October 22 2002

SHANGHAI -- Last of three parts

Richard Chang, a devout Christian raised in Taiwan and educated in the United States, has opened a $1.6-billion semiconductor factory here and plans to build a church for his 3,000 employees.

Chinese officials have displayed a cool, some would say hostile, attitude toward foreign religions. But they have put out the welcome mat for Chang because they desperately need his expertise.

This communist nation has embraced capitalism and become a manufacturing power, exporting toys, appliances and other products to every corner of the globe. Now, government officials want China to compete in a far more challenging arena: the making of semiconductors, the silicon chips that power everything from cell phones to missile guidance systems.

The semiconductor is one of the sophisticated, high-value products that form the cornerstone of an advanced economy. Chinese officials believe that mastery of the 250-step production process for the chips will teach factory managers and engineers the skills needed to lift China into the top tier of industrial powers.

With the single-minded determination it once focused on ideological crusades, the government has embarked on a crash program to develop a world-class semiconductor industry, using tax breaks, free land and other incentives to attract foreign companies and know-how.

Though primitive by the standards of the United States, Japan or Taiwan, Chinese chip making has taken a big step in the last few years.

A recent report by the U.S. General Accounting Office said several of China's factories, using foreign capital and technology, are one "generation" or less behind the world's leading semiconductor makers. Chip technology undergoes a significant advance, entering a new generation, every two years.

Chinese leaders are counting on foreign technology experts such as Chang to help them make the next leap.

Under tight security in a cavernous building in Shanghai's Pudong district, employees of Chang's Semiconductor Manufacturing International Corp. work in sterile "clean rooms," producing silicon chips with circuits as narrow as 0.18 micron, barely one-thousandth the diameter of a human hair.

The factory, among the most advanced in China, makes semiconductors for companies in Japan, the U.S. and Europe. The chips are packaged and sold under those firms' brand names and delivered to customers in China, which put them in a variety of electronic products.

"Because of our proximity, it is easy for us to penetrate the China market," said Chang, a 53-year-old engineer who is the company's president and chief executive. "We are not the price leader, but we offer better services in China. And performance-wise, we are first-rate."

China produced $900 million worth of semiconductors in 2000, compared with $11 billion for Taiwan. But it is not only in volume that China lags behind the industry leaders. Sophisticated factories such as Chang's are rare. Nearly all the chips made here are of the rudimentary kind used in microwave ovens and televisions - "trailing-edge" technology, as it is known in the industry.

China does not make enough even of these comparatively primitive chips to meet the demands of its factories, whose consumption of semiconductors is growing 30% a year. The country imports 85% of its chips.

"Semiconductors are the key to the information technology industry," said Yu Zhongyu, president of the China Semiconductor Industry Assn. "If we want to develop further, we need to have this skill."

Five-Year Plan

Just a few years ago, China's prospects in this high-tech realm seemed poor.

The United States restricted Chinese access to the most advanced American semiconductor technology out of concern that it might be put to military use. Air and water pollution made it hard to create the sterile environment needed for chip manufacturing. Skilled technicians and managers were in short supply, a legacy of the late-1960s Cultural Revolution and its purges of intellectuals.

China also lacked the necessary investment capital. Building a semiconductor factory, or "fab," involves huge start-up costs - more than $1 billion in equipment alone.

To develop a globally competitive industry, China needed foreign capital and talent. In 1995, the government set out to get both with Project 909, a five-year plan with ambitious goals for building chip plants and developing technical expertise.

China lowered barriers to foreign investment and set up high-tech zones offering free land and tax holidays. To encourage Chinese factories to use chips made in China, the government imposed a 17% tax on imported semiconductors and charged just 3% for those produced domestically.

Chip makers from Japan and later Taiwan began setting up production facilities in China. Initially, they had to export most of their output, so home-grown enterprises would be protected from competition. But the government gradually permitted foreign-invested factories to sell more of their semiconductors in China. That attracted more foreign firms.

Today, Motorola Inc. operates a giant semiconductor plant and a test and assembly facility in Tianjin, a port city southeast of Beijing. Even as it slashes jobs in other countries, Motorola has announced plans to spend $6.6 billion over the next five years in China, building at least 10 more semiconductor wafer fabrication plants.

"Everybody is making a bold dash into China," said Kirk Pond, president and chief executive of Fairchild Semiconductor International Inc. The American firm is building a $200-million facility near Shanghai to assemble and test chips for sale in China.

Taiwanese leaders feel particularly threatened by all this. They fear that the loss of chip-making jobs will hollow out the island nation's economy and give China leverage in their long-running political struggle.

For years, Taiwan barred its semiconductor makers from doing business on the mainland, though companies found ways around the rules. But this year, after lobbying by Taiwanese companies, the government eased those restrictions, permitting the transfer of all but the most sophisticated technology.

Microsemi Corp. of Irvine, a leading supplier of chips to the U.S. military and space programs, is among the American companies making their way to China. Eager to expand its commercial and industrial business, the firm has opened a factory in Shanghai, its first outside the United States.

The factory, a joint venture with a Chinese company, makes a specialized line of chips used in power plants and other industrial applications.

Raw materials are cheap, and engineers with advanced degrees and five years of experience can be hired for less than $500 a month, said Andy Yuen, Microsemi's vice president of international operations. The factory produces high-quality chips at one-third the cost of a similar product in the United States.

