Lee Yuan-tseh (
The semiconductor industry is one of Taiwan's principal industries. It centers on the made-to-order manufacturing of silicon wafers. Upstream it involves IC design. Downstream it involves packaging and testing. The industry has an aggregate production value of more than NT$700 billion (US$20 billion) a year and employs 94,000 people. The prospect of such an industry moving overseas impels us to consider the impact on the overall economy and society.
According to data from the Industrial Economics and Knowledge Center of the Industrial Technology Research Institute (工研院經資中心), if the policy restricting the establishment of eight-inch wafer foundries in China were lifted today, then by 2005 the output value of Taiwan's IC industry would be NT$217.9 billion lower than could otherwise be expected, and the industry would employ 18,000 fewer people. The output value of China's IC industry and the number of people it employs would increase by the corresponding amounts. In other words, the two sides of the Taiwan Strait are engaged in zero-sum competition in the IC industry. It is not a mutually beneficial division of labor in which the two sides have complementary strengths.
From the perspective of business alone, it makes no difference where production takes place. But the IC industry drives Taiwan's economic development. If the effects on other industries are considered, the impact of an industrial migration will be far greater than the above sums suggest, and the burden will be borne by society at large. The government will not be able to stand idly by.
Some people believe that since eight-inch wafer technology is not the exclusive preserve of Taiwan, if Taiwanese companies don't go to China, manufacturers from other countries will. Indeed, during the past 10 years, the Netherlands, Canada and Japan have invested in made-to-order wafer foundries in China. But none of them has been very successful. The foundry built jointly by China's Hua Hong and Japan's NEC, for example, is still incapable of competing with Taiwan's foundries, even though it uses 0.2 micron manufacturing equipment.
Some have deliberately played down Taiwan's supremacy in the industry. In fact, Taiwan's made-to-order silicon wafer industry dominates the world, accounting for 77 percent of global production value. It is way ahead of second-placed Singapore. Taiwan's advantage doesn't lie in equipment, but rather in its unique, innovative techniques and management ability as well as the cluster effect of the Hsinchu Science-based Industrial Park.
China has introduced incentives to attract industry professionals from Taiwan in a bid to clone Taiwan's industrial strongholds and attract core technologies. It has made progress with this strategy. Richard Chang (
Threat analysis
But a group of disbanded soldiers is no match for a large-scale, well-oiled war machine. As long as industry leaders TSMC and United Microelectronics Corp (UMC, 聯電) don't go to China, China's IC industry will be unable to threaten Taiwan's for another decade. If TSMC and UMC, on the other hand, do go, associated industries such as those engaged in design, packaging and testing will follow one after another. As soon as Taiwan's industrial strongholds have been successfully cloned, China could narrow the industry advantage achieved by Taiwan over the past decade. Some seem to have believed that eight-inch wafers were already behind the game and that Taiwan need only develop 12-inch foundries. Actually, 12-inch chips are still in the testing stage. Production costs are still high, while the yield factor remains unviably low. Particularly in the made-to-order industry, where it is necessary to deal with numerous clients, eight-inch wafers continue to prove much more flexible than 12-inch wafers, which may be suitable for certain products, but will not completely replace the eight-inch wafer.
Some think that by going to China they can lower production costs. Actually, in the wafer industry, labor costs are not high. The industry mainly relies on manufacturing and management skills. TSMC Chairman Morris Chang (張忠謀) recently said that, within five years, China's IC production costs will be even higher than Taiwan's. So, why go to China? Because of the market, Chang said.
China's semiconductor market is growing rapidly and will probably catch up with Taiwan by 2005. Admittedly, being close to the market may improve competitiveness, but not necessarily. TSMC's made-to-order clients are all over the globe. TSMC and UMC could set up marketing operations in China, as could Taiwanese companies that provide made-to-order services for China's IC designers. Another possible obstacle is that the Chinese government might force Taiwan's chip industry to set up plants in China by imposing discriminatory duties or ratios for self-manufactured content. In that scenario, our government will need -- through WTO mechanisms -- to assist chipmakers and distributors. A nasty price war could ensue.
It is regarded as axiomatic in the IC industry that the best policy is to prohibit everyone from going to China to preserve Taiwan's advantage; a mediocre policy would be to allow everyone to go to China to develop their potential; the worst policy would be to allow those who sneak over illegally to get the upper hand over the law-abiding companies that stay in Taiwan.
If the government doesn't have the determination to stop people from migrating illegally, then Taiwan's unique made-to-order wafer production technologies will gradually spring up all over China. Before long, clones of Taiwan's industrial strongholds will begin to take shape across the Strait -- and will eventually be Taiwan's downfall. This is probably why TSMC changed its mind and decided it wanted to go to China in order to "maintain the market price order."
In our view, the government should reconsider the timing of any decision to ease the restrictions, with a view to preserving Taiwan's supremacy and minimizing the impact on society. It should also draft a package of measures to be brought in to cushion the impact on society if and when such a migration occurs.
We would urge the government to hold sincere talks with the main players, assist them in developing the potentially lucrative 12-inch wafer plants, and resolve the water and electricity problems at the eight-inch wafer foundries, which are the industry's current mainstay. In addition, we call on the government to help these industry leaders, through WTO mechanisms, to overcome discriminatory tariffs and other types of discrimination that they face in China.
Meanwhile, strict and effective punishments should be meted out to those who sneak off to China illegally. If migration of this industry is ultimately inevitable, reasonable regulations should be imposed concerning quantity, timing and the amount of capital involved. The right to migrate, for example, should be linked to progress in the construction of 12-inch wafer foundries to reduce developmental gaps that might otherwise affect the stable development of the economy and society.
Just as Lee Yuan-tseh said, we cannot be sure that our opinions are always correct. But we present our views in the hope that, through rational debate, we can decide on the question of whether -- and, if so, when and how -- the eight-inch wafer foundries may go west.
Liu Chin-hsin (
Translated by Ethan Harkness
and Scudder Smith
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