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December 19, 2006 4:23 pm

Taiwan raises chip stakes

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Taiwan’s government has approved fresh semiconductor manufacturing investments in China worth a total of $825m in another cautious step in the gradual liberalisation of cross-Strait economic relations.

Under a revised review system for big-ticket investments on the mainland, the island’s cabinet gave the green light for Powerchip and Promos, the island’s largest and third largest memory chipmakers, to invest $400m and $365m respectively in 8-inch semiconductor plants.

Advanced Semiconductor Engineering, the world’s largest chip testing and packaging company, was also given approval to buy a stake in Global Advanced Packaging Technology, a Shanghai-based firm with which has an unofficial partnership.

Analysts said the approvals would have little immediate impact on Powerchip and Promos but could foreshadow a more meaningful relaxation of cross-Strait investment restrictions in the future.

In the projects approved late on Monday, the two memory chipmakers were restricted to 0.25 micron technology, which is less advanced than the manufacturing processes already being used by Chinese and international competitors.

“Promos might be a little more eager to press ahead with its mainland China presence but Powerchip is now focusing on expanding its 12-inch capacity in Taiwan, so there will not be any immediate impact from this,” said Peng Kuo-chu, an expert on the chip industry in Taiwan and China at the Industrial Technology Research Institute, a government-sponsored think tank.

Powerchip and Promos had to wait two years for approval to manufacture in China. Both companies asked the Taiwan government for permission to set up 8-inch plants in December 2004, after Taiwan Semiconductor Manufacturing (TSMC), the world’s largest contract chipmaker, had become the first Taiwanese semiconductor company to be allowed to cross the Strait.

“Our economy is in a painful process of structural adjustment as low-end manufacturing has left for China at a speed and to an extent not experienced by any other economy,” said a senior government official.

“Therefore we seek to restrict our companies from going over there until they almost cannot bear it any more. Thus, we can delay the social fallout a bit longer and help the local economy to get ready in terms of creating new jobs.”

Taiwan’s chip companies have long criticised the slow pace at which cross-Strait links are being opened, and some analysts have warned in the past that the more labour-intensive segments of the island’s semiconductor industry, such as chip packaging, could see their market share threatened by Chinese competitors.

However, the past two years seem to have proved that these risks are far smaller than feared. Since 2005, the overall gains in market share by Chinese chipmakers have been halted, and the mainland’s chip industry revenues have stopped growing faster than those of Taiwan.

“This is due to the migration to 12-inch fabs [fabrication facilities],” said Mr Peng. “The Chinese chipmakers just have not managed to keep up with their far larger peers from Taiwan.”

While Chinese chipmakers have seven 6-inch fabs compared with nine owned by Taiwanese companies and 11 8-inch fabs compared with 21 owned by their Taiwanese peers, they fall behind in 12-inch capacity. Taiwan so far has 11 12-inch plants, while there are no more than two on the mainland.

This trend is likely to continue because the capital expenditure of Taiwanese chipmakers is growing quicker than the amount that Chinese firms are spending on new capacity.

Taiwan’s government is preparing to take another liberalisation step by allowing more advanced 0.18 micron technology to be used by Taiwanese companies in China in a few weeks time, officials at the Ministry of Economic Affairs said.

Huang Ching-tang, executive secretary of the cabinet-level Investment Commission, said approvals were expected to be granted speedily. “Unless this involves a huge amount of new investment, they [companies] won’t need to undergo another cabinet policy review,” he said.

Apart from Powerchip and Promos, TSMC, which has long lobbied the government to open up mainland investments in 0.18 micron technology, is also expected to take advantage of the more liberal policy. “This would be a major upside for TSMC,” said Mr Peng. “It would probably allow them to grab more market share in China.”

The main reason behind the Taiwanese chipmakers’ eagerness to set up shop in China is access to the mainland’s fast-growing market rather than lower production costs.

Chipmakers need to be able to supply companies that produce electronics goods in China for export, but they are also aware that those with a local manufacturing presence have better prospects of getting orders from customers producing for the domestic market.

There are stronger cost pressures in the so-called back-end of the industry – in packaging and testing – which has prompted the Taiwan government to be more flexible in dealing with ASE.

The Taiwan government bans local companies from investing in higher-end testing and packaging companies on the mainland. However, the decision to allow ASE to invest in GAPT suggests that these restrictions will no longer be strictly enforced. “ASE has pledged not to engage in banned activities. That is enough for us,” said Mr Huang.

In the wake of the cabinet decision, made late on Monday, the three companies still need formal approval from the Investment Commission. However, this is no more than a formality and could be granted as early as next week, said Mr Huang.

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