 176182, 185-187, 194, 195 Motorola, 38, 59, 67, 79, 93-95, 101, 105, 108, 117, 119, 124, 125, 132, 135, 141, 154, 155, 164, 180, 182, 194, 195, 208, 210, 211, 223, 225, 228, 232, 242 Multi-chip modules (MCMs), 123, 128, 133 Multi-layer (ML), 128, 130-132, 135, 136, 187 Nanjing Radar Institute, 72 National Engineering Center for ASIC Design (NECFAD), 107 National Labor Law, 34 National People’s Congress (NPC), 8 National trade volume, 80 Nepal, 1, 181 Netherlands, 112, 187 Ninth FYP (Five-Year Plan), 49, 50, 52, 62, 74, 85, 94, 110 Nippon Electrical Company, 71 Non-volatile memory, 95, 113 Novell, 220 Open coastal cities, 25, 27, 28, 41 Original design manufacturers (ODM), 154-156 Original equipment manufacturers (OEM), 85, 126, 136, 152, 208, 209 Packaging industry, 123 Pakistan, 1, 184, 187, 189, 209, 210 Parks, industrial, 27, 28, 107, 111, 125, 136, 186, 223 science, 61, 221, 222 software, 160, 221, 222 PC, 89, 124, 126, 136, 137, 144, 147, 154, 159-166, 196, 242 Peking University, 47, 48, 58, 59, 64, 68, 104, 165, 234 Pentium, 94, 125, 165 Personal income tax, 41 Philippines, 1, 184 Philips, 93, 100, 101, 104, 112, 119, 124,
246
135, 136 Pin-grid array (PGA), 128, 142 Point of sale (POS), 82, 83, 90 Population, 1-4, 6, 8, 28, 30, 137, 192, 197, 205, 215, 222, 225, 236 Printed circuit board (PCB), 104, 123, 125, 128-136, 142-144, 228 Production, 11, 17, 19, 21, 22, 25, 27-29, 31, 33, 37, 40, 45, 49-53, 55, 57-59, 61, 63, 64, 69, 70, 72-74, 76, 78, 79, 81, 85, 94-106, 108-119, 124-137, 139141, 143, 145, 148, 152, 159, 163-165, 180, 181, 185-188, 191, 193-199, 202, 204-207, 218, 221, 223, 229, 230, 234, 236-238, 240, 241 Qinling, 1 Regional bureaus, 35 Religion, 1, 5, 6 Research and development (R&D), 15, 28, 49-53, 55, 57-59, 61, 63, 64, 69, 70, 72, 74, 76, 77, 79, 85, 93-95, 104, 106, 109, 114, 121, 125, 126, 131, 132, 159, 165, 167, 181, 182, 184-189, 191, 196, 197, 199, 201, 203, 207, 208, 210, 211, 216, 217, 220, 221, 228-230, 232, 234, 242 Research institutes, 28, 55, 57, 61, 175, 181, 203, 221, 222 Russia, 1, 80, 181, 184, 198, 208-212, 238 Satellite communications, 29, 179 Semiconductor, 26, 29, 37, 49, 62, 69, 72, 74, 78, 79, 81, 84, 85, 87-89, 93101, 104-108, 110-121, 123-128, 192, 209, 228, 236 Shanghai, 9, 27, 28, 39, 58, 59, 61, 6467, 72, 73, 78, 79, 82-90, 93, 94, 101, 102, 104, 106-114, 116, 118, 119, 123130, 133, 134, 136, 152-154, 162, 163, 165, 171, 175, 178, 180, 181, 185, 191, 194, 196, 197, 199, 201-203, 207, 216, 221-223, 226, 229, 231-234, 236, 239, 242 Shanghai Belling Microelectronics Manufacturing Company, 116 Shanghai Pudong Software Park, 222, 223 Shenyang, 9, 48, 68, 82, 151, 163 Single-sided, 128, 131, 132, 135 Software industry, 74, 160, 215-218, 220226 Southeast University, 60 Southern Software Industrial Park
China’s Electronics Industry