"We chose Shanghai as a center because everything we need is within 20 miles of our factory," said Yuen, a Hong Kong native who oversees the firm's operations in Asia and Europe. "Raw materials, chemicals, tooling - you name it, they're here. And instead of just having low-end assembly workers, we can use Shanghai as a place for brainpower. My goal is to do 100% here, no exceptions."

Return From Exile

Foreign technocrats such as Yuen and Chang provide China with something money can't buy: extensive experience in the intensely competitive semiconductor industry.

Chang was born in Nanjing, China, and raised in Kaoshiung, Taiwan, where his parents moved before his first birthday. They were among the thousands of Chinese who fled after the Communists wrested control of the mainland in 1949.

After graduating from National Taiwan University and completing his military service, Chang went to the United States, where he got a master's degree in engineering science at the State University of New York in Buffalo. He and his wife, also an engineer, went to work at Texas Instruments Inc. in Dallas.

Over the next two decades, Chang played a key role in the company's global expansion, helping oversee the launch of six semiconductor factories in Asia and Europe.

After taking early retirement from Texas Instruments in 1997, he decided to return to Taiwan. Backed by a group of international investors, Chang founded Worldwide Semiconductor Manufacturing Corp., which made custom chips for the world's leading technology firms. In 2000, Worldwide merged with a Taiwanese chip maker, and some of Chang's customers and investors urged him to start another factory.

With $1.6 billion in funding from firms such as Goldman Sachs and H&Q Asia Pacific, a Palo Alto investment group, Chang went shopping for a location. Officials in Shanghai offered him the most attractive tax breaks, along with cheap land, water and electricity and a large supply of technical talent.

But for Chang, the critical factor was spiritual. A missionary trapped in an engineer's body, he saw his company as a way to strengthen Christianity in the world's most populous nation.

"China is a good place in many aspects. The market is huge. Manufacturing costs are competitive. The pool of talent is also very good," he said. "But frankly, I was thinking about how I could share God's love with the Chinese more than how I could help the economy."

Chang traveled the globe assembling a team of chip designers, engineers and production experts, many from the Chinese Christian community. He offered the classic tech-company bargain: a chance to be on the ground floor of a pioneering venture, with stock options. To ease employees' culture shock, he is building a housing development near the Pudong factory, with a bilingual school.

Roger Lee, 43, gave up a good job at Micron Technology Inc. of Boise, Idaho, one of the world's largest memory chip companies, to join Chang's start-up as a vice president. Lee also took a substantial pay cut. Chang pays his employees at prevailing Chinese rates, which for top executives are 25% to 30% of U.S. salaries.

Lee worried about tearing his wife and three sons, ages 7 to 15, away from their five-acre spread in Boise and the friends and family they had known all their lives. But Lee, who was born in China and educated in the U.S., shared Chang's conviction that their native country was poised to become a world center for chip manufacturing.

At Micron, where Lee worked for 15 years, the Princeton graduate played a critical role in developing products and had 115 patents to his name. He hopes to replicate that record at Chang's company, where he is head of memory technology development.

"When I joined Micron, it was a start-up company," Lee said. "When I left, there were 12,000 employees. It is hard for one person to make a difference."

Shou Gouping, a 40-year-old engineer for Chang's company, left Beijing for the United States two years after the 1989 Tiananmen Square massacre and did not expect to see his homeland again. After obtaining advanced degrees in electrical engineering, Shou worked for technology firms in Silicon Valley. He met Hai Ling, a Chinese immigrant who had come to the U.S. to study physics. They were married in 1998 and had a son the next year.

Early last year, Shou's aging mother grew sick, and the couple returned to China with their son. After a decade in the United States, Shou said, it felt good to be surrounded by family and the culture and language of his childhood. Though people were poor by U.S. standards, he sensed an optimism about China's future.

Three weeks later, Shou and his wife reluctantly returned to Sunnyvale, Calif. But they left their son with Shou's mother and decided to look for a way back to China. Through a friend in Florida, Shou heard that Chang was hiring. He took a job as a technical manager in the firm's design service department, providing computer support.

Shou, a Christian, said that Chang's spiritual message resonated deeply with him.

"I had a feeling that my life should be in China, serving people and God," he said.

Chang and his employees have had their share of frustrations, including tussles with local officials over taxes, delays in getting sophisticated U.S. equipment because of export controls, and a shortage of experienced personnel.

But analysts say the company's prospects are bright. Chang has cut deals with industry giants such as Toshiba Corp., Fujitsu Ltd. and Singapore's Chartered Semiconductor Manufacturing Ltd. to obtain leading-edge technology. In return, Chang gave them an ownership stake in his firm or agreed to produce chips for them.

Chang's company "is successful because it has outside connections," said Dorothy Lai, a Hong Kong analyst with Gartner Dataquest, a technology research firm based in Stamford, Conn.

Seven months ago, Chang began holding religious services in a rented building near his factory. He hopes to start construction soon on a church for his employees.

"Every time we have done something successful, I openly mention that this is done with the Lord's blessing," he said. "At first, some people felt awkward about this. But as they realize we really practice our beliefs, they accept us."

Originally printed in the LA Times October 2002