Cross-Strait Semiconductors: One Taiwanese Company Versus One China

The semiconductor industries on both sides of the Taiwan Strait are competing fiercely. When the other side, with the strong support of the government and huge market power, allowed the semiconductor industry to enter a golden age of wild growth; when the market, time, capital, and even talent are no longer on Taiwan's side, Taiwan's one or two leading companies have to compete with the entire Chinese government.

As Dickens's A Tale of Two Cities begins: It is the best of times, it is the worst of times. For Taiwan's national treasure, the semiconductor industry, this is an awkward moment.

The best moment was when Taiwan's total semiconductor output value in 2014 reached NT$2.2 trillion, a record high, with a growth rate of nearly 17%. For several consecutive years, Taiwan, as a small island, has been ranked second in the global semiconductor industry, surpassing Japan and South Korea, and only losing to the United States. But the bigwigs in Taiwan's semiconductor industry were not happy. Because, at the same time, the crisis had quietly arrived.

On April 21, Taiwan held its annual Semiconductor Annual Meeting. All the senior executives were serious and nervous. A few days ago, Lu Chaoqun, the re-elected chairman of the Taiwan Semiconductor Association and chairman of Etron, gave nearly 10 colleagues an assignment to prepare a briefing document. Each person spoke for 7 minutes. The theme was: "The advantages and disadvantages of Taiwan's semiconductor industry, and how to face competition?"

The key to success or failure lies in 3 to 5 years

Lu Chaoqun was the first to speak. Whether Taiwan's semiconductor industry can continue to rise or will lose its golden opportunity to others, now is a critical moment. "We should find a way to attract talents from all over the world instead of letting them drain away."

"I think there are only five years left for wafer foundry and three years left for IC design," said Wang Boyuan, chairman of Zhonglei, who is known as the "godfather of venture capital."

UMC CEO Yan Bowen also made a strong statement, pointing out that China treats the semiconductor industry as a national defense industry. "This is no longer a competition between industries, but probably a competition between countries."

Former National Chiao Tung University President Wu Chong-yu pointed out that a "talent crisis" is currently erupting. For example, the number of applicants for the solid-state group doctoral program of the Department of Electronics at National Chiao Tung University, which specializes in training semiconductor talents, is even less than the number of admissions, not to mention the number of people who have officially registered to study.

Macronix General Manager Lu Zhiyuan analyzed that if your technology can only occupy the mainland market, then you will be dominated by it. The other 2/3 of the international market is a business that only world-class manufacturers can get.

Mainland China, which was far behind Taiwan and posed no threat, began to vigorously support the semiconductor industry. Since 2013, the government-backed Tsinghua Unigroup has acquired two major mainland IC design companies, Spreadtrum and RDA, and is preparing to join forces. Then Intel, the world's largest semiconductor company, invested $1.5 billion in Tsinghua Unigroup, shocking the market.

Lu Shang's strong acquisition shocked the market

In 2014, the mainland central government issued the "National Integrated Circuit Industry Development Promotion Outline", launched a large investment fund of 120 billion yuan, and encouraged local governments to add small funds of 30 billion to 50 billion yuan. With the influx of private capital, the total investment is expected to reach 1.2 trillion yuan (6 trillion Taiwan dollars).

The huge acquisitions that cost a fortune are too numerous to count. STATS ChipPAC, the world's fourth largest semiconductor packaging and testing company, Omnivision, a well-known optical image sensor chip manufacturer, ISSI, a memory chip manufacturer, and H3C, a subsidiary of HP, have all been acquired by Chinese companies.

Wang Duan, vice president of Gartner, who once worked for SMIC, the largest wafer manufacturer in mainland China, said that in the next 10 years, the growth of mainland China's semiconductor industry will definitely surpass that of other parts of the world. "And it will not be just 10 years. Once you start investing, there is no turning back!" But why is mainland China, which has not been developing well in the semiconductor industry for more than a decade, actively targeting semiconductors and making great efforts to increase its investment?

China imports more than $200 billion worth of semiconductors each year, surpassing oil to become the largest trade deficit item, and the huge import volume accounts for 70% of the global semiconductor market. In contrast, China's semiconductor chip self-sufficiency rate is less than 20%, which is shockingly low.

In addition, the surveillance crisis exposed by the Snowden incident in 2013 made mainland officials even more uneasy. They believed that the development of semiconductor chips for core electronic products was related to national security and was imperative.

Taiwan has three wins, two losses and one tie

The semiconductor industry can be roughly divided into three major areas: IC chip design, semiconductor manufacturing (including wafer foundry and memory manufacturing) and semiconductor packaging and testing.

The comparison between the two sides of the Taiwan Strait makes Taiwan worried. The mainland semiconductor industry has assembled a large army and is approaching the city. It is definitely not that Taiwan's semiconductor industry is not competitive, but the mainland's growth momentum is sharp. Since 2010, the overall average annual growth has exceeded 20%, especially in the IC design field, which has a growth of up to 30%.

Shock 1. IC chip design: China's output value approaches Taiwan's

The fastest-growing field in mainland China is IC design, because it does not require large capital, equipment or factory buildings, but can be supported by strong engineering talents.

From a company that was barely known more than a decade ago to the strongest company under Huawei today, HiSilicon is not only able to independently develop high-threshold mid-to-high-end mobile communication chips for use in Huawei phones, but its revenue has also exceeded that of Taiwan's second-ranked Novatek and is almost half the size of MediaTek.

Spreadtrum, MediaTek's arch-rival that once caused MediaTek to suffer a great loss in the 2G era, now has revenue comparable to that of Taiwan's third-largest IC design company. Recently, Leadcore, a subsidiary of Datang Semiconductor, has also emerged and has become popular due to its cooperation with Xiaomi.

