Intel, AMD walk a fine line in burgeoning sector

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US chipmakers such as Intel and Advanced Micro Devices know they simply cannot afford to ignore China's huge domestic market, cheap labour for skilled manufacturing and growing pool of world-class engineers.

But even as the two companies move aggressively to tap the world's hottest chip market, they find themselves enmeshed in an uneasy partnership with an emerging rival determined to challenge the US's technological lead.

"There is a fine line. Working with China will pull them into the world economy and that will benefit all of us, but as an industry we want to maintain our lead as the innovator," says Dave Kroll, an AMD spokesman.

China has become the world's largest market for consumer mobile phones and is expected to top the US as the biggest market for personal computers within six years.

US investment in the Chinese chip sector is expected to reach $12bn by the end of 2005 and double by 2013, according the US Semiconductor Industry Association.

Intel, the world's largest chipmaker, operates one assembly and test facility in Pudong, the free trade zone across the river from Shanghai. The company has also invested in 30 local tech start-ups and operates three R&D labs in China.

Intel is poised to build a second facility to assemble and test memory chips and microprocessors in the western city of Chengdu. It is estimated Intel's investment in China will top $ 1bn by the end of next year. Meanwhile, AMD has one memory assembly and test facility in Suzhou and is considering opening a second Chinese plant.

But while foreign groups are eager to open Chinese assembly facilities, US government restrictions, intellectual property concerns and other factors have kept US investment in wafer fabrication plants to a minimum.

Groups such as Intel are prohibited by the US government from building leading-edge silicon wafer "fabs" in China for competitive and national security reasons. The restrictions are aimed at preventing China from acquiring leading-edge chip-making technologies.

Motorola is believed to be the only US chipmaker to have run a Chinese factory making silicon wafers used in chips for cars, computers, cell phones, pagers and telecom equipment.

Its $720m plant was seen to be one of the world's most advanced wafer "fabs" when construction started in 1995. But last year Motorola sold the plant to China-based Semiconductor Manu facturing International (SMIC).

Western companies are also concerned about intellectual property rights in a country that has only begun to develop a legal and enforcement framework to safeguard IP. "They are working hard to put something in place where there was nothing before," says Intel.

Two key trade disputes have also heightened tensions between the US chip sector and its Chinese counterpart. US chipmakers chafe at Chinese regulations that levy a 17 per cent value- added tax on chip imports, while rebates offered to China-based producers can lower their burden to just 3 per cent.

China has also angered US groups by announcing it will set its own security standard for wireless communications. The US groups argue the regulation, due to be implemented by June 1, deliberately rejects a global standard and will require foreign groups to partner with a Chinese company.

US companies say that under such a scenario, foreign operators would be required to disclose intellectual property to potential competitors if they wanted to sell wireless network tec hnology in what will eventually be the single largest market in the world. The US chip industry has launched an aggressive campaign to force China to back down.

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