BEIJING The essential underpinnings of a world-class electronics industry are emerging in China, driven by a huge consumer market and an insatiable hunger for technical know-how. Market-oriented government leaders and a new cadre of technocrats here hope to forge an indigenous design capability that would complement the nation's growing consumer-electronics industry and allow it to create and hold the intellectual property that is the coin of the realm in the Information Age.
From an ambitious IC-design effort to a handful of standardization projects that will compel foreign electronics manufacturers to design to Chinese specifications, the government and its far-flung institutes and state-owned enterprises are working on several fronts to build what could be the world's next great technological power.
For now, however, China and its technology planners find themselves playing catch-up. An Asian design engineer who works in bustling Shenzhen, one of China's special economic development zones, said China is at least a decade behind the rest of the world in its IC- and system-design capabilities.
"The Chinese have to start designing their own stuff," said Andrew Chen, managing director of Shanghai Nortel Semiconductor. The rub is that "people here do not know how to design products with market appeal."
Another question mark is the underlying strength of the Chinese economy and whether it will be spared the disastrous effects of the Asian economic crisis. Many sectors of the economy are suffering and unemployment is up, yet China is still registering 7.6 percent annual growth. Foreign investment has slowed considerably, but capital investment from neighboring electronics giant Taiwan remains relatively strong, observers said.
Whatever their direction, events in China promise to reshape the global electronics industry over the next decade and beyond.
The paradox that is the $100 billion Chinese electronics market is driven by a desire to gain access to cutting-edge technologies for design and manufacturing while seeking to rewrite the make-or-break rules for control of intellectual property. The friction that the dilemma creates in dozens of Chinese joint ventures with Asian, European and American companies will influence the course of China's effort to build a top-notch electronics industry over the next decade.
Signaling that it is serious about developing a high-tech infrastructure, China has embarked on its most ambitious effort so far to build an electronics industry from the ground up: a government-led attempt to develop a domestic IC-design capability that can produce chips for internal consumption and for export. The effort centers on Project 909, a two-year-old joint venture between Shanghai Hua Hong Microelectronics Co. Ltd. and Japan's NEC Corp.
The project a key element of China's ninth five-year plan, which ends in 2000 has also established a foothold in the Silicon Valley hotbed of IC design, via a subsidiary called Newave (Santa Clara, Calif.).
NEC's 8-inch fabrication facility represents a $1.2 billion investment in China. Operations will begin in February, and the plant will eventually be capable of producing 20,000 wafers a month. Hua Hong will own 70 percent and NEC 30 percent, with output targeted for both the domestic and international markets.
Hua Hong officials said they are also talking with such Western concerns as Motorola, Intel, Lattice and Nortel about possible cooperation on Project 909.
NEC executives view the joint venture as a long-term investment in the potentially huge Chinese market that puts them ahead of competitors such as Motorola. Still, they said the chip maker must overcome a variety of startup difficulties that have been exacerbated by the decline in the global semiconductor market.
"We expect that NEC will have an advantage if the semiconductor market takes off in China in a few years," said Hidesato Tanaka, NEC's general manager of overseas semiconductor plants. "But at the beginning, we have to take back most of all the products fabricated in China."
What's more, the new plant will open using 0.35- and 0.5-micron processes technologies that are a generation or two behind the leading edge.
A Japanese industry observer described the joint venture as "a project that demands a lot of money and technology. But no one knows when the Chinese semiconductor market will actually take off in the circumstances of no money, no technology and no infrastructure."
Other industry watchers noted, however, that few foreign IC manufacturers can match NEC's competitive position in China.
The Project 909 fab is near completion in Shanghai, and installation of production equipment is scheduled to begin soon. "We will bring advanced and established technology for volume production," Tanaka said.
The Shanghai fab is part of NEC's global strategy to locate production close to key markets. "NEC wants to use the fab as a 64-Mbit [synchronous] DRAM base," Tanaka said, adding that the primary product for the Chinese market will be microcontrollers.
