Chinese semiconductor firm Vimicro sent a group of executives to Sony's Tokyo headquarters in 2001 to explore business opportunities. A one-hour talk that the company had arranged with a Sony manager was curtailed to only five minutes, however. The meeting was unexpectedly brief, but the outcome was all too common in the chip design industry at the time.

Beijing-based Vimicro makes processors for multimedia applications on PCs and mobile phones. It hoped Sony would use its chips to power the digital cameras on the Japanese firm's notebook computers.

The Sony manager simply did not believe a Chinese firm was capable of making semiconductors, which involves cutting-edge production techniques. He ushered Vimicro's executives out of the room, despite claims from the Chinese businessmen that they had already signed agreements with big global names such as Samsung and Philips.

That's why Vimicro executives' business cards included information from its subsidiary in California. They were forced to give potential customers the impression that Vimicro was a Silicon Valley company. The executives also used to spend 50 minutes explaining why chips could be designed in China. This typically left only 5 to 10 minutes to present Vimicro's products.

The times have changed, indeed.

Vimicro's chips powered 60 per cent of the PC cameras shipped worldwide in 2004, and are also used in a range of multimedia mobile phone models. Its customers and partners include global giants such as Microsoft, Samsung, Fujitsu, Logitech, Siemens and Lenovo. Even Sony, the leading player in the global multimedia entertainment sector, started using Vimicro's chips last year.

Now the Chinese manufacturer owns more than 500 patents, with some registered in the United States.

The company's rapid rise to the global stage underlines how the Chinese Government's efforts to reduce reliance on foreign technologies through "independent innovation" are transforming a number of key industries.

Despite China's unparalleled economic development over the past several years, the country has been stung by a lack of core technologies. This has put it in a disadvantageous position in the global supply chain.

It is therefore not surprising that "independent innovation" has become a national buzzword.

The National Guideline on Medium- and Long-term Programme for Science and Technology Development (2006-2020) issued by the State Council in early February is aimed at reducing the country's reliance on key foreign technologies from more than 50 to 30 per cent by 2020.

Vimicro is one of a number of Chinese companies benefiting from this strategy. The government is applying preferential policies and directing investment to promising companies to foster domestically developed but internationally competitive technologies.

"We've wanted to develop world leading technologies and target the global market since our very first day of operation," says Tom Zhang, vice-president and one of the founders of Vimicro.

Vimicro was founded in 1999, with the Ministry of Information Industry (MII) investing about 10 million yuan (US$1.25 million) as a "seed fund."

"The government played a big role in the early development of Vimicro," says Zhang.

The MII was managing 100 million yuan (US$12.5 million) at the time, a fund allocated by the Ministry of Finance to support Chinese high-tech firms. The MII registered a venture capital firm overseas to manage the fund, a dramatic departure from how it had previously supported domestic high-tech firms.

"Government support is crucial to Vimicro. But the government does not intervene in our daily operations," says Zhang.

Vimicro later managed to absorb several rounds of venture capital from a number of foreign companies, which diluted MII's stake to 10.9 per cent.

Vimicro became the first Chinese semiconductor firm to trade shares on the NASDAQ when it went public on November 15. It raised US$87 million and the MII sold its 10 per cent stake.

"The government is changing the way it helps the high-tech sector," says Zhang.

The Chinese Government launched "Project 909" in 1995 to develop the semiconductor industry, which it saw as the lifeblood of the high-tech sector. It contributed registered capital of 4 billion yuan (US$250 million). The State Council and Shanghai municipal government later injected an additional US$100 million and launched foundry enterprise Huahong in 1996.

At that time, 85 per cent of chips used in China were imported. The country's IC (integrated circuit) manufacturing technologies were three generations behind foreign technologies.

The pioneer of the project and the Minister of Electronics Engineering at the time, Hu Qili, was also appointed chairman of Huahong to further highlight the importance of the programme. In early 1980s, Hu was also a member of the Standing Committee of the Political Bureau of the Communist Party of China Central Committee.

The 10-year development of "Project 909" unearthed a number of tough lessons, Hu says in a book released in January. When introducing some production lines, for example, the government focused too much on closing technical gaps with advanced global technologies, but did not address customer demands effectively enough. That underscored the importance of establishing space between the government and company operations. Business-savvy executives needed to be developed to lead market-driven companies.

"I think technological developments in the private sector also need to be accompanied by innovative government policies," says Zhang.

Spending on research and development in 2004 stood at 196.63 billion yuan (US$24.3 billion), accounting for 1.23 per cent of the country's GDP (gross domestic product). The government planned to expand this figure to 360 billion yuan (US$44.4 billion) by 2010, accounting for 2 per cent of the GDP.

The government might set up a fund valued at 500 million yuan (US$61.7 million) in the coming years to accelerate development of the chip design industry. Yet some observers are calling for the government to help improve the ability of design firms to raise capital through means other than direct allocation of funds.

Between 2000 and 2004, investment in China's semiconductor industry amounted to US$14 billion, four times the total in the past 20 years, statistics show. Only a small portion of this was associated with chip design firms, however.

Chip design is the highest value-added business in the semiconductor industry, accounting for 40 per cent of the value chain. Compared to manufacturing, assembling and testing, chip design also requires smaller investments and costs. By 2004, there were 421 chip design firms throughout the country, with total annual revenue of 8.15 billion yuan (US$1 billion).

Vimcro's NASDAQ-listing was followed by an initial public offering (IPO) by Actions Semiconductor Co, another Chinese chip design firm. Both IPOs fell below expectations, highlighting that it will likely take time for investors to understand the profitability of Chinese chip design eneterprises.

Zhang says Vimicro's prospects are bright, however.

"Applications related to multimedia entertainment are on a roll, and an increasing number of devices will be powered by multimedia chips," he says.

"That is a big trend promising enormous business opportunities."

According to US-based research firm IDC, the global multimedia chip market will be worth more than US$4 billion in 2006, up considerably from US$1 billion in 2004.

Vimicro now employs nearly 500 people.

"We hope to hire up to 2,000 in the coming years," says Zhang.

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