back to US-Taiwan

Executive Summary
Semiconductor Report - First Quarter, 2004
April 1, 2004

Taiwan views its chip industry as vital to its competitiveness in the global business arena. For that reason, it requires semiconductor companies to apply for permission to set up factories in China, particularly since China's military buildup is another reason for the island to be cautious. The re-election of Taiwan President Chen Shui-bian has serious implications for Taiwan's semiconductor industry, as the president himself, also Chairman of the Democratic Progressive Party (DPP), is widely viewed as a hurdle to semiconductor companies doing business with China due to his party's pro-Taiwan independence leanings.

However, it would be a mistake to think that due to his re-election Taiwan will slow down the approval process for its chipmakers to set up shop in China. Although a victory by Kuomintang (KMT) candidate Lien Chan would likely have sped the development of direct transportation links and better business ties with China, Chen's second term victory should still mean better times once the political environment has stabilized.

The Chen government has already given its word to chip companies that he will allow them to move forward on their China plans, and the second term victory frees Chen from the pressure within the more radical elements of his party that demand he keep a lid on business ties with China. In fact, one of the clearest signs Chen will indeed work with chipmakers in his second term was his meeting with Taiwan Semiconductor Manufacturing Co. (TSMC) chairman Morris Chang just days after his re-election, particularly as the meeting took place even amid the controversy over an alleged assassination attempt and calls for a vote recount due to his slim margin of victory. Shortly after the meeting, TSMC - as well as rival United Microelectronics Corp. (UMC) and a host of other companies - announced stock buybacks to help support Taiwan's main stock market, which plunged by around 11% in the first two trading days after the disputed election.

According to various officials in Taiwan, it appears that the government will allow semiconductor packaging and testing companies to move forward on plans to set up shop in China in the near term. It also looks likely that TSMC will meet its target of ramping production at its Shanghai plant in the fourth quarter of 2004. TSMC, through that China plant, will then be able to take orders from customers that want to avoid China's value-added-tax (VAT), which penalizes imported chips by an additional 14% levy versus locally produced ones. That should help the world's largest chip foundry to take business back from upstarts in China like Semiconductor Manufacturing International Corp. (SMIC). There is also talk of greater loosening of technology restrictions for the foundry giant, but so far that appears to be pure speculation.

This report will focus on the implications of Taiwan's presidential election on the speed of the local chip industry's move into China, and its progress so far. In addition, the quick rise of SMIC - and its recent and hugely successful IPO - will also be a topic in the report, as will China's hotly debated VAT, over which the U.S. has filed a World Trade Organization complaint. Finally, the report will also discuss China's insistence on adopting a new security standard for wireless local area network chips called WAPI, and how that could impact Taiwan.

Table of Contents
Letter from the President 1
About the US-Taiwan Business Council 3
Semiconductor Analysis 5
Introduction 5
The State of Taiwan's Chip Industry 5
Great Expectations for Chip Freedom after May 20 7
SMIC Flies High, But Problems Show 7
TSMC Charges SMIC with Espionage, Again 10
US Files WTO Case against China Semiconductor VAT 11
The Aftermath of China's WAPI 12
Conclusion 13
Taiwan Semiconductor Industry/Government Contact Information 15
United States Semiconductor Industry/Government Contact Information 25
Sources for Taiwan Semiconductor Industry Information 33
Semiconductor Headlines: First Quarter, 2004 35
Appendix: Trends in Trade and Investment 41

This report is available to our members starting April 15, 2004. To purchase a copy of this report (US$50 for non-members), use this order form.

If you have any questions about the report, please contact Judson Payne, the Council's Director of Corporate Affairs. You can also call us at (703) 465-2930, or email us at

Not a member?