It was the year when a differential value added tax on imported chips was removed by the Chinese government but only after intense lobbying by the United States and threat of the World Trade Organization. China had been imposing a value added tax of 17 percent on sales of all imported and domestically produced semiconductors, but rebating tax, with the exception of 3 percent, for semiconductors produced in China. But in July China backed down and set about realigning its VAT so that all semiconductor products are taxed at 17 percent regardless of origin.

However, 2004 was also a year that illustrated the ineffectiveness of the Wassenaar Arrangement at trying to deny China access to leading edge semiconductor manufacturing technology.

The Wassenaar Arrangement is an agreement between 32 developed countries that attempts to prevent the proliferation of weapons and dual-use goods and services that could have potential military use. It was brought in to replace the U.S. and NATO-driven Cocom regulations of the 1980s. China is not a signatory and is one of the countries whose access to dual-use technology Wassenaar attempts to block.

Tools capable of processing 0.25-micron wafers had been the perceived limit under U.S. controls, but a number of semiconductor manufacturers in China had already announced plans for 0.18-micron and below processes. In 2004 SMIC took the bar to the 90-nanometer manufacturing node. But the year began with SMIC's initial public offering of shares, needed to allow the foundry chipmaker to continue to fund its aggressive factor-building program, including a 300-mm wafer fab in Beijing. The share offer, in Hong Kong and on the NASDAQ in the United States, was oversubscribed but was a first-day flop. Although that of course means that, in essence, SMIC got more than fair value for the shares it put on the market.

SMIC had already gone through an painful introduction to life in the global semiconductor market when its was sued for alleged intellectual property theft by foundry rival Taiwan Semiconductor Manufacturing Co. Ltd. In July Richard Chang, chairman, president and chief executive officer of SMIC, let it be known through an article interview that he had received a fax that purported to come from the Taiwanese government threatening him with a US$750,000 fine and a two-year jail term.

"They're just trying to harass us. They don't want to see China have a semiconductor business," the BusinessWeek Onine report quoted Chang as saying. Chang, who grew up in Taiwan, was being accused of contravening Taiwanese laws on Chinese investment even though his company is registered in the Cayman Islands, and he is a U.S. citizen.

Later in the year, on visit to London, Chang told Silicon Strategies that SMIC had a partner that was helping the company develop a 90-nanometer manufacturing process for logic circuits. "We have 90-nanometer SRAM manufacturing technology today. We need a partner for 90-nm to go to logic."

Chang then re-iterated previous comments that SMIC would be ready to offer 90-nm process technology for logic devices in the first six months of 2005.

Chang disclosed that its partner in this endeavor was US company Texas Instruments Inc. in October.

Apparently eager not to be completely eclipsed rival Chinese foundry chipmaker Grace Semiconductor Manufacturing Corp. said it is in the final stages of negotiating a technology transfer for a 0.13-micron manufacturing process from a U.S.-based integrated device manufacturer. However, such deals are usually announced the way SMIC had done it, after they are signed rather than before, many observers pointed out.

Nonetheless the moves in China, particularly by SMIC appeared to get to Craig Barrett, president and chief executive officer of Intel Corp. who took issue with the impact of controls on exports to China in November.

"You have to say, 'What the hell is going on?'," Barrett said at that time. [SMIC's effort] blatantly goes against U.S. regulations." It was explained that Barrett did not take issue with SMIC, but rather he had problems with the U.S. government and its restrictive export control policies for U.S. companies in China.

"If I wanted to build a 90-nm, 300-mm fab in China, the U.S. government would say, 'Absolutely not'. U.S. export controls and regulations do not help U.S. companies compete in China relative to our competition," Barrett said. "I don't like fighting with one hand tied behind my back."

In December SMIC's Chang attended a one-day conference in Silicon Valley and was apparently eager to try and diffuse the situation by stressing that it had developed a 90-nm SRAM manufacturing process technology on its own and denying any involvement in military projects.

The conference was on the prospects for the Taiwan and Chinese semiconductor industries in light of growing tension in the region. And, according to rumor, it was boycotted by TSMC because SMIC's Chang was present as a keynote speaker. TSMC denied it had avoided the event the event, and referred to a "logistical problem".

Thanks to China's desire to take a part in the semiconductor market we are all living in interesting times.

(Return to the 2004 Top 10 story list or go to No. 4).