China & the Semiconductor in the Global Electronic Age

A review of Rapid Advance: High Technology in the Global Electronic Age, by Susan K. Mays.

How is a semiconductor like a steam engine? Though reminiscent of a riddle the Mad Hatter might pose over a mug of Darjeeling, Susan Mays suggests in her dissertation that these two technologies performed a similar economic function. Both, she notes, contributed to significant increases in manufacturing output, the establishment of improved distribution networks for goods and information, and the creation of a wide range of new business opportunities. What Watt’s engine and the railroad were for the Industrial Revolution, the integrated circuits in our computers and cell phones are for the Information Revolution of the 20th and 21st centuries.

Today the semiconductor industry is synonymous with high-tech innovation, as firms struggle to produce smaller, faster microprocessors by cramming more transistors on to a sliver of silicon. The substantial equipment and human capital requirements associated with such efforts initially ensured the  dominance of American firms like Intel and Texas Instruments, but beginning in the 1970s, businesses in Japan, South Korea, and Taiwan established themselves as major players in an increasingly global electronics marketplace. More recently, China has emerged as a key site for integrated circuit design and fabrication, a particularly impressive feat given the institutional legacies of its centrally planned economy. Mays’ dissertation reconstructs the history of the Chinese semiconductor industry from the late 1970s to the mid-2000s, showing how policymakers and integrated circuit manufacturers overcame bureaucratic delays, restrictive trading policies, and a near-total absence of venture capital to secure a 25% share of the global market. Their success reflects China’s newfound capacity to supplement traditional state-led development strategies with what Mays terms “enterprise led development” (p. 4) to cultivate an environment more conducive to sustained economic growth.

In focusing upon a single segment of the Chinese economy and acknowledging the contributions of both government officials and industry personnel, Mays distinguishes her study from previous discussions of China’s state-owned sector. Instead, she embraces an evolutionary economics approach which advocates a bottom-up examination of how people within a specific industry adopt new tools, processes, or organizational forms and learn from those experiences. In her first chapter, Mays acknowledges that applying this framework to China’s semiconductor industry presents several challenges, given its close ties to the defense establishment. Nonetheless, Mays was able to collect more than fifty first-hand accounts from electronics executives and senior engineers. Considered alongside documents uncovered while working at the Wuxi National Integrated Circuit Base Company (WXICC), these oral histories enable her to trace how politicians, corporate managers, and international partners shaped the semiconductor industry in China.

After outlining her methodological approach, Mays devotes her second chapter to preliminary attempts to reform the semiconductor industry. Chinese scientists had persuaded their government of semiconductors’ strategic significance during the 1950s, but at the end of the Cultural Revolution only a handful of factories had moved beyond producing discrete circuit components like diodes or transistors. In the early 1980s, the State Council—China’s highest political body—moved to address this technological deficiency. After consulting with industry experts, in 1983 the Council settled upon a consolidation strategy. Instead of distributing resources to dozens of semiconductor facilities scattered across the country, they would instead build two regional “bases” centered around Beijing and the southern city of Wuxi: concentrated geographic areas encouraging the exchange of human and material resources among a handful of firms. For the remainder of the decade, as the government divested from a growing number of semiconductor factories, it also granted the surviving operations a degree of autonomy and limited access to the open market. At the same time, the government remained deeply involved in the management of five key semiconductor enterprises and a new project to establish China’s first world-class integrated device manufacturer (I.D.M.) facility in Wuxi, where Mays conducted the bulk of her research.

The I.D.M. initiative, also known as “Project 908” is the subject of Chapter 3. Intended to demonstrate that a Chinese enterprise could oversee all three phases of the semiconductor manufacturing process—design, fabrication, and packaging/assembly/testing (P.A.T.) —Project 908 revealed the challenges confronting state-owned enterprises engaged in large-scale technological projects. The semiconductor firm overseeing the project, Huajing, received approval to begin construction in 1990, but delayed government loans postponed the groundbreaking until 1995. Even if everything had proceeded on schedule, Huajing had previously specialized in low-end semiconductors and possessed only limited design capacity. Although treated as a failure by industry analysts, Mays proposes that Huajing’s responses to Project 908’s setbacks established a pattern for future semiconductor ventures in China. Recognizing the need for additional capital and technical expertise, for example, Huajing’s leaders formed a partnership with CSMC, a Taiwanese semiconductor firm. As part of this reorganization, Huajing abandoned its identity as an I.D.M. and reconfigured itself as a foundry, a standalone fabrication site capable of producing integrated circuit designs submitted by outside customers.

