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China Expo's October 2002 Report On People's Republic Since 1972

DONGGUAN, China, October 10, 2002 -- Ten years ago, this southern Chinese city was little more than vegetable farms and rice paddies. Today it is a teeming, smoggy monument to manufacturing. More than 4 million workers toil in 22,000 factories, churning out everything from patio chairs to power tools.

Rows of industrial buildings the size of airplane hangars stretch on for miles. Uniformed workers spill out of factory dormitories before dawn, stopping for a quick bite of porridge before heading to the assembly lines. Container trucks zip along modern superhighways to high-tech ports, where cargo is loaded around the clock onto ships bound for Los Angeles, Tokyo and Rotterdam.

Poor and isolated 30 years ago, China is emerging as the world's factory floor. The country's embrace of capitalism, coupled with an abundance of cheap labor, massive foreign investment and the collapse of international trade barriers, has sparked an explosion of manufacturing. The reverberations are being felt around the globe.

Shopping for a pair of shoes? Chances are that nimble Chinese hands sewed them, along with nearly 80% of the footwear purchased in the United States. That French provincial bedroom set on the showroom floor? It's probably part of the $4.6 billion in furniture that China shipped to the United States last year.

Computers? Factories here in Dongguan, 50 miles north of Hong Kong, produced 37% of the world's disk drives and 10% of its computer monitors last year -- not to mention tens of millions of scanners, printers and DVD players.

Though many of China's exports are familiar Western brands, made in factories owned or run by foreigners, home-grown Chinese enterprises are making refrigerators, microwave ovens and high-definition televisions for customers worldwide.

"They're going to be a force to be reckoned with," entrepreneur George Thomas said of the Chinese. Thomas heads an Illinois company that makes computer networking equipment. He recently moved his manufacturing operation to the Chinese city of Suzhou to take advantage of low wages, tax breaks and inexpensive supplies.

"They're going to drive standards," he said. "They're going to drive everything."

China is not the first developing country to become a center for low-cost production. But the speed and scale of its emergence set it apart. Until recently a minor player in the world economy, China now is the sixth-largest trading nation. Experts predict that it will rank second by the end of the decade, ahead of Germany and Japan and behind only the United States.

"The pace of China's industrial development and trade expansion is unparalleled in modern economic history," said Nicholas Lardy, a China expert at the Brookings Institution in Washington and author of several books on the Chinese economy. "While this has led to unprecedented improvements in Chinese incomes and living standards, it also poses challenges for other countries."

Despite its spectacular progress in recent years, China remains an impoverished country: Two-thirds of its people live on less than $1 a day. Its industries remain far behind their U.S. counterparts in technology, innovation, managerial expertise and marketing know-how.

But international economists say China is advancing steadily and eventually will compete with U.S. companies in making complex, high-value products such as aircraft and semiconductors. Whether this is to be encouraged or feared is a source of growing debate.

Some security experts, business leaders and members of Congress say that an economically powerful China will become a political and military rival. It is worrisome, they say, that an authoritarian country with a history of contentious relations with the U.S. has become a key source of all kinds of manufactured goods. If a political upheaval or a diplomatic dispute interrupted those supplies, the U.S. economy would suffer.

This vulnerability was underscored recently when a labor dispute shut West Coast ports, interrupting the flow of computer parts, Christmas toys and other products from China.

The skeptics would like to see China's rise slowed and its access to advanced U.S. technology limited.

"The economic growth of China is at least as potent a threat to U.S. security as the actual military power," said June Teufel Dreyer, a China specialist at the University of Miami. "Obviously, a strong economy can field a stronger military."

Advocates of free trade with China, who include President Bush, contend that economic engagement is the best way to foster a stable, prosperous China capable of buying U.S. airplanes, wheat and pharmaceuticals.

"The key is not to try to hold China back, because that in the long run is an exercise in futility and it's a political mistake. It breeds an enormous amount of resentment," said William Reinsch, a former top Commerce Department official who is president of the National Foreign Trade Council in Washington. "What makes more sense is to run faster because we can. We're an entrepreneurial society."

