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UNCLAS SECTION 01 OF 03 GUANGZHOU 000007 
 
SENSITIVE 
SIPDIS 
 
State for EAP/CM; EEB/CIP; EEB/TPP; INR/EAP; S/P 
USTR for China Office 
NSC for JLoi, JShrier 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/CUSHMAN 
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA 
STATE PASS CEA FOR BLOCK 
STATE PASS CFTC FOR OIA/GORLICK 
 
 
E.O. 12958: N/A 
TAGS: ECON ETTC EINV TNGD PGOV CH TW
SUBJECT: New Semiconductor Foundry to Open in Shenzhen; High Tech 
Growth Not Slowing 
 
REF: 09 SHANGHAI 221 
 
GUANGZHOU 00000007  001.2 OF 003 
 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. Not for release outside U.S. government channels. Not 
for internet publication. 
 
¶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 
 
GUANGZHOU 00000007  002.2 OF 003 
 
 
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 
 
GUANGZHOU 00000007  003.2 OF 003 
 
 
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 
¶2008. 
 
¶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 
granted." 
 
JACOBSEN