Tue, Oct 02, 2001 page18

• Chang's change of heart sign of China's chip boom

  CROSS-STRAIT COMPETITION The TSMC owner's declaration that the chip industry's future is in China drives home how China's economic rise is roiling Taiwan

  • NY TIMES NEWS SERVICE
  • • 
    • 
    • 

  Morris Chang (張忠謀) was born in China, but unlike some Chinese emigres, he feels little desire to return.

  "There's a big gap between what I'm used to, and what China has become," Chang said at his company, Taiwan Semiconductor Manufacturing Corp (TSCM), which sits in this vast science park.

  

  Morris Chang, founder and chairman of Taiwan Semiconductor Manufacturing Corp, speaks at a recent public appearance. Chang, long a China-skeptic, surprised many in Taiwan when he said the future of chip making is in China.

  PHOTO: LIAO RAY-SHANG, TAIPEI TIMES

  In addition to being a longtime China skeptic, Chang, 70, is arguably the most influential technology executive in Taiwan. He has spoken often of his belief that China, despite becoming a hotbed of computer manufacturing, was not ready to compete in the more advanced business of integrated circuits.

  So when Chang declared recently that the future of the world's chip industry was not in Taiwan -- or the US -- but in China, political and business leaders here sat up and took notice.

  WTO entry

  Chang's conversion was well-timed. On Sept. 17, China cleared the last hurdle in its 15-year quest to enter the WTO. The next day, Taiwan received clearance to join the WTO, the club of trading nations.

  Experts say this will accelerate China's emergence as a technology power. It will also deepen the commercial ties between the China and Taiwan.

  Chang's change of heart is the latest sign of how China's economic rise is roiling Taiwan. What started in the 1980s as a trickle of companies moving to China has turned into a torrent as the initial wave of small-time garment or footwear makers eager to tap China's cheap labor has spread to Taiwan's biggest and most sophisticated companies.

  For years, Chang was not impressed by the talk of a new economic giant in the east. He says he believed -- based on a career at Texas Instruments, and 16 years in Taiwan, helping to build its technology industry -- that China was not yet ready to succeed.

  But that was before Shanghai became home to two chip ventures started by Taiwanese entrepreneurs. One of those, Semiconductor Manufacturing International, is run by Richard Chang, who sold his Taiwan operations to TSMC last year. Richard Chang (張汝京), who is not related to Morris, has since lured away 50 of TSMC's engineers.

  "I thought it would be very tough for these ventures to succeed," Morris Chang said. "But then our engineers started going over to them. That changed my thinking."

  Now, Chang is rushing to establish a liaison office for TSMC in Shanghai. He says his company, the world's largest contract manufacturer of chips, is now likely to build plants in China.

  Government climbs aboard

  Even Taiwan's government, which has tried to stem the exodus with strict limits on the amount of money local companies can invest in China, now recognizes that its commercial future is tied to China's.

  "We see the need for Taiwanese firms to expand into China," said Tsai Ing-wen (蔡英文), the chairwoman of the government's Mainland Affairs Council.

  "A lot of people say Taiwan has to open up, otherwise its economy will suffer. There is a need to establish momentum."

  Last month, Taiwan's president, Chen Shui-bian (陳水扁), accepted the recommendation of a government-business commission to scrap a US$50 million limit on investments in China.

  The decision ends a policy known as "no haste, be patient," which had been adopted by Chen's predecessor, Lee Teng-hui (李登輝), who viewed the flow of capital to China as a threat to Taiwan's security.

  In some ways, the lifting of investment curbs is merely a recognition of reality.

  Hundreds of smaller companies circumvent the US$50 million limit by registering their China ventures outside Taiwan, in havens like the Cayman Islands. Larger companies in strategic industries, which found it harder to skirt the rules, had put intense pressure on Chen to do away with them.

  Business leaders are also pressing the president to lift a ban on direct trade and transportation links between Taiwan and China.