40 Cents an Hour

China's low wages have been the main catalyst for its manufacturing boom. The population of 1.3 billion, the world's largest, provides an almost inexhaustible supply of low-cost labor. The average factory wage is about 40 cents an hour -- one-sixth that of Mexico and one-fortieth what U.S. factory workers are paid.

China's total trade -- imports and exports -- was $510 billion last year, nearly 15 times greater than in 1980. Forty-one percent of the exports went to the United States. China recently supplanted Japan as the country with the largest trade surplus with the U.S. Last year American purchases of Chinese goods were $83 billion greater than Chinese purchases of U.S. products.

Wal-Mart Stores Inc., the world's largest retailer, bought $14 billion in merchandise from China last year -- 13% of all U.S. imports from the country. To be closer to its suppliers, the company recently opened a worldwide purchasing center with 300 employees in the southern city of Shenzhen.

On U.S. shores, the torrent of Chinese merchandise has been both bane and blessing.

To the delight of budget-conscious shoppers, retailers have filled their shelves with inexpensive Chinese-made goods, many of them bearing such brand names as Black & Decker, Stanley and Rubbermaid. The low prices of these products have helped keep inflation in check and bolstered the bottom line for many U.S. companies.

Trade with China has created millions of jobs for U.S. lawyers, marketers, shippers, truckers and others.

The trade-off is in U.S. factory jobs. In one industry after another -- clothing, furniture, light electronics -- domestic manufacturers unable to match Chinese prices have gone out of business or shifted production abroad. A recent study done for a congressional panel found that at least 760,000 U.S. manufacturing jobs have migrated to China since 1992.

Scheu Manufacturing Co. of Rancho Cucamonga sells portable industrial heaters. Until two years ago, it made all its products in Southern California. Today, it imports two-thirds of them from China. The change eliminated 130 seasonal jobs at Scheu.

"We've always prided ourselves on being a low-cost producer, because of the quality of our engineering," said Craig Scheu, a principal in the family-owned business. "The next thing we knew, not only were we not competitive, we weren't even in the ballpark. It's stunning the prices they can do."

China's emergence has been a mixed blessing for developing countries as well. Hong Kong, Taiwan, Singapore and the Philippines have lost thousands of jobs, in some cases entire industries, as production has moved to the Chinese mainland.

Mexican factories that once supplied the United States with golf clubs, blue jeans, door locks and other products have closed by the thousands over the last two years as China has taken their business.

At the same time, China's purchases of raw materials and equipment to power its export sector have bolstered Asian economies weakened by the slowdown in the U.S. and Europe.

The struggle for control of the U.S. bicycle market illustrates China's raw manufacturing muscle.

As recently as the mid-1990s, more than half the bicycles sold in the United States were made in U.S. factories. Manufacturers had survived low-cost competition from Taiwan, Japan and South Korea.

Then bicycle makers moved their assembly lines to China.

"Within a couple of years you had [factories in] what had been dirt fields churning out a half-million bicycles [each]," said Michael Kershow, a Washington attorney who represented major U.S. manufacturers in a failed attempt to secure trade protection.

U.S. companies could not match the Chinese prices. Chinese imports now dominate the market, accounting for nearly 85% of the 16.8 million bicycles sold in the U.S. last year. The share of U.S.-made models has dropped to 2%. Venerable American brands such as Huffy and Schwinn now are made abroad.

The U.S. bicycle industry lost an estimated 8,000 manufacturing jobs. Asian countries that saw their shares of the American market shrink also lost jobs. But U.S. consumers saved billions of dollars as the average price of bicycles sold through mass retailers such as Wal-Mart dropped from more than $100 to $77.

"I don't know how [Chinese manufacturers] deliver a ridable bicycle for 70 bucks, but they do," said Fred Clements, executive director of the National Bicycle Dealers Assn., a trade group with headquarters in Costa Mesa. "The low-end bikes are as good as they were when they were made in the United States. Only the prices have dropped."

Opening the Market

China's rise was made possible by a convergence of political and economic forces. Under Deng Xiaoping, China's Communist leaders began dismantling the centrally controlled economy and encouraging private enterprise in the late 1970s. The move toward a free market accelerated in the late 1980s as the Soviet Union teetered toward collapse.

