Taiwanese Firms Investing in China

Here at Hi Tech Taipei I have long argued Taiwanese companies should be careful about migrating their latest technologies to China. President Ma Ying Jeou believes enabling companies to invest in China and specifically migrate their latest technologies to China will enable those companies to remain competitive. I am not so sure.

We noted objections to moving 45 nm fabs to China in Mr. Ma please don't move the fabs to China. We also argued in China Strategy for Fabless Chip Designers that design companies should be careful about partnering with Chinese companies because their intellectual property may be at risk. In Hon Hai Fights in Shenzhen we observed how Taiwan's largest contract manufacturer is struggling to maintain its intellectual property rights from marauding Chinese pirates. In the article quoted we observed how the Chinese legal system may be complicit in the piracy by not accelerating the case and enabling Hon Hai's competitor to gain traction in the market.

However, in No 10G AUO Plant in China we conceded any investment decision into China will be a business decision and not a political one and were also pleased to note both AU Optronics (AUO) and (in Fabs to Stay in Taiwan) the big Taiwanese foundries UMC and TSMC were going to stay invested in Taiwan.

To follow up Digitimes has posted an excellent commentary on the issue of Taiwanese firms investing in China. The beginning of the commentary is quoted below.

Since Taiwan's new president took office in May this year, the government has promised to relax various restrictions on its ties and exchanges with China. Taiwan's semiconductor and flat panel industries are now eagerly awaiting changes to the investment rules that have prevented companies from setting up operations involving advanced technologies in China.

President Ma Ying-jeou has on several occasions spelled out the principles for lifting the China-bound investment restrictions. First, after the restrictions are eased, Taiwan's IT industry can remain competitive globally, and its share of global market for IC and semiconductor will not be affected. Second, the advanced technologies developed by Taiwan players and their intellectual property must be well protected in China.

Signs in the market have indicated that an announcement from the government is expected in September.

The article is well worth the read. Follow the link below.

Digitimes: Taiwan and restrictions on China-bound investments

The Foundry Industry -- A Recent History

In TSMC sees good Q2 but Expects Slowdown we noted some of the successes of TSMC and how TSMC project only a 4% growth over the next quarter. The Financial Times, in response to TSMC releasing their financials, has an excellent article on the last downturn in the industry when most industry experts believed TSMC would battle to survive. The FT argues the situation is now reversed and TSMC is very well placed to struggle through the next downturn. According to the FT:

TSMC, the world’s largest contract chipmaker, predicted flat sales and a slight squeeze on margins in the current quarter. Nevertheless, many analysts are keeping their overweight or buy ratings on the stock. They argue that, if anyone can survive, grow and make money in this industry, it will be TSMC.

Five years ago, the opposite appeared likely to happen.

TSMC and United Microelectronics (UMC), its smaller Taiwanese peer, invented and built up the business of contract chipmaking. The foundry industry, as it is known, thrived for more than a decade before the Taiwanese groups started facing competition. Chinese companies moved in at the low end of the foundry business while IBM started offering services at the top end.

By 2003 iSuppli, the market research group, warned that TSMC’s market share was slipping. Media reports started predicting that IBM would muscle its way to the top whereas TSMC and UMC would be squeezed out.

IBM had succeeded in snatching orders from some key TSMC and UMC customers such as Nvidia, Xilinx, Analog Devices, AMD and Broadcom. Meanwhile, Semiconductor Manufacturing International (Smic), China’s largest contract chipmaker, squeezed in to rank fifth among the global foundries.

Robert Tsao, then UMC chairman, even predicted the demise of the existing foundry model.

But, says Ming-kai Cheng, head of technology research at CLSA, “they were all wrong”.

China has not become a meaningful player in chip manufacturing nor have big integrated players such as IBM captured leadership in the industry.

Instead, TSMC has now pulled far ahead of everybody else. Over the past five years it has been the only foundry that has managed to hold on to its market share, remain cost-competitive, enhance technological capabilities and shield its profits from cyclical downturns.

Due to TSMC continue expanding their service and focusing on developing their capabilities, Mr. Cheng was quoted as saying "TSMC now looks more like Intel than like UMC.." The FT also says IBM have lost 3.5% of their market share (6.1% to 2.7%) and that both Chartered, the Singapore foundry, and UMC, the no. 2 foundry are both far behind TSMC. The FT further argues the low cost Chinese foundries are beating each other out of the market and that soon there will be fewer players. The FT also looked at the deregulation of investments in fabs in China (seeMr. Ma please don't move the fabs to China) saying it won't make much of a difference since UMC has apparently said China bound investments are not a priority. Afterall, as we argued in No 10G AUO Plant in China , China-bound investments are still strategic business decisions, not legaslative.

TSMC without doubt single handedly changed the landscape of the semi-conductor industry. They are one of Taiwan's best companies and continue to lead in the semi-conductor fabrication industry. Taiwan should be proud of this world class company and I certainly hope sensibility prevails and that both TSMC and UMC will not charge into China as soon as the new laws are passed. Histroy suggests TSMC have made the right moves at each stage of the game in their 20-year history. Lets hope they continue to do so.

Financial Times: TSMC set to forge a path through gloom