If a picture is worth a thousand words, then the sight of nearly 200 government agents raiding the offices of foundry United Microelectronics Corp. this month, looking for evidence of China investments, couldn't have said it better: Taiwan's restrictions on semiconductor investment in China have got to go. They're shortsighted, antithetical to the Darwinism of free markets and an ineffective tool for maintaining Taiwan's technical leadership in Asia.
For about three years now, it's been pretty obvious that UMC has had a close relationship with Chinese foundry He Jian Technology and may have transferred technology or money to the company to facilitate its founding and growth. UMC denies this, because it would violate Taiwan's restrictions on investments in certain technologies in China, including semiconductor plants capable of processing integrated circuits on 200-mm and 300-mm wafers.
It's taken the Taiwanese government a long, long time to act on one of the island's worst-kept secrets. Why is a bit of a mystery. Some say politics; others say the authorities got a reliable tip. Either way, the government felt compelled to raid UMC offices as well as the residence of John Hsuan, the foundry's vice chairman. That was followed by the arrest and interrogation of He Jian chairman Hsu Jien-hwa and the staunch denial of wrongdoing by UMC chairman Robert Tsao in an open letter to the prosecutor. In it, Tsao admitted offering guidance to He Jian and allowing the company to use patents. Eventually, UMC may buy He Jian, he said, but he insisted no money had changed hands. (That might be splitting hairs, though, since the wink-and-nod use of patents may be interpreted as investment.)
Taiwan's government fears China, a rival since the civil war of 1949. This fear has crept into its economic policy. What the government has lost sight of is that China is progressing regardless of its own attempts at protecting or suffocating, depending on one's view the island's wafer foundry business. In the years that Taiwan has put restrictions on this business, China has managed to grow its own semiconductor foundry businesses, starting with Hua Hong NEC, then quickly moving on to Shanghai Manufacturing International Corp. and Grace Semiconductor Manufacturing Corp. A handful of smaller companies have done well, too.
Tsao cited the rapid progress of these companies as partial justification for his support of He Jian. He recognized that this trend cannot be stopped by protectionist measures in Taiwan. An industry as big, fast-moving and cost-conscious as semiconductors doesn't tolerate government foot-dragging, especially when faced with unfettered overseas competition. Just ask executives at Applied Materials, who feel handicapped by U.S. restrictions on semiconductor equipment exports to China unfair because Chinese companies can turn to Japanese or European vendors that don't face the same level of restrictions.
Indeed, the only kind of intervention the semiconductor industry thrives on is the kind that encourages innovation. So the Taiwan government would better serve its foundry industry by letting business leaders determine what's good for business, while it helps create environments that facilitate growth, not restrict it. Priorities should include boosting national R&D, loosening restrictions on visas for foreign engineers and engaging in systemic reform of the education system.
There are some signals from high-ranking officials that a review of the China investment rules may be under way. Just recently, Taiwan's premier, Frank Hsieh, said, "My thinking is that the law has to be thoroughly enforced . . . according to the existing legislation. However, if the number of illegal acts is extremely high, there might be something wrong with the law, which will then require examination."
If the government insists on keeping the restrictions in place, then it should at least streamline the labyrinth of red tape. It took Taiwan Semiconductor Manufacturing Co. more than a year to get approval from the government here to build its 8-inch plant in China. That's intolerable. But if the premier is serious about changes, then the faster the better.
By Mike Clendenin, Taiwan bureau chief.