China entered the global economy just as trade barriers were falling around the world and the Internet was making it easier to do business across borders. Like their Asian neighbors, China's leaders promoted exports as a way to spur economic growth. They also wanted to create jobs for a vast peasant population.

But in contrast to Japan, China welcomed foreign investors, particularly overseas Chinese. Entrepreneurs from Hong Kong and Taiwan whose families had fled the Communists decades earlier led the way in moving production to the mainland, making cheap clothing and plastic toys.

As other outsiders set up factories, the trickle of low-margin export goods turned into a flood of increasingly sophisticated products.

Multinational companies had been chasing cheap labor around the globe for decades. But the outcome was more impressive in China, for a variety of reasons.

Foreign firms, eager to establish a presence in China, brought valuable technology and built some of the world's most modern and efficient factories. The Communist regime provided tax breaks, cheap land and other inducements and spent billions of dollars on highways, ports, fiber-optic networks and other infrastructure.

At first, foreigners were required to take on a Chinese partner to share the wealth. They were free to export their products, but the government severely limited what they could sell in China to protect domestic companies. The regime also tightly restricted foreign investment in key industries such as autos, steel and telecommunications.

Those restrictions gradually were eased. To qualify for entry to the World Trade Organization last year, Beijing agreed to open its economy still further.

The growing concentration of manufacturers and suppliers became a spur to further development. China developed into a place for one-stop shopping, where companies could obtain everything from raw materials to packaging and get their products to customers in record time.

The potential to sell their products to Chinese consumers and industries, as well as to export them, was another powerful incentive for foreign companies to invest in China. Wal-Mart, in addition to stocking its U.S. stores with Chinese goods, operates 15 stores in China and plans to open more.

The country's middle class, though just a sliver of the population, is estimated at more than 100 million and is growing rapidly. Even now, China buys more cell phones than any other country. Its expanding industrial sector is becoming a major buyer of raw materials, machinery and high-tech equipment.

China faces formidable barriers to further development. Its financial markets are small and poorly regulated. The closure of unprofitable state-owned companies has put millions of people out of work and left the country's banks with massive debts. Government and judicial institutions are rife with cronyism and corruption.

Yet the industrial transformation of recent years is nothing short of startling.

The Pearl River Delta in southern China is a center of the manufacturing explosion, producing ceiling fans, lightbulbs, pianos and other products by the container load. In less than a decade, farmland has been overrun by concrete, steel and smokestacks across an area five times the size of Los Angeles.

Dongguan, Shenzhen and Guangzhou (formerly Canton) have been transformed into giant industrial zones, linked to Hong Kong, the region's major port, by expressways more modern and less congested than those in Los Angeles.

Dongguan, which is divided into 32 districts, each specializing in its own slice of the global industrial pie, has become one of the country's wealthiest cities. Giant factories bearing names such as Nokia and Sony sit side by side with luxury housing developments for Chinese entrepreneurs and foreign managers.

"What is happening is a huge, unprecedented shift of trade flow from ... other places into China," said Craig Pepples, chief operating officer of Global Sources Ltd., an online trading network based in Hong Kong that matches suppliers in Asia with customers around the world.

Chinese suppliers now represent 34% of Global Sources' business, a level twice as high as three years ago. "It's really quite shocking," Pepples said. "You see the export figures in Taiwan and Hong Kong, which have dropped in double digits, while China is increasing even in a bad economy."

Doubts Dispelled

George Thomas, the Illinois entrepreneur, can attest to the advantages of manufacturing in China. His 40-employee company, Contemporary Controls, in Downers Grove, Ill., near Chicago, makes computer networking equipment used to automate factories.

Thomas, 58, became interested in China several years ago after getting orders from factory managers there. He was buying most of his components from China because prices were so low. After attending several trade shows in China, he realized there was strong demand for his products in that country and that he could make them much more cheaply there.

Thomas did the math. Production workers were paid $1 an hour in China and $12 an hour in Illinois. Factory lease: $2 per square foot in China, $8.50 in Illinois. Once in China, the company would be close to its suppliers and no longer would have to pay to ship components across the globe.

