Mainland tech firms moving beyond 'Made in China'

HONG KONG/SHANGHAI: China, whose vast and cheap labour force has long made it

a manufacturing hub for global tech firms, is moving slowly up the industry

value chain.

From semiconductors to cellphones and software, foreign companies are

increasingly shifting value-added functions such as research and development and

marketing to China, which is eager to graduate beyond its role as the world's

factory floor.

"You have to go where the music is played," said Peter Borger,

president of Siemens Shanghai Mobile Communications Ltd., the German giant's 60

per cent-owned China joint venture.

Siemens AG is transferring the Asia headquarters of its mobile business from

Hong Kong to Shanghai, where its factory cranks out some 1.1-1.4 million mobile

phones a month. More significantly, Siemens plans to double the size of its

research and development staff in China from the current 250, Borger said in an

interview at Siemens' Shanghai plant.

"China as an R&D center will play an important role, like India for

us," he said, noting that China will produce some 270,000 information

technology graduates annually by 2005.

Beyond "made in China"



China's advancement beyond the "design it abroad, make it in China, sell it
abroad" cycle comes partly from its surging power as a market in its own

right. Already, China is the top buyer of cellphones and next year will surpass

Japan for second place in personal computers.

China is also gaining from the diffusion of high-tech know-how, much of it

acquired from abroad, through its industries. It boasts a sizeable engineering

workforce, including numerous returnees from overseas study, increasingly

permeated by foreign business practices.

In the southern city of Shenzhen, for example, US software giant Oracle Corp

is setting up an R&D center focusing exclusively on the market in China --

which is trying to shed its status as a software backwater.

The eastern city of Suzhou, meanwhile, has become like a suburb of Taipei,

with some 3,000 Taiwanese firms having set up shop, including makers of high-end

notebook computers.

Taiwanese computer peripherals and mobile phone maker Benq Corp boasts a

beach volleyball court and talks of its "Starbucks-style" corporate

culture as its Suzhou-based Greater China marketing team brainstorms over how to

build a brand to differentiate what are often commodity products.

Its marketing staff will grow from 240 to 350 people by July. "There is

a cost advantage and then there is a human resources advantage, because here you

can hire a lot of talented people, well-educated college students," said

Michael Tseng, managing director of Benq's China business operations.

Long road ahead



To be sure, China has a long way to go before it can challenge the innovative
likes of Taiwan or South Korea, much less Japan and Silicon Valley in the United

States.

Sceptics say that the R&D functions that foreign firms are moving to

China are hardly leading-edge. Many multinationals set up training and research

centres when they invest in China to win government favour. And as is often the

case when outsiders regard China, there is plenty of hype.

"R&D is more for local applications. It's still a marketing tool,

not so much fundamental research and development," said one local

semiconductor executive. "They just call it R&D because it sounds

exciting and it pleases the government." Key technology must still be

bought elsewhere.

It rankles some in China, for example, that the core intellectual property in

a cellphone -- the chip -- must come from abroad. Even Benq, which has shifted

nearly half its manufacturing output to the mainland, has left some functions

back home.

"We have high-end products such as mobile phones that will mainly be

produced in Taiwan and we have an R&D center located in Taiwan," Tseng

said.

In search of intellectual property



China's burgeoning semiconductor sector, which has made headlines abroad, must
also procure technology overseas. Taiwan-backed Semiconductor Manufacturing

International Corp, a new Shanghai microchip foundry seen as a symbol of China's

growing sophistication, is buying technology from partners Chartered

Semiconductor Manufacturing of Singapore and Japan's Toshiba in order to speed

growth.

"The best way is to pay a little bit of money and get the technology in

house," said SMIC senior fellow Chris Chang. While there's plenty of

"downstream" chip infrastructure in the Shanghai area -- testing and

packaging, for example -- the mainland boasts little knowledge-intensive design

capability.

"Chinese design houses are in the embryonic stages," SMIC's Chang

said. Rival Taiwan-backed foundry start-up Grace Semiconductor Manufacturing

Corp expects the bulk of its orders will come from overseas design firms when it

begins production next March.

"As time goes on, we'll work with local design houses. They will grow,

they will build themselves, gradually we'll have more orders from them,"

said Nasa Tsai, Grace's Taiwanese president. Executives agreed the China tech

sector needs time to mature.

"China is definitely moving in the right direction but there's always a

dream and there's always a reality. China definitely has a great future but it

takes time," another top China semiconductor executive said.