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China's chipmakers challenge the US

Despite earlier efforts by the US to keep China behind the high-technology curve, the country is fast catching up with America's ability to make advanced semiconductors, the computer chips that run everything from rice cookers to missile guidance systems.

Already, two semiconductor plants in China have ordered equipment from Europe and Japan capable of etching circuitry just 0.13 microns wide, or less than one-hundredth the width of a human hair. Such tiny circuitry is used in the smallest, fastest and most powerful computer chips in world.

The two Shanghai companies that have ordered the equipment, Semiconductor Manufacturing International and Grace Semiconductor Manufacturing, could start manufacturing made-to-order chips with superfine circuitry as early as next year.

Export controls that were originally intended to restrict the sale of such chipmaking technology to China have lost their teeth, largely because the US no longer has a monopoly on any of the roughly 250 processes used to manufacture computer chips.

"If the US won't sell us a piece of equipment, we can get it elsewhere," said Joseph Xie, an American-educated native of Shanghai who returned to China last year to work for Semiconductor Manufacturing International, which was founded by Richard Chang, a Taiwanese businessman.

The general availability of the most sophisticated chip-making tools poses a problem for Washington, which has long wielded cumbersome export controls meant to ensure that American technology does not fall into the hands of China's military.

It is part of a broader challenge to keep an American edge at a time when commerce often trumps politics and the line dividing commercial and military technology is increasingly blurred.

American executives say that if the US does not relax its grip on semiconductor manufacturing equipment shipments to China, American makers of such gear will lose an increasing share of sales as nimbler competitors meet China's quickening demand for the sensitive machines.

Though American companies created the semiconductor manufacturing equipment and materials industries decades ago, Japan took over several critical areas of the market in the 1980s and today is the leading supplier of several key pieces of equipment, including lithography machines that miniaturize circuitry designs and use lightwaves to transfer them onto silicon wafers.

European companies, too, now make and sell much of the equipment, chemicals, gases, films and other materials needed to make integrated circuits. The result is that anyone wanting to build an up-to-date semiconductor plant no longer needs to turn to the US.

So, the chip-making technology is flooding into China, raising concerns that it could help the country turn its enormous yet inefficient army into a streamlined, high-technology force.

Chinese government institutes have bought some of the most sensitive equipment, including some from Germany that could be used to manufacture radiation-hardened electronics and solar cells for satellites, high-power radio-frequency weapons and infrared sensors and imaging equipment.

A report recently released by the Government Accounting Office in Washington warned that China's new chip plants gave China's military an important source of custom-made integrated circuits not subject to foreign export controls. That makes China's communications, surveillance and missile guidance equipment "less vulnerable to foreign disruption during a protracted conflict," the report said.

The report called for a review of American export-control policy, which it said had been aimed at keeping China two generations behind American industry in semiconductor manufacturing. It quoted an unidentified senior official of the Defense Department as saying that China's advancing chip industry "will have direct application in future military systems," including advanced radar used to track missiles.

To control the dissemination of such technology, the US is a member of the Wassenaar Arrangement, an information-sharing forum that was created in 1996 to succeed the Coordinating Committee for Multilateral Export Controls. The forum's 33 participating countries agree to maintain export controls on a long list of technology and to notify the group of any sales.

But the Wassenaar Arrangement does not have the binding status of a treaty, and each country is free to decide what it will export.

"Think how bad the Japanese economy is," said Nasa Tsai, president of Grace Semiconductor. "They love to sell."

The US, for that matter, also approves most equipment sales. But it can take six months or more for American companies to secure an export license. By that time, many have lost the sale.

Last year, Semiconductor Manu-facturing International dropped plans to buy a piece of sophisticated equipment from a California company after waiting months for the US to issue a license. It placed a multimillion-dollar order with a Swedish company instead.

"We love to do business with the US, but we can't wait forever," Xie said. "Europe and Japan are getting the business."

China's semiconductor industry consisted of a handful of relatively primitive plants just a few years ago, but it has grown quickly as manufacturers shift operations here to feed the fastest-growing computer chip market in the world.

A multinational industry association, Semiconductor Equipment and Materials International, predicts that China will be the world's second-biggest consumer of computer chips by 2010, behind only the US.
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