Yet Thomas had doubts about whether Chinese workers could meet his standards for quality. As a test, he sent a Chinese factory instructions for making a piece of customized networking equipment. Within days, he had a sample that worked flawlessly.

"I was fairly flabbergasted," he said.

Contemporary Controls began looking for a location in China and found one in Suzhou, an ancient city of canals and exquisite formal gardens near Shanghai that has become one of China's busiest manufacturing zones. The company agreed to spend $200,000 on a production facility and began operations last summer, with 13 Chinese employees.

In addition to low labor costs, Suzhou offered a two-year tax holiday, cheap real estate and a ready network of suppliers and customers.

Contemporary Controls can buy just about everything it needs within a 20-mile radius. Semiconductors are the one component it must import; the chips now made in China are not sophisticated enough. But some of the world's leading chip makers, including Fairchild Semiconductor International Inc., are opening factories in China and the company hopes to be able to buy all its chips locally within a few years.

Thomas expects difficulties operating in China, given the horror stories he has heard about customs delays, unreliable suppliers, corrupt officials and theft of designs and techniques.

But he is optimistic, because his customers are factories and China is building more of them than any other country. Thomas plans to keep his 28 U.S. workers busy with research and development, design work and manufacturing for the U.S. market. The Suzhou facility will supply the rapidly growing Asian market.

Moving Up a Level

Beijing's leaders know that being the cheapest assembly line in the world will not keep their people fed forever; too many other countries are vying to fill the same role. So China is working hard to reach the next level of industrial sophistication.

This will require more than foreign money and technology. Though its factories excel at producing foreign-designed goods, China has yet to develop a cadre of industrial innovators comparable to those in the U.S., Japan or Germany. Its ranks of skilled managers are thin, its command of marketing weak.

The result is that though the Chinese can make high-quality cars for Volkswagen, Toyota and General Motors, they have yet to develop a model of their own with a recognizable brand and an international market.

Chinese officials are striving to change that. They are trying to develop their own global brands in electronics, home appliances and personal computers -- Chinese versions of Sony, General Electric and Dell. Some of these products -- Legend computers, Haier refrigerators and Konka televisions -- already are well-established in developing countries and are making inroads in the U.S. and other industrialized nations.

The government also is spending heavily to develop the highly sophisticated industries that could propel China into the first rank of economic powers -- aerospace, semiconductors and biotechnology.

China has built dozens of high-tech research centers, mounted a campaign to lure ethnic Chinese scientists living abroad and overhauled its higher-education system, with a focus on training first-rate scientists and engineers.

Gary Hufbauer, a senior fellow at the Institute for International Economics in Washington, said he would not be surprised if Chinese workers were assembling commercial aircraft within a decade.

China's move into industries traditionally dominated by the U.S. will lead to greater tension, much as Japan's economic ascent did in the 1980s.

"China will become more prosperous and we will have more trade battles," Hufbauer said. "But they will be battles of prosperity."


China Expo's October 2002 Report On People's Republic Since 1972 -
Part TWO
The Microchip and China's Semiconductor Goals

DONGGUAN, China -- In a vast climate-controlled room far from the dust and din of the woodcutting machines, rows of young Chinese women create elaborate patterns from thin strips of wood. Fingers flying, they shape veneer into complex patterns of contrasting grains and colors, wooden tapestries meant to transform mere cabinets into objets d'art.

The workers who craft these designs are paid 40 cents an hour, which allows factory owner Samuel Kuo to make high-end furniture for American consumers for 30% less than his U.S. competitors can.

By tapping into the aspirations of China's poor, Kuo has helped turn a remote stretch of rice paddies in the Pearl River Delta into a furniture-making powerhouse. His factory is one of thousands churning out dining room sets, sofas, china cabinets and coffee tables. In less than a decade, China has become one of the world's leading furniture producers and the top exporter to the U.S.

"For the next 10 or 15 years, China will be the manufacturing base for all of the world," said Kuo, 47, whose Lacquer Craft Manufacturing Co. ships 1,400 containers of furniture -- the equivalent of 18,200 bedroom sets -- to the United States each month. "For anything that involves people, China is the place."

