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10GUANGZHOU7 2010-01-06 09:22:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Guangzhou
Cable title:  

New Semiconductor Foundry to Open in Shenzhen; High Tech

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1. (SBU) Summary: High-tech industry in Shenzhen might have reached
critical mass, now attracting new industries and growth with
encouragement from the municipal government. In addition to
favorable policies and support, government and industry contacts
cite free market forces in Shenzhen as a major incentive for
high-tech companies interested in investing here. Shanghai-based
semiconductor manufacturer SMIC is breaking into Shenzhen with a
multi-phase foundry project that will open in 2010. However, SME
firms complain that rising costs and capricious local authorities
could hinder long-term growth. End summary.

Semiconductor Industry Moving into Shenzhen


2. (SBU) SMIC, the Shanghai-based semiconductor manufacturer, is a
few months away from opening the first phase of a new foundry in
Shenzhen, the city's first major semiconductor manufacturing
facility. In meetings with econoff at the construction site,
Project Manager Dong Yixin said the US$1.6 billion project had been
in the works for more than three years. The plant will initially
open with 600 employees, said Dong, but he does not expect wafer
production to begin until the third quarter of 2010, at the
earliest. Although most of the manufacturing equipment for phase 1
has arrived in Shenzhen, with only a few key machines yet to be
procured, the new SMIC facility's testing and calibration period
will likely take six months or more.

3. (SBU) Once it becomes operational, phase 1 will produce 8-inch
wafers, according to Dong, followed by a future second phase that
will produce 12-inch wafers. Most of the new plant's key management
and technical positions will be filled by long-time SMIC employees
who will be relocated from the company's Shanghai headquarters and
other well-established facilities in China. Equipment procurement
is handled at headquarters, but Dong said the eventual second phase
project would rely on equipment utilizing IBM-licensed 45-nm
technology. However, Dong was unable to predict when the second
phase might commence, noting that he was focused only on completing
the initial facilities.

Government Takes a Leading Role


4. (SBU) When asked about the reasons SMIC chose Shenzhen to make
such a large new investment, Dong said the company's senior managers
and city leaders had previously worked out the details including
project size, funding and location. Dong explained that his
experience as Facilities Project Manager had been very positive when
requesting specific support from the city whether requirements
focused on upgrading local infrastructure, increasing the
availability of resources like water or electricity, or improving
transportation and logistics facilities for personnel and inputs.
Dong suggested that city officials' willingness to support the
project may have been unusually solicitous because of the
investment's large size and its status as the first such plant to
set up in Shenzhen.

5. (SBU) SMIC Vice President for Corporate Relations Matthew
Szymanski confirmed to econoff that the new Shenzhen plant is a

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wholly owned subsidiary of the company and not owned by the local
government, as is the case for SMIC's facilities in Wuhan and
Chengdu. Szymanski said the local government had provided some
financial support to the project, which he said was detailed in SEC
filings in both the United States and Hong Kong, where the company
is publicly listed. At the same time, Szymanski said that his
company could benefit from even greater local support, and he
offered that support provided to IBM from the State of New York and
the U.S. Government was greater than Shenzhen's support to SMIC.

6. (SBU) Officers of the Shenzhen Semiconductor Association
separately told econoff that the SMIC project marks a major
breakthrough for the Shenzhen municipal government in its efforts to
expand high-tech industry in the city. The SMIC plant will be the
first major foundry to locate here and the project is only the
second major semiconductor producer to select the city for a
high-value investment in the last few years, according to Secretary
General Richard Cai. The Shenzhen Semiconductor Association
currently represents 80 member firms, most of which are "fabless"
design firms who hire semiconductor foundries to manufacture their
chips. The association also includes several large consumer
electronics firms that produce semiconductors as one of their major
business lines, but Cai said the $1.6 billion SMIC foundry along
with an expansion of operations by Swiss-owned STS Microelectronics
in early 2009 to build a $500 million packaging facility will
broaden and deepen the city's role in this industry.

Marketing Shenzhen as a High-Tech Hub


7. (SBU) Shenzhen is eager to position itself as a destination for
high-tech investment in general. The China High-Tech Fair, annually
held in Shenzhen and jointly organized by China's Ministry of
Commerce and the Shenzhen municipal government, is one of the tools
the city has used to encourage high-tech industry development in
recent years. The 2009 fair lasted one week in November and
exhibitors hailed from provinces and cities across China and around
the world, major Chinese and international high-tech firms, as well
as research universities and other organizations looking to expand
their presence in China's lucrative high-tech sector. In addition
to hosting diplomats and media at the opening ceremony,
informational seminars and matchmaking sessions during the fair
further emphasized Shenzhen's position as a growing high-tech center
despite the economic downturn.

Balancing Government Support and Market Forces?



8. (SBU) Both government and industry contacts from the top down
claimed that Shenzhen had succeeded in attracting new high-tech
investment not only through sustained government action, but also
because free market principles played a larger role here than in
other competitive Chinese locations. Vice Mayor Zhuo Qinrui told
the Consul General in a recent introductory meeting that the city
had successfully encouraged the development of four "pillar"
industries over the past 29 years - high-tech component
manufacturing, "culture industries" like Internet content providers
and publishing, finance and logistics. In Shenzhen, the
encouragement focused mostly on providing incentives and support for
otherwise private business decisions, rather than establishing and
directing major state-owned enterprises (SOEs) in the city,
according to Zhuo. He said municipal leaders recognized the
importance of "market forces" when encouraging high-tech industry
because it tended to be more innovative and profitable for both the

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businesses and the community. He added that the city government
would continue its quest for new high-tech investment in the future,
and Shenzhen plans to expand its development focus to three "new"
pillar industries - information technology, biotech/pharmaceuticals
and new energy.

9. (SBU) Shenzhen Semiconductor Association Director General Cai
also said a key factor that makes Shenzhen more attractive than
other cities in China is the lack of SOEs and, therefore, direct
government involvement in the semiconductor industry. He said the
city had worked hard to create an environment for semiconductor
industry growth, but the lack of major SOE players in the market was
evidence of the government's willingness to take a more hands-off
approach to the city's high tech development.

Challenges Remain for High-Tech Firms in Shenzhen



10. (SBU) Despite the upbeat outlook from local officials and
industry associations, high-tech small and medium enterprises (SMEs)
still face major challenges in Shenzhen, according to CEO Jeff Yang
of telecom component maker Continuous Computing. In an initial
meeting with the Consul General, and in a follow-up meeting with
econoff, Yang said the rapid growth of Shenzhen's industrial base
had led to increased costs that would make a small company owner
think twice about opening new offices in Shenzhen at this time.
Continuous Computing opened its Shenzhen branch in 2005 and enjoyed
low costs and low government interference at first. However, rents,
wages, labor turnover and other costs all increased rapidly in the
company's four years here, and local government interference also
began to affect the company after the economic downturn struck in


11. (SBU) According to Yang, SME firms like his were powerless to
defend themselves against local tax officials who targeted
foreign-invested enterprises to try and make up for local revenue
shortfalls during the economic downturn. The tax bureau has since
cleared the company of any wrongdoing, but Ya&NQ1Q"7sin
Chengdu might be less inclined to "take foreign investors for