Building in China, one relationship at a time

By Matt Wickenheiser
WaferNews Editor

What’s the key to unlocking the door to the China market? In a word, guanxi – relationships – according to Photronics CEO Dan Del Rosario.

“You have to build the relationships up to the highest levels,” Del Rosario stressed. “I’ve been 18 months working my way up.”

Photronics recently established Photronics Imaging Technologies (Shanghai) Co. Ltd., a wholly owned foreign enterprise (WOFE), and announced plans to build China’s most advanced reticle fabrication facility in the Zhangjiang Semiconductor Industrial Park, spending about $300 million in infrastructure and advanced photomask manufacturing technologies over the next five years.

Over those 18 months, Del Rosario has been meeting with officials from both the provincial and central governments, having conversations over dinner, talking about the future of China and Photronics, and slowly moving to higher and higher levels of officials.

You have to show a true interest in benefiting the country, warned Del Rosario.
“What you really need to ask, is what can we do for China,” he remarked.

Trust is a huge factor, explained Del Rosario, and “everything is done on a handshake.” After an official at one level trusts you, said Del Rosario, he’ll introduce to his superior, and so on. The successful companies in China will be those that have the deep, institutional relationships, said Karen Sutter, director of business advisory services for the US-China Business Council.

“I trust these people, and they trust me,” said Del Rosario. “It’s not a level playing field.”

Sutter and Del Rosario spoke about the China market recently at SEMInvest in New York City, along with Mike Luttati, exec. VP/COO of Axcelis Technologies, Vincent Sollitto, president and CEO of Photon Dynamics, and Bruce Freyman, corporate VP of manufacturing at Amkor Technology. All four companies have moved into China, to varying extents, and the executives commented on the potential benefits and pitfalls of that market.

“The impact of relationships is everything,” agreed Freyman. “What’s written down in law is not necessarily practiced.”

Amkor found several times, expounded Freyman, that the guidelines under which a business operates in China are based more on what a company negotiated, rather than what is written in the rulebooks. On top of that, Del Rosario noted, laws in China “change monthly, weekly…”

The execs all have high hopes for China, with Axcelis, Photon Dynamics, Amkor, and Photronics estimating that in 2005, revenue from there will be 15%, 30%, 15 to 25%, and 20% of their totals, respectively.

Part of what makes China so attractive to the tool and materials industry are the statistics associated with the country:

? There are 1.3 billion people in China;

? According to Gartner, China imported $13.8 billion worth of semiconductors in 2000, and exported only $3 billion;

? Gartner forecasts that China’s electronics equipment production will grow at an average 13.3% from 2000 to 2005, compared to the world rate of 5.9%;

? By 2010, it’s predicted that China will consume 30% of the world’s chips;

? Some forecasts show that as early as 2005, China will be the 3rd largest semi producer in the world;

? China’s goal is to become a $24 billion IC market by 2010.

The huge internal end market, cost pressures for relocation to China, and falling regional barriers are all driving the next wave to China, Sutter noted. China’s central government and the provinces are working to make the region even more attractive to outside investment, the panelists remarked, with preferential investment options, tax breaks, land deals, and other incentives.

“The government has given the edict that Shanghai will be the technology center of the world,” said Freyman.

Additionally, each of the regions competes with each other for high-tech investment, Sutter said.

“A lot of people say there isn’t a China market – there’s China markets,” she related.

Sutter urged companies looking to expand in China to use the regional competition to their advantage – “Everything is negotiable.” Sutter also advised that companies shouldn’t just look at the 1.3 billion population – they should instead focus on their niche’s customer, and on their suppliers. Companies may need to be close to each, geographically, Sutter suggested, as travel across provincial borders may include costs and restrictions.

For example, she said, McDonald’s eateries in China get their supplies – chickens, beef, etc. – from local suppliers, not from a central distribution system.

An additional attraction is the low cost for employees, Del Rosario said, with a well-paid engineer bringing home $10,000 yearly. While $10,000 doesn’t seem like much, in China, where food and housing is very inexpensive, it’s “an inordinate amount of money.”

In the past, said Del Rosario, when companies have transferred employees to other countries from the US, they also transferred their US salaries. That created a huge disparity in salaries, and personnel issues soon followed. Photronics’ goal is to have 95% or more of its work force in China local. Some Chinese nationals living and working in the US have approached Photronics about working in China, related Del Rosario. Del Rosario said Photronics will repatriate them, but at Chinese salary levels.

Also on the human resources front, Sutter commented that there is a labor shortage right now for high-tech niche workers, while Del Rosario mentioned that the country’s universities are graduating one million engineers a year. Sutter warned, however, that while there may be many talented engineers, the Chinese tend to be weak in areas of management and business know-how.

Though the internal market is great, there was some discussion as to whether China will become “the foundry to the world,” with its huge potential for growth and, possibly, exports.

Del Rosario stressed that he believed the market will remain an internally driven market – and that Photronics was focused on serving chipmakers serving that market – though he said he thought China would export consumer goods. Freyman, of Amkor, said he believed both the export and internal-market models will exist.

Sollitto predicted that while China’s focus will initially be on the internal market, as the country tries to fuel its economic growth, it will need to develop its export economy.

As to the speed of development in China (especially in comparison to Taiwan’s past ramp-up), Sollitto noted that “everything is getting faster” these days.

“Everybody is so jazzed about China, so psyched about China, that we will help them do it faster,” remarked Sollitto.

One of the possible obstacles to growth remains US trade restrictions, limiting sophistication of chipmaking equipment that can be shipped to China.

“Ultimately it slows the process, it doesn’t necessarily stop it,” said Sutter.

A close look inside the government restrictions show a “disconnect in the documents,” said Del Rosario. The way each country follows the documents is different, he noted, with Europeans shipping into China and Japanese, Koreans, and Taiwanese not.

Additionally, he said, there are huge questions as to whether the restrictions actually work to hold China behind the current technology node.

“If you can ship a KrF stepper in there, it can get down to 0.13,” he stated.

Other issues for companies looking to China include the protection of IP and the repatriation of profits.

For Axcelis, which has been doing business in China for 20 years, IP protection isn’t really an issue, as “it’s difficult to reverse engineer an implanter.” However, he reported, Axcelis does face issues concerning applications-oriented IP developed in China, and issues with how to protect IP concerning spares and consumables.

Sutter’s advice to companies was blunt: “If you have technology that’s critical, if it’s that important to you, I wouldn’t take it off-shore. Period.”

But, said Del Rosario, as China seeks to build its semi industry, it recognizes the importance of protecting companies’ IP.

“China is really trying to reform, they are clearly sending a signal to people – they have prosecuted some IP cases last year,” said Del Rosario. “As more companies in China develop IP, they will make stronger laws.”

Strategies for protecting IP include keeping only hard copies of manuals and procedures at plants (no electronic copies), having employees sign confidentiality agreements, and making sure that no one employee sees the whole picture of production, but rather bits and pieces, Sutter suggested.

Greater control over the business means a greater ease of profit repatriation, and that can be accomplished through establishing a WOFE, rather than a joint-partnership, said Sutter. In addition, said Sutter, a joint-partnership may lead to conflicts down the road, if the company you’re partnered with also signs agreements with your competitors.

So when all’s said and done, is it too late to get into China?

It all comes back to the slow, steady process of building guanxi, Del Rosario said.

“It’s not too late – but are you willing to put in the time?”

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