An outpouring of Chinese products is reshaping the global economy. Around the world, makers of everything from bicycles to bath towels are struggling to survive intense competition from inexpensive, high-quality Chinese goods. Thousands of factories have closed as production jobs have moved to China.

That migration has been driven, above all, by low wages. In furniture, for instance, labor represents 30% of the cost of production in the U.S. In China, it is less than 7%.

As furniture factories have moved to China, their suppliers and related businesses have followed, making the country an exceptionally efficient place to operate. Akzo Nobel, a Dutch-Swedish conglomerate that is one of the largest suppliers of furniture finishes, has closed plants in the U.S. and Europe and is opening three factories in China.

"We can't expand fast enough," said Michael Keith Estes, a managing director at Akzo Nobel. He predicted that 90% of U.S. furniture production would move to China within five years. "It's a sleeping dragon, and it woke up."

Crossing the Strait

Among the first to move to China were furniture producers from Taiwan, which were being squeezed by rising wages and land costs at home.

Kuo, whose family manufactured wooden pool cues in Taichung, a city in central Taiwan, was among the pioneers. After completing his military service, Kuo took over the family business, expanded into furniture and began looking across the Taiwan Strait for a cheaper place to operate.

That was in the early 1990s, and China was eager to attract foreign investors. The government wanted to convert the southern city of Dongguan, 50 miles north of Hong Kong, to an industrial zone specializing in exports. Officials there offered Kuo tax breaks, inexpensive land and light regulation.

Long-standing animosity between Taiwan and Beijing complicated such a move. At the time, Taiwan prohibited direct investments in the mainland. But entrepreneurs devised ways around the rules, and the government generally looked the other way.

Kuo set up a factory in Dongguan and started making simple wooden tables, which he shipped to the U.S. at bargain prices. Quality was unpredictable. Shoddy packaging fell apart in transit and the furniture arrived with nicks and dents. It was hard to find a steady supply of top-grade wood, because China's forests had been depleted by years of unrestrained logging.

Gradually, Kuo turned things around. He imported high-quality wood, upgraded his machinery and brought in experienced managers from Taiwan and the U.S. Soon, his Dongguan factory was able to meet the standards of a growing list of U.S. customers, including prominent brands such as Ashley, Standard and Progressive. In 1994 he closed his factory in Taiwan.

Competitors took note of Kuo's success and followed him across the strait. Today, 2,000 foreign furniture companies operate in southern China, 350 of them owned by investors from Taiwan.

Those Taiwanese-owned factories produce nearly three-quarters of China's wooden furniture exports. Kuo hopes this mutual dependence will reduce the likelihood of military conflict between the island and the mainland. "We speak the same language," said Kuo, whose wife, Grace, handles the company's finances while his teenage children attend school in Taiwan and Australia. "We're all Chinese."

*Economy and Quality

The road to Kuo's factory in Dalingshan, a township within Dongguan, is lined with small shops selling wood, paints and furniture-making supplies. Lacquer Craft is a sprawling complex of blue-and-white buildings with several huge manufacturing, assembly and warehouse facilities and four dormitories for Kuo's 5,000 employees.

By midmorning, the factory is bustling. Young men wearing goggles feed wood into precision cutting machines that fill the room with a constant screech. Workers drive motorized carts between buildings, unloading supplies and moving furniture pieces to the next step in the production process. At the end of the assembly line, workers wrap dining room chairs and dressers with padding and plastic for the long sea voyage.

By the time it reaches the showroom of a Macy's or a Levitz, the furniture commands prices ranging from $300 for an end table to as much as $4,000 for a dining room set.

At each step of the manufacturing process, Kuo tries to shave costs without compromising quality. He does this by combining modern technology with manual labor.

He has purchased some of the world's most expensive wood-measuring and -cutting machines, so waste is minimized and furniture parts will fit together seamlessly. But he relies on human hands for fine decorative touches or for rote labor that in China can be done at low cost. For instance, Kuo economizes on raw materials by purchasing cheap wood for certain uses and paying workers to cut out the knotholes.

In the "veneer room," hundreds of women piece together intricate designs. The ornamentation enhances the appearance of a cabinet or a bureau and thus its market value. That is not the only reason Kuo is fond of veneer. Every last piece of wood is used, so there is far less waste and more furniture can be made from the same quantity of timber.

