China May Have to Wait for Chip Investment From Taiwan

The Taiwan government is planning major changes to regulations governing chip-related investments in China, but the island's companies are in no hurry to build new factories on the mainland.

"Currently, we do not have a fab expansion plan in China," said Rick Tsai, CEO of Taiwan Semiconductor Manufacturing (TSMC) at the company's second-quarter investors' conference on Thursday. The company's current Shanghai facility will reach its maximum capacity by the end of the third quarter and TSMC owns enough land at the Shanghai site to build a few more fabrication plants, or fabs there.

But the world's largest contract chip maker sees worsening business conditions on the horizon, caused by high energy prices and rising materials costs.

Other chip makers have also noted problems.

Taiwan's DRAM makers, for example, continue to post losses in a tough market for their chips. DRAM prices have fallen below the cost of production due to a chip glut, leading to the losses. Taiwanese DRAM makers have all cut back on their expansion plans.

TSMC's biggest rival in the contract chip making business, United Microelectronics (UMC), doesn't plan to build any new factories in China soon, either.

UMC is focused on legally taking ownership of a 15 percent stake in China's He Jian Technology, a contract chip maker UMC executives have admitted to aiding in its start-up phase. But UMC and company executives say they broke no Taiwanese laws by helping the Chinese company. He Jian is UMC's partner in China.

"Aside from the He Jian stake, we have no other plans to invest in China," said Sun Shih-wei, CEO of UMC, during the company's second quarter investors' conference on Wednesday.

A number of global companies have been attracted to China for its huge market, low-cost labor and incentives for chip related investment, such as construction subsidies, low-cost land in special technology park zones, and tax breaks.

Last year, Intel, the world's largest chip maker, announced plans to build a US$2.5 billion chip fab in Dalian, on China's northeastern coast.

Taiwanese investment to China has been held back over the years by stiff regulations controlling the amount of money and kind of technology Taiwanese chip makers may invest in China. Taiwan has controlled such investments over fears of job losses or that Taiwanese technology might be used to bolster Chinese military might. The two separated in 1949 amid civil war, and Beijing has long threatened to use force to take over Taiwan if the island moves toward formal independence.

The election of a new president in Taiwan, Ma Ying-jeou, has brought about change in Taiwan-China relations. He rode to election victory on a campaign platform advocating wide reforms to trade and investment policies with China. Last month, for example, direct flights between Taiwan and China started for the first time in over 50 years.

And in an interview with IDG News Service earlier this week, a high ranking Taiwanese government official revealed plans for far-reaching changes to chip investment restrictions that will take place in September of this year.

The easing will likely be met by applause from Taiwanese chip makers, but a worsening global economy appears set to keep them from taking advantage of the coming rule changes.

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