The replacement of I.D.M.s with specialized production facilities (what Mays refers to as “de-verticalization” (p. 30) and state-controlled enterprises with foreign partnerships characterized the semiconductor industry in China throughout the 1990s. Chapter 4 explores these trends by highlighting two enterprises that the Chinese government designated as “national champions” during the late 1990s: Huahong-NEC and SMIC. In contrast to national champions in other East Asian countries, these enterprises were not intended to transform China into a self-sufficient semiconductor producer or limit the participation of foreign investors. Rather, the State Council proved extremely open to the prospect of international investment to improve their nation’s electronics infrastructure. Consequently, unlike the state-owned Huajing, Huahong-NEC started off as a Sino-Japanese joint venture from its inception. Moreover, where Huajing and Huahong-NEC both began as I.D.M.s before concentrating on fabrication, SMIC—a wholly foreign-owned enterprise with Taiwanese management—embraced the foundry model from the outset. Despite negotiations over subsidies, import tariffs, and debates over intellectual property, both enterprises thrived, providing policymakers with valuable insights as they pushed to further integrate the Chinese semiconductor industry into the global market.

With Huahong-NEC and SMIC leading the way, semiconductor production in China boomed at the end of 1990s, as did the market for consumer electronics. Chapter 5 shows how those firms’ experiences prompted the creation of new industry-wide policies that spurred the growth and diversification of Chinese semiconductor enterprises after 2000. As international companies established operations in China to be closer to their customers and benefit from lower labor costs, the Chinese government recognized that one-off ventures such as Project 908 or the national champion enterprises could not address longstanding legal and institutional obstacles that complicated efforts to attract new businesses. To signal its ongoing commitment to semiconductor production, in 2000 China’s Ministry of the Information Industry issued a new policy, known as Document 18, which streamlined the process of enterprise formation, provided incentives for foreign investment, and opened new sources of domestic and venture capital. Mays observes that not all of Document 18’s provisions, such as its intellectual property guidelines or a value-added tax on imported semiconductors, proved effective, but it did contribute to the proliferation of Chinese fabrication and PAT sites.  In addition, it  set the stage for a new campaign to cultivate high-end design firms. Still, through a combination of top-down policymaking informed by the bottom-up guidance of industry leaders, China was able to become part of the global semiconductor value chain.

Mays concludes her dissertation with a comparative analysis of the Chinese semiconductor industry and its counterparts in Japan, South Korea, and Taiwan. All of these countries, she observes, relied on government policies to foster the growth of high-tech industries, but China was unique in its heavy dependence on foreign investment and the rapid pace of its transition from state-owned enterprises to a  wide range of businesses (e.g. joint ventures, foreign companies) participating in the international market. China’s relatively late entry into integrated circuit production also enabled it to capitalize upon the industry-wide shift away from I.D.M.’s by adopting the foundry model, which Taiwanese firms pioneered in the 1990s. This experience also left China poised to benefit from the ongoing de-verticalization of semiconductor manufacturing, as new software tools accelerated the creation of firms dedicated solely to integrated circuit design.

Whatever course the Chinese semiconductor industry might take, Susan Mays has produced what may well become the definitive history of its late 20th century rise to global prominence. Through her exhaustive investigations of the documentary record and her conversations with industry personnel, she has effectively mapped the changing contours of the institutional and commercial environment within which integrated circuit production occurred in China over the past three decades. More importantly, she has reaffirmed the value of balancing official accounts of those changes with the perspectives of manufacturing personnel responsible for their implementation. In this fashion, she has not only provided a valuable contribution to the global history of electronics but also an important methodological model for subsequent historical investigations of technological innovation.

Benjamin Gross
Chemical Heritage Foundation
bgross@chemheritage.org

Primary Sources

Interviews with key figures in the Chinese semiconductor industry
Project Records from Project 909 and Huahong-NEC compiled by Hu Qili (head of Huahong-NEC)
Industry History by Wang Yangyuan (co-founder and former chairman of SMIC)
Reports from CSIA (China Semiconductor Industry Association) and CCID (China Center for Information Industry Development)
Archival documents obtained at Wuxi National Integrated Circuit Base Company (WXICC)

Dissertation Information

Columbia University. 2013. 462 pp. Primary Advisor: Madeleine Zelin.

Image: “Semiconductors, the ‘brains’ of electronic products and systems.” Photo courtesy of the Ridgetop Group.

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