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Chipmakers Watch as U.S., China Fight Over Chip Tax

Chipmakers Watch as U.S., China Fight Over Chip Tax

By CHRIS CZIBORR

The U.S. filed the first World Trade Organization claim against China earlier this month, contesting Beijing’s tax on imported semiconductors.

But the tax isn’t a concern for Newport Beach-based Mindspeed Technologies Inc.

The networking chipmaker sells products to Chinese telecommunications companies that are building networks across the country. Mindspeed’s Chinese customers are paying a 17% value-added tax on the company’s chips (the tax can be cut to as little as 3% through a rebate program, providing the chips are made in China).

So far, China’s demand for networking chips is outweighing the tax, according to Mindspeed spokesman Tom Stites.

“The rebate is not a huge impact at this point,we’re selling relatively sophisticated networking chips,” Stites said. “It’s a pretty short list of people that the Chinese would be looking at to supply those products, whether it’s us or somebody else in Europe or Asia.”

Mindspeed’s Chinese customers, who include Huawei Technologies Co., Zhongxing Tele-com Co. and Harbour Networks Co., don’t have much choice but to pay the added tax on networking chips, according to Stites.

“Although China is building a semiconductor capability internally, they’re not real sophisticated at this point,” he said. “Their factories are not up to the standards of the capability of our products,design expertise is just getting developed there. So we don’t run into much local competition there for the products we sell.”

None of Mindspeed’s rivals, who include Pennsylvania’s Agere Systems Inc. and Germany’s Infineon Technologies AG, is utilizing Chinese chip plants, Stites said.

Asia makes up about half of Mindspeed’s $80 million in yearly sales, and China makes up about half of the company’s sales to the region, Stites said.

Irvine-based Broadcom Corp., Orange County’s largest chipmaker, does have chips made in China. Last year, the company shifted some production from Taiwan to Shanghai-based Semiconductor Manufacturing Inter-national Corp., China’s largest contract chipmaker.

“Broadcom is sensitive of the need to have local content for international markets in general,” Broadcom spokesman Bill Blanning said. “Where it’s feasible, we do provide local content,one of the locales where we are doing that is China. Our approach is to work with governments to better understand their rules and then do our best to operate as economically as we can within those rules.”

While China’s chip tax isn’t an issue for Broadcom, the company faces another sticking point there. Beijing is requiring wireless chipmakers such as Broadcom and Intel Corp. to adhere to a proprietary standard controlled by about two dozen Chinese companies and known as the wired authentication and privacy infrastructure, or WAPI.






Broadcom Balking

Broadcom, Intel and other chipmakers have balked at complying with the standard, saying it would force them to share trade secrets with Chinese companies. The Bush administration also is pressuring China to ease up on its wireless restriction.

The tax issue isn’t a big one for Irvine-based Microsemi Corp., according to Chief Executive Jim Peterson (photo). The company’s Shanghai plant doesn’t sell much of what it produces within China, he said.

Besides, he said, lower taxes aren’t the real lure of producing in China. The benefit is lower overall costs, he said.

“If there’s a financial advantage and a benefit to our bottom line and our stakeholders, I would certainly take a hard look at relying more on Chinese chipmakers,” Peterson said. “China already has a lot advantages other than the tax rebate.”

Microsemi relies on global sales for about a quarter of its $200 million in yearly revenue. Most of the company’s global sales come from Asia.

Bejing’s policy is designed to get more chipmakers to shift work to China in a bid to grow the country’s fledgling chip industry. Today, most contract chip production is done in Taiwan.

Imports account for about 80% of China’s chip market, which analysts value at $27 billion yearly and rank as the world’s third largest.

The San Jose-based Semiconductor Industry Association is siding with the U.S. government on the China chip tax.

“If we want to keep manufacturing in the U.S., we have to make sure everyone is on a level playing field,” said David Hatano, the association’s vice president of public policy. “China’s tax encourages manufacturing there rather than in the U.S. or elsewhere.”

Part of Outsourcing Debate

The China chip tax can be seen within the context of a larger trade debate playing out in the U.S., according to Esmael Adibi, director of Chapman University’s A. Gary Anderson Center for Economic Research.

“The China tax debate sounds like another outsourcing issue,some American producers always want protections,” Adibi said. “But if we protect one industry, it’s at the expense of everybody else in the U.S. Trade disputes like this aren’t going to benefit anybody in the long run.”

“Even if China continues with its tax rebate, it just means we can get those products cheaper,” Adibi said.

Indeed, many chipmakers don’t end up paying the full value-added tax because their products in turn are exported from China as part of consumer electronics and other products.

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