Surging domestic and foreign demand for electronics equipment is expected to transform China’s semiconductor market into a $30 billion affair by 2006—more than twice its 2001 level—making it the largest after the United States and Japan. At present, global chip manufacturers satisfy most of that demand, but few are making much in the way of profits. Instead, they are hoping to nudge their Chinese operations into the black when volumes surge, since even slim margins could produce large returns. By the same token, negative margins, coupled with the market’s risks, could lead to substantial losses.

Getting beyond breakeven will be tough. Chinese chip consumers require more from their chip manufacturers than do users in developed markets, according to a recent survey of 25 Chinese companies in ten industries. But global chip makers may be able to meet these requirements profitably by adapting channel strategies to accommodate the different types of end users.

In all but a few industries, Chinese companies that use semiconductors know less about chip design than do their foreign counterparts. The survey indicates that the Chinese want manufacturers to provide more help with chip design—from complete product specifications to help in selecting chips for circuit boards....