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CHENGDU,CHINA'S ELECTRONICS

IC INDUSTRY IN CHENGDU

OTHER ELECTRONICS INDUSTRY

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CHENGDU,CHINA'S ELECTRONICS

INDUSTRY BASE

Currently, the IT industry, which includes electronics and software, is China’s biggest industry. In 2006, according to Ministry of Information Industry, China’s electronics manufacturing output reached RMB 4.27 trillion, or US$ 547 billion .

To some foreigners, it might come as a surprise that Chengdu, a city in Southwestern China, has a long history in the electronics industry. During China’s 1 st Five Year Plan (1955-1960), China established its first communication research institute-No.10 Institute in Chengdu, and set up its first college with a focus on electronics-Chengdu Telecom Engineering College, now known as the University of Electronic Science and Technology of China (UESTC). In 1960s, in preparation for a potential war with the former Soviet Union, many more electronic research institutes and manufacturers were transferred from the coastal region to Chengdu and other cities in Western China.

While its relative remoteness was the reason why Chengdu became one of China’s electronics industry bases in the past, it turned out to be a hurdle for foreign investors when China first opened its doors in the late 1970s. But with the passage of time, Chengdu is becoming a hot spot again.

With the rapid growth of the electronics industry in China, coastal regions, such as Jing-Jin-Tang, Yangtze River Delta and Pearl River Delta, are facing shortages of land and operating costs is also rising. But most importantly, competition for talent is heating up and some have shifted their focus to China’s vast hinterland. The question is where. In 2003, one landmark foreign investment provided a hint.

INTEL, TURNING POINT FOR CHENGDU

On August 27, 2003, Craig Barrett, then CEO of Intel Corp announced that Intel will invest US$ 375 million in Chengdu to build an assembly and test plant. It is Intel’s second packaging facility in China.

In 1995, Intel Products (Shanghai) Ltd was established in the Waigaoqiao Free Trade Zone of Shanghai Pudong New Area. Waigaoqiao Free Trade Zone is the biggest free trade zone among China’s total 15 free trade zones. The initial investment was only US$ 30 million and took Intel several years to upgrade the plant from low-end products to its core CPU packaging. With an initial focus on assembling and testing of flash memory, in 2001, it started assembling and testing of chipsets, the heart of the PC motherboard. In 2003, it started the assembling and testing of CPU. To date, the total investment in Waigaoqiao plant has reached US$ 500 million.

In contrast, plans in Chengdu have progressed much faster. The construction of the first factory Intel Products (Chengdu) started from April 2004. According to the original plan, the first factory would start trial production in June 2005 and formal production will start from

October 2005. The annual export value was to reach US$ 400 million after the first factory commences operation and US$ 1 billion after the second factory opens.

However, the process turned out to be even faster than planned. Before the completion of the first factory, in March 2005, Intel announced the addition of more investments to the second factory, which made the total investment increase from US$ 375 million to US$ 450 million.

Currently, after the completion of the second factory, the total investment of Intel in Chengdu has reached US$ 525 million, making it one of the biggest projects in Central and Western China. Products not only include flash memory, chipsets but also the most advanced CPU

products.

While the reason for Intel’s aggressive expansion into China is out of question, its decision to choose Chengdu is well calculated. In 2001, when Intel decided to expand its assembling and testing capacity in China, besides Chengdu, Suzhou, Shenzhen, Xi’an and Shanghai were also short-listed.

In Intel’s official website, it cited “its strategic location, the quality of its educational system and the well-trained workforce in the region” as the reasons for choosing Chengdu as one of its major production bases in China.

In Intel's official website, it cited "its strategic location, the quality of its educational system and the well-trained

workforce in the region" as the reasons for choosing Chengdu as one of its major production bases in China.

The total number of staff has reached more than 1200. Out of them, more than 70% are fresh graduates, recruited in the recent two years, with a majority of them coming from local universities.

Table11.1 Electronics Talent Groomed in Chengdu

To encourage more talent from outside Chengdu, Intel’s job opportunities section mentions that Chengdu is a beautiful city full of vigor and vitality. “In the downtown area, high-rise buildings, local shops and beautiful greenery flank long and wide boulevards. Just a walk away, one will stumble upon peddler markets and shopping malls. Here one can taste typical Sichuan cuisine, regional wine and tea or find special local products like Su embroidery pieces, bamboo-woven porcelain ware and lacquer ware. Downtown offers the opportunity to become familiar with the local folklore and customs that contribute to Chengdu’s bustling energy”.

For a high-tech industry, talent is paramount. If a place can generate talent and retain them while attracting more to come, it has won half the battle in persuading investors.

Besides its strategic location and rich talent pool, there are many reasons for Intel to choose Chengdu. According to an article in a local news paper in Chengdu, the Hi-tech Zone where Intel factories are located in Chengdu only costs RMB 27 million, while the land cost for Intel Shanghai factories was RMB 170 million.

Indeed, the Chengdu government has viewed Intel as a breakthrough and a special office was especially dedicated to Intel. Intel also enjoys a “five year free and five year half” income tax break, which means Intel does not need to pay income tax for the first five years starting from the year it makes profit, and only pay half tax for the next five years. The normal tax break for foreign investors is only “two year free and three year half”.

While the Intel case is more a unique one and other investors should not expect to receive the same treatment, Intel’s decision really elevates Chengdu to be one of the IC industry’s hot spots in China.