Several of the top ten IC design companies in mainland China also have their own breakthroughs. For example, Rockchip has taken over the world's largest MP3 and chip market, and GalaxyCore specializes in CMOS image sensor chips.

IC design companies in mainland China have sprung up like mushrooms after rain, reaching as many as 700. Although the quality of the companies varies greatly, the market is huge and buyers can be found for mid- and low-end chips. The overall IC design industry output value is approaching that of Taiwan, and may even be on par with or even surpass Taiwan this year.

In contrast, Taiwan relies on MediaTek alone to support the overall situation. In 2014, MediaTek's revenue exceeded NT$210 billion. It has to catch up with Qualcomm, the world's largest mobile phone chip manufacturer, and has to take into account the rise of Chinese manufacturers. So far, not only is no one in Taiwan able to catch up, but it is also outnumbered by ten. The combined revenue of the top ten IC design companies in China can only match that of MediaTek.

Shock 2. Semiconductor packaging and testing: The world's fourth largest company is in China

In the semiconductor packaging and testing sector, because China includes local foreign investment in its output statistics, the overall output value seems to have surpassed Taiwan. However, ITRI IEK System IC and Process Research Department Manager Peng Maorong estimated that "about 70% is foreign investment and only 30% is local."

Taiwan has two semiconductor packaging and testing companies: ASE, the world's largest, and Siliconware Precision Industries, the third largest. ASE has recently been focusing on high-cost system-in-package (SiP) technology, absorbing most of Apple's orders, and Siliconware Precision Industries has also actively deployed mid- and high-end packaging, and its operations are stable and upward. However, most industry insiders are worried that the packaging and testing field will be the most fiercely competitive field between the two sides in the future due to its relatively low technical threshold.

In particular, at the end of last year, the mainland government launched an investment "Big Fund" to assist the largest packaging and testing company, Jiangsu Changdian Technology, to acquire the Singapore packaging and testing giant STATS ChipPAC in a small-to-big merger. Although in the short term the two companies will allow Taiwanese manufacturers to gain some benefits from transferred orders due to cultural integration and restructuring, in the long run, this merger will not only allow Changdian to become the world's fourth largest packaging and testing company, but also take its technology to a higher level and quickly enter the European and American markets that were previously difficult to enter. Many analysts believe that this is a "short-term bullish and long-term bearish" deal for Taiwanese manufacturers.

How long can TSMC continue to win?

Shock 3. Semiconductor manufacturing: TSMC dominates but has hidden concerns

In the semiconductor manufacturing sector, Taiwan's strongest area is "wafer foundry", with an overall output value of nearly NT$1 trillion, close to half of Taiwan's entire semiconductor industry and several times that of mainland China. It is currently the only field in which Taiwan still has a chance of winning.

TSMC's revenue in 2014 was as high as NT$762.8 billion and its profit was NT$263.9 billion, both record highs. It continues to be the most profitable company in Taiwan, with a 50% market share in the global foundry market, ranking first in the world, and has always been the company with the largest market capitalization in the Taiwan stock market.

In today's most advanced 14/16 nanometer process, the only companies that can compete with TSMC are Intel in the United States and Samsung in South Korea. If we compare it with SMIC, the largest wafer foundry in China with an annual revenue of about NT$60 billion, TSMC is not only 12 times smaller in scale, but also 70 times more profitable than SMIC.

TSMC, which has achieved brilliant results, has not been immune to pressure from the mainland. With more and more mainland customers, the proportion of revenue has increased to 8%. In addition, a large part of the chips produced by European and American IC design customers are sold to mobile phone or electronics manufacturers in the mainland. All of these have led TSMC to state several times since last year that it is "actively evaluating the advantages and disadvantages of setting up 12-inch wafer fabs in the mainland."

UMC, which has regained the throne of the world's second largest wafer foundry, has taken the lead in landing and has established a joint venture with the Fujian and Xiamen governments to build a 12-inch wafer factory in the mainland, which will officially start production in the second half of next year. The reason why it is so active is that UMC faced the threat of mainland factories faster than TSMC. Its top competitor SMIC has announced that its monthly production capacity of 28nm will reach 35,000 pieces by the end of next year, which may surpass UMC. If the semiconductor strength of the two sides of the Taiwan Strait is comprehensively evaluated from the six major aspects of technology, operation, cluster, capital, market, and talent, Taiwan has three wins, two losses, and one tie.

Taiwan still has advantages in technology, operation and settlement. However, the mainland's market and abundant capital are far beyond Taiwan's reach. Lu Qianhao, vice president of ZTE's consumer terminal strategy department, mentioned that Taiwan's strongest point is technology, while the mainland's strongest point is its vast market.

Regarding the "market", the mainland market purchased more than 400 million smartphones last year, and 6 of the top 10 smartphone manufacturers in the world are from mainland China; not to mention the funding, the mainland government has invested heavily in cultivating the semiconductor industry.

Even though the two sides of the Taiwan Strait are currently "tied" in terms of talent, Taiwan is facing a huge crisis, and the industry has already felt the magnetic attraction of the mainland to attract talent.

Yuan Diwen, who moved from a senior executive at MediaTek to a mainland IC design company Spreadtrum as senior vice president, is a microcosm of the loss of outstanding talents from Taiwan. It is rumored that Huawei's HiSilicon also has many Taiwanese engineering talents working for it, and SMIC now has more than 100 Taiwanese executives. (This article is excerpted from the June issue of "Foresight Magazine")