Taiwan’s technology sector has been playing a crucial role in boosting economic growth, with semiconductor companies alone contributing 15 percent to GDP, Ministry of Economic Affairs statistics showed.
Leveraging that strength, the Cabinet came up with a 10-year expansion project to turn Taiwan into Asia’s “high-end manufacturing hub and the center of semiconductor process technology.” By that time, the local semiconductor industry’s production value is forecast to reach NT$5 trillion (US$175.23 billion), up more than 55 percent from NT$3.21 trillion this year, the Industrial Technology Research Institute estimated.
To reach that goal, the Cabinet said it would make every effort to solicit foreign suppliers of key semiconductor materials to invest in research and development (R&D) centers in Taiwan. It also encouraged local companies to join the supply chains of Taiwan Semiconductor Manufacturing Co (TSMC) and ASE Technology Holding Co to explore growth opportunities. TSMC is the world’s biggest chipmaker, while ASE tops the chip testing and packaging services segment.
It is easier to make progress by standing on the shoulders of giants.
Manufacturers are eligible to deduct their capital expenditure from the retained earnings that are designed for firms to recover accumulated losses, pay shareholders cash dividends or employee bonuses, or reinvest. Local companies are required to allocate 10 percent of their net profit as retained earnings under the Company Act (公司法). Taiwan is one of very few countries that implements the rule.
However, it is risky and takes a lot of effort to start a new business or develop a new technology from scratch as most chip designers do. MediaTek Inc, which designs 5G smartphone chips in competition with Qualcomm Inc, allocates about 25 percent of its revenue, or about NT$50 billion a year, to R&D. Its R&D investments have totaled more than NT$420 billion over the past decade — enough to build eight Taipei 101 skyscrapers.
Chip designers cannot deduct their R&D spending from retained earnings, and are calling for fair treatment from the government to unlock their significant growth potential by lessening their cost burden.
Taiwanese chip designers led by MediaTek in 2018 generated NT$3.7 trillion in production value, holding a total share of only 17.2 percent of the global chip designing market, which means there is ample space for growth. Besides, the global chip designing market is two times bigger than the foundry market, totaling US$120 billion.
Taiwan’s foundry companies led by TSMC and United Microelectronics Corp have seen their global market share rocket to about 72 percent, with production value of about NT$1.8 trillion. That only gives foundry companies 28 percent in which to grow.
However, high risk usually goes hand-in-hand with big returns. That explains why local chip designers usually deliver a much better gross margin than chip manufacturers. MediaTek, which designs 5G smartphone chips, reported gross margin of 44.2 percent last quarter. The figure is much higher than the gross margin of 21.8 percent and net profit margin of 20.3 percent reported in the third quarter by United Microelectronics, the world’s No. 3 contract chipmaker.
Chip designers say that they have made significant contributions to GDP, as the lion’s share of their R&D investments are paid to researchers, which boost the country’s private consumption. Chip designers do not operate any factories or manufacturing tools, but own patents and intellectual property. It makes sense to exclude R&D investment from the 10 percent retained earnings allocation.
Relaxing the Company Act rules by granting chip designers incentives similar to those for chip makers would positively affect chip designers’ business growth, but also create a new growth engine for the country’s economy.
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