By Dr Ming-chin Monique Chu, Lecturer in Chinese Politics at the University of Southampton.
In recent years the Chinese government has systemically strived to improve the competitiveness of domestic semiconductor industry because of the national security importance of this industry. According to Chinese policy makers, a strong domestic semiconductor industry will become the cornerstone of the country’s economic development as well as its national defence.
As a result, Beijing has introduced various policies designed to increase local civilian firms’ competitiveness, market share, and research and development (R&D) capabilities. Efforts have also been made to increase the domestic supply of semiconductor chips, which have been largely imported so far.
Since 2001, Beijing has initiated a series of policies to help spur the spin-on in the Chinese context because of the dual-use nature of semiconductor technology and its recognition of the dominant spin-on trend in the global semiconductor industry. (The spin-on trend means that semiconductor technologies have predominantly flowed from the civilian side to the military because the former has become more superior to the latter in technological advancement.) Once China manages to improve its civilian firms’ semiconductor capabilities, the Chinese military can benefit from the technological transfers from the civilian side of the economy in its attempt to build a capable digitalized modern force, with improved precision strike capabilities and integrated abilities to operate in the battlefield.
It is little wonder that China has recently beefed up its efforts to engage in ambitious merger and acquisition (M&A) activities in the global semiconductor space in order to gain access to pertinent intellectual property (IP) in the pursuit of ascendancy in the strategic industry.
Some of the firms headquartered in the USA or Taiwan, two of the major players in the worldwide semiconductor sphere, have become the main targets. For instance, the Chinese state-owned Tsinghua Unigroup has attempted to acquire U.S. memory chip maker Micron Technology; it has also attempted to invest in U.S. hard-disk drive maker Western Digital, Taiwan’s integrated circuit (IC) design leader MediaTek, and three Taiwanese chip packaging companies. These three Taiwanese packaging firms include Silicon Precision Industries, ChipMOS Technologies, and Powertech Technology that together have more than 17% share of the global chip packaging capacity.
However, the U.S. regulators blocked the Chinese firm’s $23 billion offer to acquire Micron Technology on national security grounds last summer. In March the firm dropped its bid to become the biggest shareholder of Western Digital after the U.S. regulators had planned to investigate the deal.
As the Chinese firm turned its acquisition spree to Taiwan’s IC sector, which functions as one of the major pillars of the island’s economy, the Investment Commission of the Ministry of Economic Affairs in Taipei announced in late March that the three acquisition applications would be reviewed with scrutiny. Hence this case is likely to become one of the first major challenges for Taiwan’s President-elect, Tsai Ing-wen, after she takes office on 20 May.
To analyse Tsai’s policy options concerning the aforementioned M&A cases, it is crucial to understand the way in which Taiwanese semiconductor actors (including firms and individuals) have contributed to the development of China’s sector. According to my research, which culminated in more than 160 elite interviews by 2009, the Taiwanese contributions to China’s nascent industry have permeated through IC design, fabrication, packaging and testing subsectors through trans-border transfers of technology, human resources and investment especially since 2000. The extensive scope of this semiconductor migration across the Taiwan Strait, as detailed in my book, The East Asian Computer Chip War (Routledge 2013 and 2016), has constituted the production globalization trend in the worldwide industry.
As Wang Qinsheng, Chair of Huada Electronic Design (HED), noted in Beijing in 2005, “through various forms of “internationalization,” calibre and capital from Taiwan have entered mainland China and played important roles [in mainland’s semiconductor industry]. . . [Taiwan president] Chen Shui-bian is unable to control the trend.”
Klaus Wiemer, former president of Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s leading foundry headquartered in Taiwan, and former CEO of Chartered Semiconductor, echoed Wang’s observation: “I don’t think there would be much of a semiconductor industry in China today had it not been for Taiwan. . . Taiwan essentially went across the Strait and started to participate in the Chinese semiconductor industry. They took money over there. They took people and management skills.”
According to pertinent Taiwanese insiders, China’s market opportunities, location-specific resources (such as the availability of software engineers), as well as government policy incentives have primarily accounted for their decision to move across the Strait for the silicon gold rush, sometimes in defiance of regulations at home.
The strategic implications of the said migration are two-fold. In economic security terms, new Chinese entrants may thus become able competitors for Taiwanese firms in due course. In traditional national security terms, the Chinese military would seek to benefit from the domestic civilian semiconductor sector, improved over time with
According to the president of HeJian Technology in 2005, a start-up established in Suzhou, China, with assistance from UMC that “made use of grey areas” in existing Taiwanese regulations, Beijing’s “obvious military ambition” would drive the Chinese military to exploit the domestic commercial IC industry to modernize its forces. China would utilize part of its chip industrial base, by pouring in state money, to produce ICs for the military as it continues to attract foreign investments to develop the industry.
As a Pentagon ofﬁcial argued that it would be “important to have a reliable and vibrant industry domestically” in the U.S. because the country had relied on chips to ﬁeld its weapons systems, the same observation would apply to China.
Admittedly, the Chinese ambitions to enhance its domestic semiconductor capability are not without challenges, despite the tremendous state-led endeavours to establish national champions. These include, for instance, the abilities of local firms to innovate, the reluctance by foreign firms to transfer their core technologies to China, and the obstacles faced by local firms to acquire foreign giants due to national security concerns on the part of foreign governments.
However, it does seem that the Taiwan factor has continued to foster the development of the Chinese industry. For example, TSMC has recently decided to build a wholly owned 12-inch wafer foundry in Nanjing, China, to further expand its local market share. Besides, experienced Taiwanese engineers and executives have continued to join microelectronics firms in the world’s second largest economy. Two of the most recent cases involve the former president of HeJian Technology and the former president of Nanya Technology.
Given the analysis above, whether Tsai’s new government gives the green light to the applications filed by Tsinghua Unigroup to acquire the three Taiwanese packaging firms may not seem to matter much because packaging constitutes the low-end of the production supply chain. The potential cost of such decision, nevertheless, would be reduction in Taiwan’s market share in the worldwide subsector.
Nevertheless, if the Chinese M&A ambitions spill over to target Taiwanese firms in the fabrication and the top-end IC design subsectors, Taipei may face a serious dilemma. That is, to what extent will the approval of these Chinese applications further erode the economic competitiveness of Taiwanese firms by helping their Chinese counterparts gain access to crucial IPs? More importantly, will such decision run the risk of helping the Chinese military improve its warfighting capabilities, to the detriment of Taiwan’s long-term survival and security?
Dr Chu’s book The East Asian Computer Chip War is published in hardback and now paperback by Routledge. Click here to visit the publisher’s webpage for the book.