October 28, 2003 3:58 PM PST

Chip group seeks China, U.S. reforms

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China's government is playing too active a role in the country's semiconductor industry, but the United States isn't doing enough for its own, according to a chip trade group.

The Semiconductor Industry Association (SIA), which represents a host of chip companies throughout the world, asserted in a report Tuesday that China is using its internal value-added tax (VAT) to favor domestic suppliers.

China imposes a 17 percent VAT, which operates like a sales tax, on semiconductor sales. However, Chinese and international manufacturers that produce chips in China receive a rebate that effectively drops the VAT to 6 percent. Companies that both design and produce chips in China pay a 3 percent VAT.

"We feel they have not lived up to their commitments," George Scalise, president of the SIA, said in an interview.

Although China has reduced its import tariffs, as is required in the agreement that let China and Taiwan into the World Trade Organization (WTO) in 2001, the VAT manipulation reverses the impact and gives local companies, or international companies with local facilities, an economic advantage.

China has become the leading destination for tech companies worldwide. Demand for a wide variety of products continues to grow faster there than anywhere else in the world, and domestic suppliers, for now, can't keep pace. China only makes about 15 percent of the semiconductors it consumes, Scalise pointed out.

The country will be a major chip exporter as well, he said. A number of foundries--chip companies that make semiconductors for companies that don't want to maintain their own factories--have already been established around Shanghai.

Discriminatory taxation isn't the only problem U.S. semiconductor makers face, Scalise said. Government-backed research and development have dropped precipitously in the past several years. In previous decades, the government paid for two-thirds of research government labs conducted; companies paid one-third. The situation has since reversed.

"This is not a very stable situation," he said. "We've got to fund basic research at our universities."

Additionally, federal and state governments aren't doing enough to keep U.S. manufacturers in their own country, according to the SIA. Lower labor costs and--often more significantly--WTO-permissible tax incentives are encouraging manufacturers to put factories and engineering centers in Asia and Europe.

China, Ireland and others have offered corporate income tax breaks to manufacturers that build facilities in their own country. In Taiwan and China, "there is not a tax on the exercise and sale of employee stock options," Scalise said.

Some legislators have begun to propose changes that could encourage companies to keep operations or build up new ones in the United States. Under current tax law, U.S. manufacturers get taxed if they bring profits from overseas operations into the United States. As a result, manufacturers use these profits to build facilities overseas.

With the proposed Homeland Investment Act now winding its way through the U.S. Congress, taxation on overseas gains would be temporarily eliminated, said Daryl Hatano, vice president of public policy for the SIA.

Senator Joseph Lieberman and Intel Chairman Andy Grove have warned about the loss of U.S. technology jobs and, indirectly, suggested tax incentives as a way to reverse the trend.

New York Governor George Pataki, who will speak at the SIA annual dinner next month, has encouraged the growth of semiconductor and nanotechnology facilities in that state over the past few years, with notable successes.

 

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