No, You Can't Buy That Chip Gear
For an executive from a nation running a staggering trade surplus with the U.S., Richard Chang sure has had to work hard to buy American. For nine months the chairman of Shanghai's Semiconductor Manufacturing International Corp. (SMIC) -- the world's third-largest contract maker of chips -- has been trying to place an order for more than $1 billion worth of advanced equipment from Applied Materials Inc. and other U.S. suppliers to outfit three new state-of-the-art silicon wafer plants.
But Chang has run into a stone wall named the Export-Import Bank of the U.S., the government agency that helps finance purchases of U.S. exports by foreign companies. The Chinese company says it needs Ex-Im loan guarantees so it can borrow at reasonable rates from Western banks. But Ex-Im Chairman Philip Merrill has shelved the request because of objections by Micron Technology Inc., the world's No. 2 maker of dynamic random-access memory (DRAM) chips.
The battle over SMIC could be repeated as China expands in advanced industries like chips. The issue: By subsidizing exports of equipment, is the U.S. also giving an edge to new Chinese rivals to American companies? Backers of the SMIC deal say that won't be the case. Memory devices account for just 20% of the Chinese foundry's output. An internal analysis by Ex-Im suggested the order would be a big net gain for U.S. jobs. But in an April hearing, Merrill said he was persuaded to oppose the deal by a study commissioned by Micron, which earned a slim profit in 2004 after losing $2.7 billion the previous three years. It asserts any new capacity would add to a global glut that already has driven down DRAM prices.
Micron also has a powerful ally. Republican Senator Michael D. Crapo, from Micron's home state of Idaho, chairs the international trade subcommittee that oversees Ex-Im. In an October letter to Merrill, Crapo and three Idaho members of Congress said taxpayers should not "support the development of this Chinese production capability [when] they are worried about keeping their own jobs."
Chang could easily buy the same equipment from Japan or the Netherlands. But he hasn't given up. Chang and other SMIC execs have traveled several times to Washington offering concessions to allay Micron's concerns. They hosted Merrill in Shanghai in January. Chang has scaled back his original request for $1.2 billion in loan guarantees to $770 million, enough for two new fabs making 12-inch wafers, instead of three. He also has promised the new plants will only make logic chips, and that SMIC's DRAM output will remain less than 1% of world supply. Why the determination to buy from the U.S.? Most of SMIC's existing equipment is American. Like other SMIC execs, Taiwan-born Chang, a veteran of Texas Instruments Inc., is a U.S. citizen. Also, "most of our engineers were trained in the U.S. and are familiar with U.S. equipment," says Deputy Treasurer Gareth Kung.
But Merrill has refused even to let the Ex-Im board vote on the issue. Micron has asserted SMIC could still use the equipment to make memory devices, or convert other plants for that use. Kung says Micron and Crapo have ignored requests to discuss the issue. Micron declined to comment. Attempts by Ex-Im staff and Representative Donald A. Manzullo, chairman of the House Small Business Committee, to broker a compromise have failed. Now, the SMIC flap is fueling a political battle in Washington over Ex-Im's role -- and could determine whether Merrill, appointed by President George W. Bush in 2002, keeps his job after his term expires in July. More than 70 members of Congress from both parties, California Governor Arnold Schwarzenegger, and the trade association for the U.S. chip equipment industry all have urged Ex-Im to approve the loan. Several House Republicans, frustrated that Ex-Im isn't more speedily processing applications, want Merrill out. "The Ex-Im Bank lacks leadership," says Manzullo, whose committee grilled Merrill on Apr. 6. "I don't think the President would be wise in reappointing this guy." Ex-Im declined comment.
U.S. makers of chip equipment, which rely on exports for 70% of their sales, are growing nervous. Besides SMIC's $770 million order, $5 billion in follow-on equipment orders could be at stake, estimates Applied Materials. Last year, U.S. suppliers grabbed 51% of China's $2.7 billion in chip-equipment purchases. With many more mainland fabs in the pipeline, China's equipment market should reach $4.2 billion by 2007, says Semiconductor Equipment & Materials International (SEMI), the industry trade group. "We hold the winning hand now in China," says Applied Materials Chairman James C. Morgan. "And if we are not careful, we will throw it away."
The Micron study contends SMIC can raise the funds it needs from Chinese banks. Indeed, in early May, SMIC secured a $600 million credit line from Chinese banks. But with the cost of new wafer fabs nearing $3 billion, SMIC's Kung says "it is imperative that we diversify our funding." And in an industry known for booms and busts, foreign banks see long-term loans as risky without credit guarantees. Last year, Ex-Im approved a $650 million guarantee for Singapore's Chartered Semiconductor, another foundry. SEMI Public Policy Director Maggie Hershey says Ex-Im help is likely to be critical, especially in winning orders in Asia. "Our companies must invest a huge amount of revenue to stay at the leading edge, so we cannot afford to lose any markets," she says.
Whether this dispute can be resolved is unclear. Susan Wheeler, a spokeswoman for Crapo, denies the Senator's main aim is to protect a home-state company. She says he's concerned Ex-Im staff is not adequately analyzing the potential downsides of such export credits. Ex-Im says it hasn't finished its analysis. "It is only fair that there needs to be a clear picture on how this would affect the U.S. economy," Wheeler says. Of course, SMIC could promise to abandon memory chips, which it says give it an edge over Asian foundries that only make logic devices. But that would be a generous concession for the privilege of importing equipment from the U.S. that is readily available elsewhere with no strings attached. "Throughout the process, we have compromised as much as we can," insists SMIC's Kung.
SMIC says it has about a month to decide where to buy the equipment to keep its plans on track. The irony is that if SMIC does find another source of credit, Micron could lose out even more. Because then SMIC will be free to crank out as many memory chips as it wishes.
By Pete Engardio in New York, with Bruce Einhorn in Hong Kong
— With assistance by Bruce Einhorn