"He has the best veneer room in the world," said Winsor White, an American furniture designer living in the Philippines who came out of semi-retirement to work for Kuo. "No one in the U.S. can afford to do that today."

Once a piece is completed, it heads down a mile-long, serpentine finishing line with 19 spraying stations and 300 workers, more than twice as many as would be found in a U.S. factory. Each item gets extra sanding, buffing and finishing, attention reserved for only the most expensive furniture in the United States.

Kuo has no trouble filling jobs. An estimated 10 million laborers from across China, more than 60% of them women, are looking for work in Guangdong province. Their hours are long and the labor grueling, sometimes dangerous. They keep at it because their paychecks help feed the families they left behind.

Among Kuo's employees is Dai Zhiying, 23, from a village in Hunan province in central China. Dai's education ended with elementary school. As a teenager, she took a job driving a truck at a cement factory for $36 a month. Six years ago, she followed relatives to Dongguan, where she held a series of jobs in clothing factories, each offering a few cents more per hour than the one before.

Last December, Dai took a job on the drawer assembly line at Kuo's company. Lacquer Craft stood out from the city's other export factories because it gave regular raises and performance bonuses.

2,000 Drawers Per Shift

The workday starts at 7:30 a.m. and lasts until 8 p.m., with breaks for lunch and dinner. During each shift, Dai and her co-workers assemble 2,000 drawers, more than three per minute. Employees live six or eight to a room in rent-free company dormitories and pay about $7 a month for three meals a day. They relax by watching television or a rented movie in a communal screening room or playing basketball in the courtyard.

Dai and her husband, a painter at Lacquer Craft, have moved into an apartment outside the factory with their year-old baby. She now makes about $50 to $60 a month, 25% more than she made at the cement factory in Hunan. "These factories are all the same," she said. "But my friends told me, 'If you stay at Lacquer Craft, your salary will go up.' "

Salaries average $100 a month for production workers at Lacquer Craft, Kuo said.

After six years with the company, Mei Xiaoli earns $240 a month as a supervisor in the machine room, 12 times the average income of a Chinese peasant. Every new year, Mei, 25, joins the migration back home to his village in northern China's Henan province. But after visiting his family, he said, he always is eager to return.

"The economy is very slow in my hometown," he said. "I came here to make money."

Kuo said it's in his interest to offer his workers progress toward a better life, however gradual. Employees who are treated well are less likely to defect to one of his competitors. Lower turnover reduces training costs.

"Under communism, people all got the same pay," he said. "Now, people will jump to another job for a penny an hour more."

Buying a Brand

As competitors flooded into China, Kuo realized that he couldn't compete on low prices alone. After studying the U.S. market, he became convinced that having a brand of his own was the best way to increase sales and profit.

As a supplier, Kuo was not in control of his production. The large American furniture brands that were his major customers told him what to make and how much. Kuo wanted to sell directly to retailers. But he knew that an unknown Chinese brand stood little chance of success.

Then Kuo heard that one of his biggest clients, Universal Furniture Ltd., based in High Point, N.C., was up for sale. Last year Kuo paid an undisclosed sum, believed by industry analysts to be at least $25 million, to acquire Universal's brand name and its sales and marketing network. He did not want its factories in the United States and Asia, which were sold or closed.

The marriage of Universal Furniture's name with Kuo's low-cost production base has been lucrative, he reports. Though overall U.S. furniture sales have been slumping, Kuo said the demand for his ornately carved dining room sets and veneered cabinets has been so strong that he plans to spend $20 million building new production capacity in China.

Kuo said furniture manufacturing is in China to stay. One reason is that the country's population -- at 1.3 billion the world's largest -- ensures an almost endless supply of cheap labor. Millions of peasants will travel across the country for even a meager paycheck. As wages rise in industrial areas such as Dongguan, manufacturers can open factories elsewhere.

Kuo has started building a second factory near Shanghai, where wages are lower than in southern China and government incentives even more appealing.

"China is getting stronger and stronger," Kuo said. "It still has 10 to 15 years to go before it reaches the next level. But compared to 10 years ago, it has come a long, long ways."