(SSIP), 223 Special administrative region, 9 Special economic zones, 25, 27, 28, 33, 41, 222, 235, 236 State Administration for Industry and Commerce (SAIC), 35, 36, 224 State Council, 8, 9, 20, 25, 27, 33, 39, 4951, 53, 55, 64, 72, 85, 93, 114, 120, 170, 171, 175, 179, 188, 195, 202-204, 208, 209, 217, 218, 237 State-owned enterprises (SOE), 12, 15, 17, 18, 22, 40, 41, 43, 53, 75, 77, 78, 87, 93, 106, 119, 165, 175, 179, 188, 240 Static random access memory (SRAM), 112, 118, 126 Supply chain, 19, 37, 111, 123, 229, 232, 242 Surface mount technology (SMT), 133, 136, 137 Sweden, 181, 189, 205 System-on-chip (SoC), 104, 111, 115, 133 System revenue, 107 Taiwan, 1, 2, 4, 5, 11, 21, 27, 31, 32, 38, 50, 78, 79, 94, 96, 101, 102, 104, 106, 113, 118, 129, 133, 135, 137, 140, 149, 150, 154, 155, 187, 228, 230 Taiwan Semiconductor Manufacturing Cororation (TSMC), 94, 118 Taiwanese, 78, 94, 124, 129, 135, 136, 139, 148, 152 Tariff rate quota, 20 Tariffs, 19, 20, 24, 25, 32, 41, 42, 119, 195, 197, 198, 200, 201, 237, 242 Technological upgrading, 25 Telecommunications, 29, 50, 66, 69, 71, 72, 74, 75, 80, 82, 86, 95, 105, 162, 169-173, 175-177, 179, 180, 186, 191, 196, 211, 212, 222, 233 Telecommunications industry, 74, 169, 175, 180, 185 Telecom law, 188 Telecom operators, 153, 169, 171, 188 Tenth FYP (Five-Year Plan), 15, 22, 50-52, 61, 68, 74, 82, 83, 94, 124, 159, 197, 218, 224, 232 Thailand, 80, 181, 183 The People’s Bank of China (PBOC), 26, 39, 40 Thin quad flat pack (TQFP), 126 Three Gorges Electronic System Project, 86
Index
Tianjin, 9, 27, 28, 78, 83, 84, 94, 95, 102, 108, 124, 125, 127, 130, 154, 178, 180, 191, 197, 199, 223, 234 Tontru Information Industrial Group, 163, 165 Torch program, 61, 62, 229 Toshiba, 68, 93, 98, 114, 115, 119, 141, 155, 164, 166, 191, 192, 194, 205, 206, 232 Total Access Communication system (TACS), 180 Transmission equipment, 86, 180, 183 Tsinghua University, 47, 48, 58, 60, 68, 82, 104, 194, 219, 234 Turnover tax, 41 TV industry, 191-193 United Nations Conference on Trade and Development (UNCTAD), 31, 32 United States, 1, 3, 19, 20, 22, 23, 25, 26, 30, 31, 33, 34, 37, 38, 40-42, 47, 49, 51-54, 56-64, 67-69, 71, 79, 80, 95, 101, 104-106, 113, 114, 118-120, 124, 126, 128, 129, 131-133, 135-137, 140, 141, 148-151, 155, 160, 166, 172, 173, 181, 185, 187, 192, 195, 198-201, 204, 205, 208-212, 216, 223, 224, 227-232, 235-237, 239-242 Value-added tax (VAT), 22, 25, 41, 84, 120, 217, 235 Very large scale integrated circuit (VLSI), 73, 106 Vietnam, 1, 187 Wave discrete devices, 127 World Trade Organization (WTO), 12, 17, 19-22, 25, 27, 31, 34, 38, 40, 41, 43-45, 69, 78, 119-121, 160, 171, 175, 179, 188, 196, 198, 200-202, 216, 217, 225, 226, 229, 232, 237, 240-242 Wuhan, 9, 86, 128, 180, 186, 224, 234 Zhejiang University, 60
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