A Preliminary Assessment of Taiwan’s Restrictions on Chinese FDI in its Semiconductor Industry

A Preliminary Assessment of Taiwan’s Restrictions on Chinese FDI in its Semiconductor Industry

A Preliminary Assessment of Taiwan’s Restrictions on Chinese FDI in its Semiconductor Industry

Controlling direct investment from the People’s Republic of China (PRC) in sensitive or strategically important sectors of Taiwan’s economy has long been a concern of Taiwanese policymakers, including in the semiconductor industry, also known as the integrated circuit (IC) industry. Limited PRC investment in some sectors of the Taiwanese IC industry was nominally permitted in 2013. Yet, Taiwanese policymakers’ lingering concerns over inbound PRC investment in this strategic sector, valid though they are, could have the unintended effect of hampering the long-term competitiveness of one of the country’s most important industries.

IC producers are lynchpins of Taiwan’s economy, accounting for an estimated 13.4 percent of the island’s exports by value.[1] Semiconductors produced by companies like Taiwan Semiconductor Manufacturing Corporation (TSMC) are also of crucial importance to major downstream Taiwanese manufacturers like Hon Hai Precision Industry (also known as Foxconn). Now, however, Taiwanese IC producers are staring down increased competition from Chinese semiconductor companies with strong government backing, in the form of “Made in China 2025”  (中國製造2025) a plan unveiled by the PRC’s State Council in 2015 to bolster Chinese domestic producers across a broad sweep of manufacturing and high-technology industries. Through MIC 2025, the PRC has committed to supporting its domestic IC sector through a range of measures, including financing of up to $161 billion over 10 years, and creating, as in other targeted sectors, a dominant firm meant to act as China’s “national champion”—in the case of the IC sector, that firm is Tsinghua Unigroup, a company spun out of Beijing’s Tsinghua University that rose to prominence in 2013-2014.

As the shape of the Chinese government’s MIC 2025 push came into focus in 2014 and 2015, leading Taiwan IC companies began to lobby publicly for Taiwan’s government to open their industry to more investment from PRC companies. Their reasoning proceeded along two paths:

  • First, the scope and scale of PRC support for its domestic champions meant Taiwanese companies needed to ‘get on board,’ lest late movers would inevitably be swept away by the strengthening tide of Chinese competition.
  • Second, Taiwanese semiconductor executives have asserted that Taiwan’s regulations limit their strategic options by prohibiting them from selling stakes to Chinese companies. This would limit their flexibility compared with other global competitors. David Ku, CFO of MediaTek—a Taiwanese company that competes directly with Qualcomm in semiconductor design—told Bloomberg, “I need to have the strategic flexibility, which means I can go anywhere, talk to anyone and ask for acquisitions or joint ventures with cash or shares. The way that the current Taiwan regulations restrict us, we’re basically not in the same playground.”

The first reason is not convincing. Industry analysts such as the research firm IC

Insights believe China will fall far short of its MIC 2025 goals, making unlikely the short-to-mid-term market dominance Taiwanese producers fear. The second reason, however, makes an important point that policymakers should take note of: China is already a global leader in terms of its importance as a market for IC manufacturers’ products, and as a source of investment capital (an important consideration in the capital-intensive IC industry). Leading IC companies understand that access to markets and capital in China will remain dependent, at least in part, on their willingness to appear supportive of government initiatives such as MIC 2025, which may in turn necessitate the formation of strategic alliances with Chinese entities.

Navigating this concatenation of forces is Tsai Ing-wen’s Democratic Progressive Party (DPP) government, which has tacked carefully away from the PRC since it assumed power last year. Concerns over former President Ma Ying-jeou’s embrace of cross-Strait economic integration was a contributing factor in Tsai’s electoral victory. The Tsai administration has responded, in part, by limiting the acquisition of stakes in Taiwanese IC companies by PRC entities, even in sectors nominally open to investment, such as chip ‘packaging.’[2]

In late October 2015, Tsinghua Unigroup announced it would acquire a 25 percent stake in Powertech, a Taiwanese chip packaging company. Powertech management specifically cited China “market access” as part of its rationale for making the deal. A little more than a month later, Tsinghua announced its intention to acquire a 25 percent stake in two more Taiwanese packaging firms, ChipMOS and Siliconware Precision Industries (SPIL)—SPIL and Powertech were Taiwan’s second and third-largest IC packaging companies by revenue in 2016.

The new Tsai government wasted little time signaling its caution, with an official from the Ministry of Economic Affairs telling Reuters in February 2016, “We said from the start [all three] will not be entirely approved … Whether one or two of the cases can pass, we need to see the review process.” All three deals eventually failed. Although the Tsai government did not comment publicly on its deliberations, neither were any of the applications rejected outright: SPIL withdrew its application in late April 2016 when it appeared government approval would not be forthcoming, with ChipMOS and Powertech following suit in November 2016 and January 2017, respectively.

In erring on the side of caution, the Tsai government has limited Taiwanese IC companies’ “strategic flexibility.” Consequently, many companies have fallen back on second-best options in the months since the collapse of Tsinghua Unigroup’s deals. ChipMOS and Tsinghua Unigroup responded with an announcement that the latter would acquire a stake in the former’s mainland subsidiary. TSMC’s widely-admired chairman Morris Chang—who called in mid-2016 for the Taiwanese government to allow direct mainland investment in his industry—opted to press forward with plans for a US $3 billion foundry plant in Nanjing. In an attempt to build on the scale it believes is necessary to remain competitive, SPIL agreed to a buyout proposal by ASE, Taiwan’s largest IC packaging company. In an ironic, perhaps retaliatory, twist, the deal remains on extended hold, pending antitrust approval from PRC regulators.

Taiwan’s semiconductor industry clearly views the Chinese market and funding as competitive necessities. By refusing to allow PRC corporate entities to acquire non-controlling stakes in relatively non-sensitive parts of its domestic IC industry, the Taiwanese government may be missing an opportunity to carve out competitive latitude for homegrown IC companies. An overly broad approach to restricting inbound investments may also have the inadvertent effect of pushing cooperation offshore, farther from the eyes of Taiwanese regulators who could otherwise ensure compliance with regulations designed to assuage concerns around intellectual property loss and undue PRC influence.

The main point: The Tsai administration’s caution toward investment from the PRC in its highly-prized domestic IC industry for national security concerns, while understandable, could have the unintended effect of handicapping its companies’ long-term competitiveness in one of their key markets.

[1] Author’s calculation, made by dividing total IC exports for 2016 by total exports for 2016. NT$ converted to US$ using the spot exchange rate prevailing on December 31, 2016.

[2] As the last step in the chip manufacturing process, packaging—wherein delicate semiconductor components are ‘packaged’ in their protective final casings—is generally seen as less technically demanding than chip design and manufacturing, reducing concerns around intellectual property theft. The packaging sector is on Taiwan’s positive list for PRC investors, giving mainland persons nominal permission to invest, subject to several provisions on corporate control. However, PRC investment in chip design companies (such as MediaTek) and manufacturing companies (such as TSMC) remains prohibited.