Ties That Bind - Bay Area Council Economic Institute

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124 Ties That Bind But there is a second industry that shadows the one depicted above. This second industry is made up of formerly state owned enterprises (SOEs) that lack the money, the talent, and the basic management processes to compete on the global stage. These companies are employing rather obsolete equipment and inferior technology, and they are serving a largely domestic market whose requirements are far different from those of the global market. They are starved for investment funds, they lack significant management experience in a market economy, and they are constrained in their employment relations with the people they have. Indeed, the government remains the largest shareholder of these companies, and often enjoys majority ownership. And the Chinese government is far from monolithic. The national ministries compete with one another for influence, and there are significant tensions between the provincial and town governments and the national government. Typically, one of these entities has ownership in an SOE, but not the other entities, who have different ownership positions in rival firms. And while there are a few highly capable design firms in China, the sheer number of design firms operating in China (over 600 at this point) means that most are facing a likely shakeout, a process that will be fraught with problems in a single party state that cares deeply about maintaining social stability. Within the industry, there are multiple business models in play, as firms compete in the market with different configurations of skills and focus. The older firms tend to utilize a quasi-vertically integrated business model. This model has conferred certain benefits in China, particularly the ability to employ administrative means to achieve economic coordination in a context where intermediate markets are thin or non-existent. But this model has encountered significant limits in its ability to support companies able to compete in the global market, because the products created by these quasi vertically integrated firms do not fit with global market requirements. Almost all of China’s 600 integrated circuit (IC) design firms are new. Culturecom Holdings, maker of China’s V-Dragon Central Processing Unit (CPU), switched from comic book publishing to IT in 1999. Comlent, maker of China’s first radio frequency integrated circuit (RFIC) used in cell phones, is just three years old. China’s star design house, Vimicro, which has a 60% global market share in PC multimedia chips, was founded in 1999, an
Investment: Building Global Businesses in a New China elder among the IC design firms. Spreadtrum, provider of 100% Chinese IP chips and software for wireless applications, first opened its doors in 2001. The explosive growth is not limited to design. China’s only SI equipment provider, Advanced Micro-Fabrication Company (AMEC) is slightly over a year old. China’s chip foundry prodigy Semiconductor Manufacturing International (SMIC), founded in 2000, now has a 6% global market share, making it the third largest foundry in the world in terms of revenue. Younger firms have imitated the greater division of innovation labor in the global semiconductor industry with the foundrycum-fabless business model. This model seeks to leverage the intermediate markets for technology (or for foundry capacity) that have emerged in the U.S., Europe, and Taiwan. However, the protections around intellectual property and some of the supporting institutions for these intermediate markets are not fully formed in China, creating hazards for the fabless approach in China as well. Notwithstanding these hazards, the latter business model seems likely to be the only model capable of enabling Chinese firms to penetrate the global market for semiconductors. There are many possible outcomes to the insights and trends revealed through our interviews. Indeed, there are many possible unforeseen contingencies that could completely reorder the industry. But, based on the first hand knowledge of our interviewees, some important implications, predictions and guesses can be derived: � Autonomous, privately run, technologically advanced Chinese SI firms (the outwardly focused segment) are the equal of any globally competitive firm and are probably the best hope for China’s future. � The elements of the semiconductor industry with the best government connections and the highest levels of government support (the domestically focused segment) are likely to follow the path of most SOEs into either radical reform or extinction. This misallocation of very limited resources could seriously retard China’s SI development. � The domestically focused semiconductor industry segment will likely continue to lobby for exclusionary domestic standards (a la WAPI), which, if they are 125
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The Bay Area Economic Forum wishes
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Bay Area Economic Forum 201 Califor
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Table of Contents Introduction ....
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Introduction About This Report The
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Introduction dollar-denominated ass
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Introduction practices of their sup
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Executive Summary The San Francisco
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Executive Summary As Silicon Valley
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Executive Summary 8. Establish regi
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1 A Rich History of Work and Reward
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A Rich History of Work and Reward m
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A Rich History of Work and Reward t
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A Rich History of Work and Reward T
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2 New Networks Emerge The Bay Area
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New Networks Emerge With scholarshi
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New Networks Emerge nomic Law; the
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New Networks Emerge and academics f
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New Networks Emerge schools on the
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New Networks Emerge Hong Kong and T
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New Networks Emerge financing—ban
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New Networks Emerge Since the mid-1
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New Networks Emerge (R&D) innovatio
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Hong Kong Seeks Its Role New Networ
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New Networks Emerge In recent years
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New Networks Emerge savings rates a
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New Networks Emerge Two, featuring
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New Networks Emerge All of the abov
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3 Bay Area-China Trade: Behind the
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Bay Area-China Trade: Behind the Nu
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