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Executive Summary
Semiconductor Report - Annual Review, 2004
January 1, 2005

Taiwan's semiconductor industry wrapped up its best year ever in 2004. Most of the island's chipmakers grew sales by double-digit percentages, and even some of the worst-off companies regained composure after a tough time in previous years.

It was also a year of politics, and most people on the island voted for the status quo. Taiwan enjoyed its third free presidential election in the spring, ushering the incumbent - President Chen Shui-bian - back into office for a second term, and in December, Taiwan voted for maintaining an opposition-led parliament. That should keep government leaders busy in 2005 - and there is a lot to do for chipmakers because officials made very little headway on issues impacting them last year.

On the China side, global chipmakers won a major victory when Beijing said it would do away with a controversial value added tax by April 2005. However, industry groups remain vigilant, and stress the need to pay attention to new measures meant to take the place of the VAT, as Beijing has proposed a few new measures worth watching.

When chipmakers recount the past year in Taiwan, they will review a number of milestones and realized opportunities. Taiwan Semiconductor Manufacturing Company (TSMC), the largest foundry chipmaker in the world, became the first chip company from the island to legally set up a factory and start producing semiconductors in China. Unfortunately, it is not clear when the next Taiwan company will make the same journey, nor is there much hope of a China opening anytime soon for chip testing and packaging companies like Advanced Semiconductor Engineering (ASE) - a boon for U.S.-based Amkor.

Taiwan's memory chipmakers made out the best in 2004, mainly by being early in their adoption of new manufacturing technology using 12-inch silicon wafers for chip production. By the end of the year, Powerchip Semiconductor, Promos Technologies, and Nanya Technology were all running the cost-efficient 12-inch fabs, making Taiwan the most condensed 12-inch cluster in the world. If these Taiwan companies are right, 2005 will be even better and will prove them prescient in their ability to time the market upturn and take full advantage of it by gambling that the expensive 12-inch fabs would pay off. Had 2004 been a down year, two of the above firms might be going out of business today.

The island's chip design industry will likely lick its wounds from 2004 and try to determine what lessons to take into the coming year. Companies like MediaTek and Via, both former rising stars for Taiwan, faced stiffer competition from their U.S. and Japanese rivals on high margin products, while fellow Taiwan firms ate away at their lower-end offerings. Although there were a few standouts in 2004, like A-DATA and Novatek, their success can be attributed partly to their market segment - memory chips and LCD screens - and both could face a tougher year this year if sales of those products drop off.

This report will explore some of what went right and what went wrong in 2004, and will detail political wrangling that continues to threaten Taiwan chip industry investment in China. It will also take a hard look at China as it seeks to replace its VAT, which expires in April 2005. Taiwan's efforts to curb investment in China will also be a topic of this report.

Table of Contents
Letter from the President 1
About the US-Taiwan Business Council 3
Semiconductor Analysis 5
Introduction 5
State of the Industry 6
Taiwan, China Relations, and Government Policy 7
U.S. Trade Policy with China 11
Looking Forward to 2005 15
Conclusion 15
Glossary of Terms 17
Conference Summary: Taiwan + China Semiconductor Industry Outlook 2004 27
Taiwan Semiconductor Industry/Government Contact Information 33
United States Semiconductor Industry/Government Contact Information 43
Sources for Taiwan Semiconductor Industry Information 53
Semiconductor Headlines: Fourth Quarter, 2004 55
Appendix: Trends in Trade and Investment 61

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