Why Investing in Taiwan Will Help Fix China’s Broken IC Industry

Mainland China’s cross-straits investment in Taiwan will help the island country survive the global crisis and at the same time help fix its own IC market, according to the report “Mainland China’s Semiconductor and Equipment Markets,” recently published by The Information Network, a New Tripoli, PA-based market research company.

China’s chip industry is broken, a combination of the recession and too little money being spent by the government. Only $7 billion was spent on fabs in the past five years, enough to build only two 300mm fabs. Investments by China into Taiwan will not only enable the country to endure its deepest recession, which was down 10.24% last quarter, but will catalyze a change in the Taiwanese government’s attitude toward semiconductor technology transfer.

For years, rigid regulations controlled technology and monetary outflows from Taiwanese chip makers to China. Several factors played a role, such as concerns about China stealing and copying IPs, fear that the technology would strengthen China’s military capabilities, and loss of jobs.

Added Dr. Castellano:

Macroeconomic forces have changed the landscape. Taiwan needs money, and although the government may be reticent to give up its advanced technology, China’s massive economic stimulus package to Taiwan will serve to lessen regulations. This move will strengthen China’s semiconductor companies, minimizing the need to import the vast number of chips it currently does to manufacture consumer electronic products.

China's IC industry is expanding rapidly. In 2008, Mainland China produced 42.5 billion ICs, which accounted for 24.3% of domestic demand as a result of massive building programs and the weak economy. In comparison, Mainland China produced only 20.9% five years ago. However, in 2008, consumption of ICs in Mainland China outpaced production in domestically made ICs. Consumption grew 6.8% to 174.7 billion chips while production decreased 0.4% to 42.5 billion chips.

These issues are resulting in consolidation as the mainly foundry-based Chinese industry (SMIC (SMI), Grace, HeJian, ASMC, and CR Micro) competes with TSMC (TSM), UMC, and other entrenched Asian foundries. Hua Hong NEC Electronics (NELTY.PK) will soon acquire Grace Semiconductor.

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Things are also changing internally in China. As much as $25 billion is earmarked over the next five years to prop up the industry, including $5 billion for the joint venture between Elpida (ELPDF.PK) and Suzhou Venture Group and $5 billion for Sino-chip.

Areas propelling the Chinese IC industry are part of the government stimulus program such as projects to supply subsidized electronic goods to rural areas of China. The construction of 3G networks, the expansion of mobile TV operations are big areas of opportunity. The Chinese government has realized internal stimulus was not enough without the advanced technology needed from Taiwan to make these programs successful.

Disclosure: no positions

Comments

[Mad Hedge F...:]

The PRC is starting to pour money in. Regular readers of this letter are well aware of my aggressive recommendations to buy emerging markets China and Taiwan. Now you have another reason to buy both. The Middle Kingdom’s China Mobile (CHL), the world’s largest cell phone company, bought 12% of Far Eastone Telecommunications (4904.Taiwan). Although a small deal, it represents the first ever direct investment by a mainland company in the rebellious former province. The move could trigger a takeover binge by big Chinese companies of their offshore cousins. It was only a few years ago Taiwanese businessmen were arrested for just visiting, let alone investing in China, which they have done in a major way for 30 years. The iShares MSCI Taiwan fund ETF (EWT) has popped by 32% since the announcement last week, and is now up a gob smacking 74% from the March lows. Having endured daily shelling from the mainland (at exactly 12:00 noon every day) while on the small Republic of China island of Quemoy, this is more than just a symbolic gesture for me. I guess if you can’t beat them, buy them.

May 28 09:04 AM

[huangthomas:]

Taiwan just announced semiconductor technology and manufacturing is off limit to mainland investment and investment in telecoms requires government review. It probably will be turn down for national security reasons. Taiwan stock market already responded well to the inflow of mainland capitals.

May 28 10:17 AM

[huangthomas:]

Over the last decade or two, there are many countries try to emulate the success story of Taiwan Semiconductor Manufacturing Corp. They all failed (Singapore/Chartered Semiconductors, Hong Kong, Borneo,.....etc.). The first Chairman and CEO of TSMC, Morris Chang was a vice president of Texas Instrument, COO and CFO are all Americans. It was ran like an American company and staffed with Taiwanese high tech graduate students from silicon valley. And the timing is everything. I always wonder if success story of Morris Chang and TSMC can be repeated anywhere.

May 28 12:52 PM