A Chip Industry Takes Off in China

For China's industrial planners, accustomed to success in making everything from toys to solar panels, the semiconductor industry has been the one that got away. Over the past decade, young, local chipmakers, backed by state banks and local governments, have thrown billions of dollars into semiconductor plants. It was good money after bad: Despite years of effort, homegrown chipmakers such as Shanghai's Semiconductor Manufacturing International (SMI) remain distant also-rans against global powers Intel (INTC), Samsung Electronics, and Taiwan Semiconductor Manufacturing (TSM).

Don't write off the Chinese just yet, warns Leo Li. He's the chief executive officer of Spreadtrum Communications (SPRD), a 10-year-old chip designer based in Shanghai that went public in 2007 and trades on Nasdaq. Spreadtrum is what's known in the industry as "fabless," meaning it outsources production to other companies and focuses on what it does best. In Spreadtrum's case, that's designing processors and other chips for mobile phones. With China's large export-driven electronics industry, growing domestic market, and deep pool of inexpensive and talented engineers, the fabless model suits Chinese companies like Spreadtrum just fine, Li says. "We are closer to the customers, the manufacturers, and the market," he says. "Only in China will fabless companies grow in size in the future."