Asian Business News

The Chi of Chinese driving

Sometimes it can be the more mundane aspects of a society that can provide clues to how they will respond to a global economy. David Ridsdale recently visited China and decided that the method of driving through the mega cities reveals a great deal about the Chinese approach to dealing with the global economy.

Any new visitor to Shanghai receives their first major culture shock as a passenger when they travel in a car or bus from the airport. The driving will seem fairly similar to other countries until a major intersection or roundabout is reached. The Chinese driver prefers not to stop and will enter a teeming roundabout despite the hundreds of cars crowding and merging all around. Passengers will clutch their arm rests and many close their eyes. And yet somehow the cars all merge and no sound of grating metal reaches the ear. Stopping the vehicle is considered the very last act available.

The first vehicular trip in Shanghai makes you feel lucky you survived a mad driver but it only takes a few days to realise that this sort of driving is the norm. Then you notice that none of the cars have any dents in the panels. As strange as the style of driving may appear to the outsider, it works for the millions of Chinese drivers in Shanghai. The ability to move forward, never stop, and avoid obstacles is an excellent analogy to the Chinese approach to the global market. Some countries may have erected roundabouts in an attempt to slow the Chinese growth in the world market but they did not count on the Chinese style of driving.

The real reason that Chinese driving works is twofold. Firstly drivers sound their horn to let others know they are there rather as a reactionary sound. Secondly everyone participates in the Chi of driving. Cars, buses, bikes, pedestrians all enter an intersection with the full knowledge that constant movement is faster than stopping and starting. Despite many near misses and close calls, it all appears to work in the city. It is true that this style of driving does not work as well in the suburbs where cars are travelling much faster but that is another analogy for a fast changing society. Learning to drive in the hustle and bustle where the average speed is lower is much easier than in the outlying regions that require more support to integrate in the changing world.

The analogy is perfect for how China has entered the global economy. They let everyone know they where coming and now they are on the move they have no desire to stop. Instead the government erects local roundabouts so as to try and control the direction and speed of the countries changing fortunes. After a number of years of extraordinary growth many analysts presume that the government is putting the breaks on to slow the growth. Nothing could be further from the truth as the government is doing no more than erecting new road signs and traffic controls to better manage the flow.

A key factor for the manufacturing growth of the country was the setting up of specialised manufacturing hubs to encourage local growth and foreign investment. These hubs were given better tax levels and heavy financially supported buy government funds. It is basically a state supported form of capitalism. In recent weeks the Chinese government has announced changes to these hubs, with tax levels returning to the same as areas outside the hubs. The current push is to increase support and investment for those areas of the country that had missed out on focused assistance. Especially in the Western and Central parts of the country. This change will affect some aspects of manufacturing and investment over the next few years but will raise the need for each sector and area to move towards profit margins rather than rely on the state funds.

Semiconductors
One of the caveats in the recent announcements by the Chinese government was the exclusion of high technology manufacturing. Whereas other manufacturing sectors will be expected to make profits, no such burden is upon high technology manufacturing like the semiconductor sector. None of the large foundries on China have ever made a profit as yet. Any profits from the smaller companies have not been large enough to cover the costs of future research or capital expenditure. This will not be as big a problem as it could be due to the decision of the Chinese government to make high technology manufacturing a key strategy for the future of the Chinese economy. Between the lines it means the government will continue to provide for the research and capital expenditure of the semiconductor industry in China. This is probably the main reason that the country continues to attract foreign interest and investment despite the predictors of doom in the analyst community.

Like the Korean semiconductor manufacturing industry before it, the Chinese industry is still finding its feet and there are some reports of a lax approach to process control in some foundries. Although companies need to be careful at this stage to ensure quality control is acceptable, this issue will eventually improve as the global industry demands a level of manufacturing that anyone must move towards to have any chance of success.

A strong indicator of the continued strength of the Chinese semiconductor industry is the recent announcement by Intel to build its next green field 300mm fab in the North-Eastern Chinese town of Dalian. This fab will use the highest technology that the USA government will allow Intel to export into China, suggesting it will be 90nm. Intel understands that the usual battle they have with AMD for CPU supremacy is played to a different tune in China than in the West. For further proof look no further than the announcement in the same week of Intel setting up a college for the study of semiconductors. No prizes for guessing the city that Intel has chosen for the first largescale training base sponsored by the US computer chip giant. The port city of Dailan.

This college will require an investment of 348-million-yuan ($44.6 million) and will be part of the Dalian University of Technology. The college is expected to become China’s top training centre for professionals involved in integrated circuitry and is expected to open in Aug 2008.

Intel will donate an eight-inch chip assembly line to the college and help train teachers and develop the curriculum. In return they build the new fab and establish a firm foothold in a fast growing economy and market. This sort of investment is probably beyond the capacity of AMD at present but I would expect the newly acquired Taiwanese arm of the company will become the base for any future expansion but you would have to say that Intel has taken pole position.

Manpower
When China decided to enter the microelectronic manufacturing market they enticed great numbers of engineers from Taiwan, USA and other parts of the world to help build up a world class pool of engineers. At the same time they increased the number of courses qualifying engineers to the point that the Chinese Universities produce more engineers than anywhere else in the world. Unfortunately they have not held onto all the engineers leaving a lack of real world experience and are producing engineers whose expectations do not meet their experience.

The first problem that arose was based on the decision to pay engineers based on a structure similar to the Taiwanese foundries where engineers are paid a small base wage but receive huge bonuses when manufacturing expectations are met or exceeded. There was nothing inherently wrong in wanting to follow what has been a successful formula in Taiwan but none of the major foundries have achieved profitability so there were no bonus payments. This has led to an exodus of the engineers brought in from outside.

Other than those holding top tier positions, most of the engineers have returned to the countries they were based in. This means there is a shortage of experienced engineers in the Chinese food chain and the Chinese foundries and manufacturers rely heavily on capital equipment suppliers for expertise. Companies wanting to enter the Chinese market should take careful note of this issue. You cannot sell in China without providing strong services support.

Another issue that is affecting the Chinese market is the home grown engineers. Without clear guidance on what is required for engineering courses, even local companies have trouble deciding the validity of an applicant’s credentials. A recent example was of a Chinese engineer wanting to join a foundry. His papers said he was qualified in electrical engineering in a West Chinese university but when pushed it was discovered he had been taught to set up a LAN network. Those local engineers who gain employment in the local industry have employment expectations beyond their capacity. Swept up in the enthusiasm for growth in the local market, engineers are expecting middle management position almost as soon as they leave education. Obviously experience is an important metric in such an industry but many feel they should move straight into higher paying positions and will change companies quickly and dramatically if this is not forthcoming. It will take time before the local industry finds a balance in this area.

Slow and Steady
The industry may be growing in a unique manner but growing it is. There may be some slow down in the broader Chinese economy over the next few years but it will not affect the semiconductor market due to its preferred status by the State. The teething problems within the industry are no different than the early teething problems of other countries that have experienced rapid growth. Both Korea and Taiwan have proven that time will weed out problems leaving a robust participant.

Having an understanding of the Chinese culture and method is paramount to success. It is why foreign companies talk about the long haul and the need to participate in the market now. Even if that means an initial loss. What seems like a potential roadblock to many companies and countries is no more than a roundabout to the Chinese. They will continue to approach such situations as the drivers in Shanghai. Slow and steady with the expectation that everyone will be on the look out for each others movements and ready to move into any gap, no matter how small it appears. The one thing nobody wants to do in China is stand still and wait to be let in.