The government looks set to ease the ban on Taiwan's companies investing in semiconductor manufacturing facilities in China, a possibility that has spread what analysts call irrational alarm throughout the nation.
It all began last year when Taiwan's semiconductor guru Morris Chang (
"It's about time for TSMC to launch operations on the mainland," Chang told an Economic Development Advisory Council (經發會) panel in August last year. Less than a year earlier he said that TSMC would not invest in China for at least four years.
Since then, Chang, along with fellow Taiwan semiconductor manufacturers, has been lobbying the government to loosen restrictions to allow these companies to build factories, or what they call fabs, in China.
Economic doom
Fearing the flight of capital to China, the government has long held restrictions on what industries can and cannot invest in China.
Some government officials and scholars fear that allowing Tai-wanese companies to invest billions of dollars in China to build state-of-the-art integrated circuit-manufacturing facilities would spell economic doom for Taiwan.
"It will create a technology downfall. All industry will close, talent will leave and the science parks will return to their original undeveloped state," cried Vice President Annette Lu (
Taiwan's electronics industry as a whole accounts for about one-third of the country's total manufacturing output, and is responsible for more than half of its exports. Coming from a country where exports account for more than 30 percent of GDP, this is no small matter.
What is at stake is not only new investment in fabs, which can each cost US$3 billion to set up, but the backbone of Taiwan's electronic industry.
"If semiconductor manufacturing goes it will take with it all supporting industry. It would be a fatal blow for Taiwan," said Sam Lin (林錫銘), president of Weltrend Semiconductor Inc (偉詮電子).
The general trend over the past 10 years has been the migration of Taiwan's manufacturing industry to China, where labor and resources are cheaper. Electronics companies say manufacturing in China is as much as one-third cheaper than in Taiwan.
Although semiconductor man-ufacturers had previously said that it would be four years or more before they would invest in China, most now agree that the time has arrived.
"When the Chinese authorities provide incentives like tax breaks as well as sufficient supplies of high-tech personnel and water and electricity, and our competitors start to take advantage of these, we will lose our competitive edge if we do not follow suit," TSMC's Chang told the panel.
Analysts say that from a historical view of Taiwan's manufacturing trends it is only logical that semiconductor manufacturers begin to move.
"To hold them back is futile," said Steve Lin (
Indeed, it would only force them to channel money through a third country, creating greater costs and obstacles for the companies rather than giving them incentives to keep it at home, he said.
The government seems well aware of that. Yesterday, Minister of Economic Affairs Christine Tsung (宗才怡) told the legislature that before the end of the month her ministry will probably give the nod to allow 8-inch fab investment in China. At the session, Premier Yu Shyi-kun supported the proposition.
Only two members on the decision-making panel are thought to have rejected the idea: John Deng (
Bullish
Analysts remain bullish on the prospects, holding that with the trend of investment in more advanced 12-inch fabs, Taiwanese companies will move their old 8-inch equipment to China and invest in more modern fabs in Taiwan.
"They could even set a regulation that for every 8-inch fab built in China the company must build a 12-inch in Taiwan," said Chengchi's Lin.
Because China's demand is for lower-end chips, only the 8-inch fabs are necessary. This would allow Taiwanese companies to transfer their 8-inch equipment to China and buy new 12-inch equipment for its Taiwan fabs, which need cutting edge technology.
"If the old doesn't go out, then the new can't come in," said Vice Minister of Economic Affairs Steve Chen (
Rather than draining Taiwan's economy, investment in China may be healthy, analysts say.
"Production in Taiwan for the worldwide market, and production in China for the China market," said Henry Wang (
In fact, TSMC has said that if it invests in China it would be to serve the China market. It has no interest in moving its entire manufacturing operations to China.
"In order to serve our customers better we need to have a presence in China," said TSMC spokesman Tzeng Jinnhaw (曾晉皓).
But how big is the China market? At the moment, very small.
A miniscule portion of TSMC's total sales came from China last year. Sales were so small that China as an independent market did not even register on TSMC's sales list. Nor does anybody expect it to be worthwhile for many years.
"China's design houses can't even fill up one 8-inch fab now," said Wang at EnTrust.
With consumer electronics products as the cornerstone of China's electronics industry, some analysts don't see China's market picking up for another 10 years.
"The buying power for computers and other high-end electronic products still is not there," Lin said.
Yet the world sees it as just a matter time before the buying power arrives and the market explodes, which is why everyone is trying to position themselves now to take advantage of that explosion when it comes.
Of course, they may go bust trying. An Economist Intelligence Unit report showed that 60 percent of multinationals doing business in China were losing money in 1998.
Lin's research shows that some 10,000 Taiwanese companies are losing money in their China investments.
"We do expect the China market to grow," said TSMC's Tzeng. But when and by how much still remains speculation.
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