Ties That Bind - Bay Area Council Economic Institute

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Ties That Bind
U.S. for at least another decade. In niche areas such as cell phone cards, however, Chinese capabilities
may rise more rapidly.
In 2004 the U.S. and China settled a World Trade Organization complaint, initiated by U.S.based
IDMs, which challenged China’s policy of rebating a 17% value-added tax on semiconductors
produced and sold domestically. The Taiwan government—concerned about the potential
economic dependence created by the $100 billion in Taiwanese investment already in
China—has placed restrictions on new semiconductor investment and technology transfer on
the mainland.
Although semiconductor equipment manufacturing is identified as a goal in China’s five year
plan, because of its high capital costs, its intellectual capital intensity, and the speed with which
the technology advances, China isn’t likely to develop a major semiconductor equipment manufacturing
capability in the near future. This means China will remain an attractive market for Bay
Area equipment producers. U.S. producers will need to compete on price, however, with the
used equipment being imported for lower-tech fabs.
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San Jose’s Intel Corporation, which has fabs in the United States (6), Israel and Ireland, and
assembly and/or testing facilities in Costa Rica, Malaysia and the Philippines, operates three
plants in Shanghai, and recently invested $200 million in a fourth in Chengdu, a city of 10 million
in Sichuan Province, deep in China’s interior. Despite its remoteness from Beijing and from the
major coastal centers where most foreign companies locate, Chengdu offered labor costs 30%
lower than Shanghai and generous local incentives. To support its venture into virgin territory,
Intel trained most of its workforce from the outset. Production workers were sent to train at Intel
facilities in Malaysia and the Philippines, and courses on semiconductor physics and in factory
processes were created at local schools and universities. Since then its first plant in Chengdu has
ramped up more quickly than expected, and construction is underway on a second facility. With
the opening of its second Chengdu plant, Intel will have 6,000 employees in China.
Intel rival AMD does its product and systems R&D for microprocessors in the U.S., with additional
design and development teams located in Germany, China, Japan, India and Korea. Manufacturing
of its microprocessors takes place at five facilities: two wafer fabs in Dresden, Germany
and three assembly and test facilities in Singapore, Penang (Malaysia), and Suzhou (China). AMD
also operates eight flash memory manufacturing facilities, including wafer fabs in Austin and
Aizu-Wakamatsu (Japan), and assembly and testing facilities in Bangkok, Kuala Lumpur, Penang
and Suzhou. Several AMD sales and marketing offices in China target its growing market, particularly
for flash memory products used in mobile phones.
A number of Silicon Valley firms have found lucrative markets as suppliers to the foundries.
Mountain View-based chip design software maker Synopsys, for example, has been active in
Taiwan since 1991 and currently has two offices there—in Taipei and Hsinchu—as well as offices
in Hong Kong, Beijing, Shanghai and Shenzhen. Synopsys software helps designers of