Josie Cory
Publisher/Editor TVI Magazine
TVI Magazinem, tvinews.net, Associated press, Reuters, BBC, LA Times and NY Times
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China Expo's October 2002 Report On People's Republic
Since 1972 - Part Three

China Christianity and The Microchip

SHANGHAI -- 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."

Chinese Academy of Arts Conference, Monterey Park California / January 3, 2003
Chinese Academy of Arts - Beijing Executive Commitee
1. Mr. Wang Ganfu, Vice President, Chinese Academy of Arts.
2. Dr. Ding Yaping, Editor in Chief, China Culture and Arts Publishing House, Chinese Academy of Arts.
3. Prof. Long Rui, President, Arts Research Institute, Chinese Academy of Arts.
4. Prof. Zhang Baiqing, President, Film & TV Research Institute, Chinese Academy of Arts.
5. Mr. Hou Yangxiang, Deputy Editor in Chief, Vice President, China Culture and Arts Publishing House, Chinese Academy of Arts
6. Ms. Zhong Jiang, Editor, China Culture and Arts Publishing House, Chinese Academy of Arts
Chinese Academy of Arts - USA Executive Commitee
1. Liu Bing, President, Evergreen Publishing
2. Miss. Cheng Meixian, Manager, Evergreen Publishing
3. Mr. John Qu, President, New Bridge Media, Inc.
4. Mr. Curtis Skene,Director, New Bridge Media, Inc. International Investment Banking);
5. Mr. Able Kwan, Director, New Bridge Media, Inc.
6. Mrs. Jane He Qu, Manager, New Bridge Media, Inc.
Honored Guest
1. Miss Karen Han, Assistant to Michael D. Antonovich, Supervisor, County of Los Angeles.
2. Mr. Davia T. Lau, Mayor, City of Monterey Park
3. UCLA - Dr. Chou, Houng-Hsiang, Professor, School of the East-Asian Language and Literature Study, UCLA.
4. UCLA - Mrs. Amy Ching-Fen Tsiang, Head,Richard C. Rudolph East-Asian Library,UCLA.
5. USC - Prof. Zhang, Cuo, Dean, School of the Language and Literature East-Asian, USC.
6. USC - Dr. Sun, Shaoyi, Professor, Asia-Pacific Communication Center , USC.
7. Dr. David Wu, Representative, UCRiverside; Vice President, American-Sino Academic Foundation; Professor, Mt. San Antonio College.
8. Mr. Woody Mu, Manager, International TV Distributions, Warner Bros.);
9. Mr. Troy Cory, Singer , Producer, Publisher, Television International);
10. Josie Cory, Editor in Chief, Television International);
11. Mr. Si Jiuyue, Chief Correspondent, Xinhua News Agency , Los Angeles Bureau)°F
12. Mr. & Mrs. Li,Zijian, Artist);
13. Mr. Li, Binyang, Composer, President, Southwest China Association, USA)°F
14. Mr. Latif Icin, President ,D&L International Inc.)
15. Ms. Diana He Wang, Vice President ,D&L International Inc.)
16. Pianist, President, Taitang International Inc.);
Award Presenters and
Achievement Recipients
1. Miss Karen Han, Assistant to Michael D. Antonovich, Supervisor, County of Los Angeles.
2. Mr. Davia T. Lau, Mayor, City of Monterey Park
3. UCLA - Dr. Chou, Houng-Hsiang, Professor, School of the East-Asian Language and Literature Study, UCLA.
4. UCLA - Mrs. Amy Ching-Fen Tsiang, Head,Richard C. Rudolph East-Asian Library,UCLA.
5. USC - Prof. Zhang, Cuo, Dean, School of the Language and Literature East-Asian, USC.
6. USC - Dr. Sun, Shaoyi, Professor, Asia-Pacific Communication Center , USC.
7. Dr. David Wu, Representative, UCRiverside; Vice President, American-Sino Academic Foundation; Professor, Mt. San Antonio College.
8. Mr. Woody Mu, Manager, International TV Distributions, Warner Bros.);
9. Mr. Troy Cory, Singer , Producer, Publisher, Television International;
10. Josie Cory, Editor in Chief, Television International;
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