SEMICONDUCTOR FIRM IN SW CHINA SEES RISING COMPETITION FOR

UNCLAS SECTION 01 OF 02 CHENGDU 000319 SENSITIVE SIPDIS DEPT FOR EAP/CM E.O. 12958: N/A TAGS: ECON ELAB EINV EIND ETRD PGOV CH SUBJECT: SEMICONDUCTOR FIRM IN SW CHINA SEES RISING COMPETITION FOR SKILLED LABOR CHENGDU 00000319 001.2 OF 002 ¶1. (U) This cable contains sensitive but unclassified information - not for distribution on the Internet. ¶2. (SBU) Summary: Leshan-Phoenix Semiconductor (LPS),a joint venture between U.S. ON Semiconductor (ONS) and Leshan Radio Company, says that attracting and retaining the engineers needed to work at its Leshan facility may become more challenging as other high technology firms move into the provincial capital, Chengdu. LPS, the second largest foreign-invested firm in Sichuan, produces a broad range of products including broadband and advanced logic chips, integrated circuits, and amplifiers, which are exported around the world. Company officials say that an entry-level engineer could expect a 50 percent higher salary working for a foreign-invested firm in Chengdu rather than Leshan, but attribute this to Chengdu's higher cost of living. Multinational companies now moving to Chengdu often receive preferential subsidies from the city government that help lower overall operating costs, but Leshan-Phoenix, founded over a decade ago, does not receive any subsidies. End Summary. Joint Venture Still Second Largest in Chengdu -------------- ¶3. (SBU) ON Semiconductor established its joint venture with Leshan Radio Company in 1995. LPS Director of Operations DN Leong said that it was difficult for ONS in the mid-90s to find a suitable partner, and the location in China was a secondary consideration. From modest beginnings, LPS has grown and today employs 2,200 worker who to produce a wide range of products sold to companies including Dell, Motorola, Nokia, and IBM. Sales from LPS account for 20 percent of ONS's global sales. About 60 percent of the products produced at the Leshan facility are shipped to customers in Asia, with China and Korea being the first and second largest destinations respectively. The US receives 30 percent of the products, while Japan receives only 3-5 percent. Leong said that LPS would ship 26.4 billion units this year, down from 26.6 billion units last year. LPS is currently shipping about 720 million product parts per week. Competition for Engineers Intense, Salary a Driving Factor -------------- -------------- �A; ¶4. (SBU) Leong told Consul General on December 8 that his company found it increasingly difficult to attract and retain engineers. He attributed the difficulty to the company's location and starting salary. Leong said that LPS recruited primarily from universities in Chengdu, particularly the University of Electronic Science and Technology of China (UESTC),which is the top electrical engineering school in Sichuan. Graduates often preferred to stay in Chengdu rather than move to Leshan, located about 75 miles to the south, according to Leong. LPS offers engineers graduating with a bachelor's degree a starting salary of 2,500 RMB (about 366 USD) per month; graduates with a master's degree could earn 4,000 RMB (about 586 USD) per month. Leong claimed that these salaries were two-thirds of what the graduate might expect to earn in Chengdu if employed at a multinational technology firm, but defended the salary saying that Leshan's cost of living was lower than Chengdu's. ¶5. (SBU) Leong said demand for qualified employees would likely become even stronger as more companies move to Chengdu. He said his company is trying to recruit the same type of entry-level engineers who would be qualified to work at Intel's Chengdu facility. The Taiwan electronics manufacturer Foxconn also plans to open a manufacturing facility in Chengdu, according to Leong, which will bring many new skilled jobs -- and new competition for engineers. (Note: Foxconn signed a deal on 16 October to invest 1 billion USD in the construction and development of the Foxconn Chengdu Industrial Base, which will produce LED televisions, LCD modules, software, and other products, according to a Chengdu government website. End Note.) CHENGDU 00000319 002.2 OF 002 Scholarships to Attract Recent Graduates, But Retention and Wages Pose Challenge -------------- ¶6. (SBU) Leshan-Phoenix has established a scholarship fund for students at UESTC as a way to aid the company's recruiting efforts. Leong noted that the company offered 100 scholarships annually to students in the amount of 1,000 RMB (146 USD) each. Scholarships are not tied to any requirement to work for Leshan-Phoenix, and Leong did not indicate how many of the students who received scholarship went on to work for the company. (Note: Annual tuition for most majors at UESTC is 5,000 RMB (732 USD) and 10,000 RMB (1,465 USD) for students at the software college. End Note.) Beyond the challenge of recruiting engineering students, Leong mentioned that the company has trouble retaining mid-level engineers. He said that once engineers had about three years of work experience, they became recruiting targets for other companies. ¶7. (SBU) Labor costs account for about 10 percent of the Leshan-Phoenix's total operating costs, but would increase to 16 percent of total costs if the company raised wages to compete with those in Chengdu. This would make labor costs comparatively more expensive than ONS operations in Malaysia, but still less expensive than those in the Philippines. Leong said that labor costs in Malaysia accounted for 15 percent of total operating costs, while the figure was 18 percent for the factory in the Philippines. Government Incentives Going to Newly-Arrived Companies -------------- -------------- ¶8. (SBU) Leong told CG that other firms seeking to hire engineers might have lower, non-labor operating costs because of government subsidies. He singled out Intel Corporation as one example, which he said received preferential electricity rates. (During a separate conversation in Chengdu, Intel officials told us they also received large tax rebates from the Chengdu government. These rebates, as currently structured, are based on the value of the products exported, but will be phased out in coming years.) Leong noted that Leshan-Phoenix received only expedited customs clearance for it products, even though he claimed his company is the second largest foreign-invested firm in Sichuan after Intel. BROWN