China - The Land of Opportunity

ARM opened its offices in Shanghai in July 2002. In July 2003 ARM announced that Semiconductor Manufacturing International Corporation (SMIC) had licensed its 7TDMI core and joined its Foundry Program.

China and World Trade Organization (WTO)

China was accepted into the WTO in December 2001. In preparation for or as consequence of joining China agreed to do several things. It signed the Information Technology Agreement which eliminates tariffs on chips, semiconductor manufacturing equipment, computers and other IT-goods. It passed a law extending intellectual property protection to semiconductor layout designs (maskworks). It pledged that state-owned enterprise would purchase products based on commercial terms not politics, that foreign firms could open plants without agreeing to transfer technology to Chinese firms and that foreign firms would have trading and distribution rights.

After unsuccessful negotiations the United States filed the first case against China at the World Trade Organization on March 18th, contending that Beijing imposes unfair taxes on imported semiconductors. China has a Value-Added Tax (VAT) of 17% on all imported and domestically produced semiconductors and integrated circuits. However, China provides a rebate of the VAT burden in excess of 3% for certain integrated circuits manufactured within China, representing a 14% differential. This discrimination against imported semiconductors is in violation of China's WTO obligations.

The Semiconductor Industry Association and the World Semiconductor Council (WSC) issued a joint statement in May 2003.
Discrimination [due to the VAT policy] has the effect of limiting market access, distorting patterns of trade and investment and negates the benefits China promised to provide when it joined the WTO. The WSC calls for China to lower its VAT rate to 3% for all semiconductors regardless of origin.
Late breaking news from the website of Ministry of Commerce of the PRC:
China has agreed to consult with the United States on the alleged "discriminatory" value-added tax on chips, the Ministry of Commerce said in Beijing Friday. The message has been sent to the US side via the Chinese delegation to the World Trade Organization. The two sides will decide the detailed arrangements of the consultation after negotiation.

Wi-Fi Standards

Citing national security reasons China issued two new WLAN standards in May 2003 that require the use of Chinese encryption technology standards. This impacts a wide range of technology products. These standards differ significantly from and are incompatible with internationally recognized protocols. Compliance would require adapting of products solely for the Chinese market and would lead to interoperability problems. The standards are now schedule to go into effect in June 2004.

The encryption standard is called Wired Authentication and Privacy Infrastructure (WAPI). Chinese authorities are requiring foreign Wi-Fi equipment manufacturers to work with 11 specific Chinese partners in value-added production to acquire the necessary encryption standard. Foreign firms fear that this will require them to share a considerable amount of intellectual properties with their Chinese competitors.

U.S. Secretary of Commerce Donald Evans, Secretary of State Colin Powell and U.S. Trade representative Robert Zoellick sent a letter to Chinese Vice Premier Wu Yi and others to reconsider the law.
"We are particularly concerned that the new rules would require foreign suppliers to enter into joint ventures with Chinese companies and transfer technology to them, … Such compelled investment would appear to be inconsistent with China's WTO commitments."
Intel said this month that it would not be able to produce mobile chipsets by China's June 1 deadline. The industry press has quoted Intel spokespersons as saying
"We have determined we are not able to produce products by the June 1 deadline that meet our quality standards, and we don't have a schedule or roadmap to produce those products. As a matter of philosophy, we continue to believe that proprietary closed standards specific to one country are the wrong business model. We believe that global standards are fundamental to making wireless LANs a viable technology worldwide."
Other companies such as Broadcom have said that would have difficulty meeting the deadline. There are other areas where China is pushing its own standards including DVD and 3G cell phones.

On the other hand the U.S. semiconductor equipment manufacturing industry is trying to push the United States into greater cooperation with China. Under current regulations, U.S. equipment makers can't easily ship high-end equipment to China. The Wassenaar Agreement regulates the export of any products that could be used to enhance military capabilities or provide technology to countries whose policies do not restrict the proliferation of military technology. US ATE suppliers must obtain export licenses to sell systems with pattern generation rates higher than 333 MHz to customers in China. Obtaining the licenses can take up to six months. As a result, U.S. manufacturers are losing out on sales to European and Asian competitors, according to the Semiconductor Equipment and Materials Institute and others.

Intellectual Property

The WTO's TRIPs (Trade-Related Aspects of Intellectual Property Rights) Agreement requires an enforcement system that: permits effective action against infringements; provides expeditious remedies which constitute a deterrent; is fair and equitable; is not unnecessarily complicated or costly; and does not entail any unreasonable time limits or unwarranted delays. TRIPS requires that member countries must apply their criminal laws in cases of commercial piracy; it is not enough to merely have laws on the books unless those laws are used effectively. In 2001, in accordance with its WTO commitments, China improved its legal framework considerably, amending its patent, trademark and copyright laws to comply with the WTO Agreement on TRIPs.

The International Intellectual Property Alliance has recommended that China remain subject to TRIPS monitoring due to lax enforcement of laws against piracy. The IIPA is a private sector coalition representing the U.S. copyright-based industries in efforts to improve international protection of copyrighted materials. The IIPA estimates losses due to piracy of copyrighted materials (excluding entertainment software) in China were over $1.8 billion dollars in 2002.

Chinese companies and software engineers also often see their own software fall victim to IPR violations, which is increasing the pressure for better protection. The long-term solution against piracy lies in mobilizing domestic firms to take the lead in IPR protection.

In January 2003 Cisco filed suit against Huaewi Technology Ltd in Texas. Cisco alleged that Huawei unlawfully copied and used Cisco's IOS software, Cisco documentation, and other copyrighted materials, and infringed at least five Cisco patents. In October the two firms came to agreement and Huaewi will abide by an injunction and has made changes to certain of its router and switch products.

Taiwan Semiconductor Manufacturing Co. (TSMC) filed court papers March 22nd in U.S. district court detailing alleged corporate espionage on the part of its mainland China competitor, Semiconductor Manufacturing International Corp. (SMIC). Last December TSMC filed a suit alleging infringement of five U.S. patents as well as stolen trade secrets. SMIC argued TSMC's allegations involve activities that have only taken place in China and Taiwan, therefore federal and California state laws are not applicable.


In the keynote address at the SEMICON China 2004 market briefing Zhang Qi of China's Ministry of Information Industry (MII) said during the past two decades China has encouraged the growth of the information industry as an accelerator for the overall economy. The information and electronics sector now accounts for about 44 percent of China's total exports.

In terms of employment, the sector provides jobs for over four million people, up 11 percent from the previous year. Madam Qi also noted that China's IC industry made dramatic technology progress during 2003. “The gap between [China] and developed countries is narrowing,” she said.

Although Chinese technologies currently are two generations behind the leading edge, by 2005 the leading semiconductor foundries will have closed that gap to just one generation according to iSuppli. In the first nine months of 2003, three new 200mm fabs entered pilot production in China from Advanced Semiconductor Manufacturing Co. (ASMC), Grace Semiconductor, and He Jian Technologies. Two others are scheduled for production by the end of 2005. While China has no 300 mm fabs in operation today, analysts expect four to be in operation by 2007. SMIC has partnered with Infineon Technologies AG to build the first 300mm fab in China this year, in Beijing. At SEMICON China 2004 David Wang, EVP of Applied Materials said that out of every four wafers produced in the world today, two are from China and Taiwan. He predicted that within 10 years one out of every two wafers would be produced by chipmakers in China and Taiwan.

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