"China should expect that the joint-venture fab will make salable products in China as early as possible, and so do we," said Shinichi Akashi, another NEC program manager.
Hua Hong, meanwhile, has established seven new design centers including the U.S.-based Newave with operations located in Shenzhen, Ninjin, Beijing and other Chinese cities. Beijing Hua Hong IC Designing Co. Ltd., for instance, will provide Project 909 with 200 types of ICs by 2001. Products will include DRAMs, IC cards, codecs and special ASICs.
Yu Zhoughou, vice president of Shanghai Hua Hong Microelectronics, told EE Times that the design centers will concentrate on digital-TV and Video CD applications as well as digital-switching ICs and ASSPs for the consumer market "to supply local industry."
Hua Hong has also identified the smart-card market as one of huge potential for China and the new fab. The estimated size of China's smart-card market is 60,000,000 units. The Chinese government is pushing smart-card technology through its "golden card" project.
Given such applications as smart cards, wireless telecommunications and digital video, the total available chip market in China is enormous, officials here said. Yu said China consumes about 10 billion chips per year, but only 700 million (or 7 percent) of those ICs are made here.
According to IC Insights Inc. (Scottsdale, Ariz.), Chinese government sources predict that the $4 billion Chinese IC industry will grow to $15 billion by 2000 and $50 billion by 2005. The projected 37 percent compound annual growth rate would support more than $200 billion in electronic-systems production, the market analysts said.
The IC-design initiative is seen here as a way to bridge that gap. "Chinese companies have system-design knowledge, but they know very little about IC design," said Pan Jian-Yue, chief China representative for Synopsys Inc. (Mountain View, Calif.). "The government is encouraging companies to set up design houses in China to help grow our R&D and manufacturing technology base. Motorola and Nokia have both set up design centers at the request of the government, which has made it a matter of national policy to help expand China's design knowledge."
While pursuing its own technology strategy, China is reaching out to foreign consumer-electronics and IC makers. Jin Zheng-Long, senior economist with the China Audio Industries Association (Shanghai), said 40 foreign companies have formed joint ventures with the group. Members include JVC and Sony.
The group also has relationships with U.S. chip makers, including C-Cube Microsystems (Milpitas, Calif.) and ESS Technology (Fremont, Calif.). Association members are working with U.S. companies on several co-development projects.
The projections for explosive growth in China's video-player market offer ample incentive to work with the audio group. The association's three-year forecast calls for 10 million to 15 million Video CD and Super Video CD players to be sold annually. The local DVD market is projected to hit 2.5 million players by 2000.
But some observers question the rosy forecasts. One Japanese source cited "a glut of products in China" and said companies are hard-pressed to sell their local output.
While much of China's high-tech focus has been on digital video, industry officials predicted other emerging markets will drive China's nascent chip industry. They noted that the spectacular development of Taiwan's PC-driven electronics industry had a profound impact on China's technocrats.
But the Chinese IC market is expected to develop differently. "The best chance China has [for promoting its domestic chip industry] is telecommunications," said Andrew Chen of Nortel.
Just across the frontier checkpoint from Hong Kong, at the Shenzhen plant of STS Microelectronics Co. Ltd., China's future design engineers are being trained as part of a joint venture between European chip maker STMicroelectronics and Shenzhen SEG Hi-Tech Industrial Co.
Solomon Ng, an STS design-center manager from Singapore, has a roomful of trainees working on ASIC designs for mixed-signal devices, DVD photosensor heads and other audio, video, industrial and standard linear products.
The STS Design and Development Center, perhaps the top design facility in China today, has 19 Chinese engineers.
The STS manager is upbeat about China's design capabilities but realistic in his assessments. China lags the rest of the world in IC design by 10 years, Ng said.
Contributors to this report include Richard Wallace and Sunray Liu in China, and Junko Yoshida and Yoshiko Hara in Japan.