  `Can't waot any longer'

  The 50-year-old ban forces Taiwan companies with operations in China to route supplies through Hong Kong -- not to mention employees traveling from Taipei to Shanghai.

  "We just cannot wait any longer for direct airline routes to mainland China," said Daniel Wu (吳景明), the president of the EVA Airways Corp.

  Tsai said establishing direct links was a thornier issue than lifting investment curbs. Beijing has demanded that Taipei recognize the existence of a single China before the two can negotiate. Chen, whose party formally espouses an independent Taiwan, has refused to accept the "one China" principle.

  How long Chen can hold out is a matter of debate. Taiwan is in the grip of an economic crisis, which began earlier this year with the collapse of the technology industry in the US and has worsened with the recent terrorist attacks in New York and Washington.

  Taiwan's export orders plunged 16.7 percent in August as its main customer, the US, cut back sharply. Unemployment is expected to top 5 percent in August, while years of economic growth, even during the Asian crisis of 1997 and 1998, have abruptly ended in a likely recession.

  TSMC, which just a year ago was lamenting its inability to meet the surging demand for chips, typifies the reversal of fortunes. Its factories, which were running overtime late last year, tumbled to 44 percent of capacity in the second quarter of this year.

  Chang said his company's monthly sales hit bottom in May and June and predicted that they would rebound next year. But analysts said the terrorist attacks -- and the prospect of a military retaliation -- make any revival next year uncertain.

  Indeed, the specter of protracted economic weakness in the US will add to the pressure on Taiwanese companies to move to China, where the labor pool is larger and cheaper than at home.

  "Taiwanese chip companies have to manufacture in China to be globally competitive," said Su Chi (蘇起), a former head of the Mainland Affairs Council who advises the former governing KMT.

  China's lure

  Few countries boast China's combination of low-cost and plentiful labor at many levels of expertise. Taiwan's universities produce 4,000 engineers a year; China turns out 145,000. A trained engineer in Shanghai costs one-third to one-quarter that of one in Taipei, according to the investment firm Credit Lyonnais.

  In the past, Chang said China was handicapped by a lack of infrastructure, namely the companies that produce raw materials for silicon wafers. He also said that China, even with its platoons of engineers, lacked the skilled labor to build and run advanced chip factories.

  Now, he says, China can easily surmount these weaknesses. Chip ventures also enjoy powerful political support.

  In the most talked-about Taiwanese foray into China, Grace Semiconductor Manufacturing, is a joint venture of Winston Wong (王文洋), the son of Taiwan's most powerful industrialist, and Jiang Mianheng (江綿恆), the son of China's president, Jiang Zemin (江澤民). The two are building a US$1.63 billion wafer factory outside Shanghai.

  Chang, who prizes his place atop the corporate pyramid here, is clearly rattled by the prospect of being left behind.

  "Even if Taiwan companies did not go to China, even if no other foreign companies were interested, they could always do it themselves," he said. "You can pick up the low-end expertise pretty easily."

  There are still a few brakes on China's chip industry.

  Restrictions on the export of advanced technology from the US mean that the latest technology -- etching chips on 300mm wafers -- cannot be done in Chinese factories.

  But that leaves many other simpler memory and logic chips that can be produced there. And analysts believe that with China about to enter the WTO, the export controls will eventually disappear.

  That will make the global chip industry, which has fallen into recession roughly every five years since 1970, even more competitive.

  Since the early 1980s, when Japan aggressively entered the market for memory chips, Chang said, these boom-and-bust cycles have been precipitated by new competitors like South Korea and Taiwan building factories.

  As painful as this recession is, Chang said he fretted even more about the next one, when China's factories will be churning out chips.

  "They will be enormously disruptive in about five years," he said. "I wish they would go away, but they're not going away."
• Most Popular

  • 1

    UK navy unveils plans near Taiwan

  • 2

    31 charged over KMT-led recall campaign forged petitions

  • 3

    Chikungunya fever cases rise to 13, CDC says

  • 4

    Merida confident about outlook for bicycle market

  • 5

    US involvement in Iran could affect Taiwan: expert