Taiwan Semiconductor: 'Openness' is Not Frightening, the Fear of 'Openness' is What's Scary

        The mainland semiconductor market is your only choice. For Taiwan's semiconductor industry, 'openness' is not frightening, the fear of 'openness' is what's scary.

In the face of crisis, if handled properly, it can often become a turninging point, bringing new growth opportunities. And if financial capability, innovative technology, market demand, and national security concerns are all properly managed, this growth will demonstrate explosive momentum.

No, this is not a spy novel I'm writing, but rather a summary of my observations on the latest developments in the semiconductor industry.

Multiple interrelated factors have changed the landscape of the semiconductor industry -- including shifts in demand drivers, rising R&D costs, ASP pressures from high customer concentration, and investment risks -- which have reduced profitability for companies, accelerated market consolidation, and ultimately brought even more stringent new challenges.

At the same time, the recent actions of the Chinese government have further intensified this situation. As the world's factory, China is actively upgrading its economic strength toward higher value-added directions, transforming product labels from "Made in China" to "Made by China."

The Chinese market accounts for approximately 40 to 50 percent of global semiconductor demand. Although Chinese consumers' purchasing power for electronic products is growing, the vast majority of these imported semiconductor components are built into end products and then re-exported. Under China's previous semiconductor policy -- let's call it 'China Semicon V1' (commonly known as Document No. 18, the "Several Policies on Encouraging the Development of the Software and Integrated Circuit Industry" issued in June 2000) -- approximately 90 percent of China's semiconductor components still rely on imports, and a significant proportion comes from Taiwan.

So, if China catches a cold, Taiwan sneezes.

Let me give an example to illustrate the scale of this. In 2013, China's spending on imported semiconductor components exceeded its spending on imported oil. Therefore, for China, semiconductors are not just a strategic industry but a matter of national security.

Consequently, in June 2014, China recognized the shortcomings of China Semicon V1 and issued a more market-oriented policy, China Semicon V2 (the "National Integrated Circuit Industry Development Promotion Guidelines" issued in June 2014). This policy continued the existing approach of Semicon V1 (national programs for technology development) and further enhanced it through new provincial-level incentive programs, stronger financial backing (the National IC Fund, multiple local government investment funds, and state-owned/private partnerships), and new anti-monopoly actions. China Semicon V2 also received support from the "Made in China 2025" plan announced in June 2015, which aims to upgrade China's manufacturing capabilities.

So, what will happen next? Through public acquisitions and minority equity investments, Chinese government policy and financial support will directly drive corporate consolidation among multiple companies, and indirectly encourage Intel, Qualcomm, and other players to participate through financial or other forms. These actions have become headline news and have generated substantial business for bankers, lawyers, and consulting firms. Therefore, it is very likely that one or two large-scale Chinese semiconductor companies will emerge in the future, capable of competing with MediaTek and Qualcomm for orders.

This will be a very serious threat.

But what impact will this have on Taiwan's semiconductor industry, which was instrumental in creating Taiwan's economic miracle and transforming its export-oriented economy from labor-intensive to technology-intensive? Although the actual distance from Hsinchu to Fuzhou is only 135 miles, sometimes it feels like 100,000 miles apart.

Taiwan's Ministry of Economic Affairs (MOEA) has relaxed investment restrictions for Taiwan's semiconductor companies in China, but still prohibits Chinese capital from entering Taiwan's semiconductor companies. The MOEA regards China as a potential threat because it must protect Taiwan's trade secrets, intellectual property (IP), and jobs. But if we look at the global semiconductor ecosystem in 2015, we can see that the MOEA's approach is merely a futile effort!

In fact, IP can be obtained from Imagination, Synopsys, and other players. Intel and Qualcomm's participation in the development of China's ecosystem will help strengthen China's semiconductor industry capabilities. China's National IC Fund and other institutions will also actively acquire companies, assets, and IP beyond Taiwan. Meanwhile, every day, China's design engineers are growing and surpassing the learning curves that their counterparts in the United States, Europe, Japan, Taiwan, and South Korea have climbed. In this environment, Taiwan government's restrictions not only misunderstand national security issues but also isolate Taiwan's semiconductor industry from the critical industry shifts happening in the world's largest semiconductor market -- a market that is right across the strait and speaks the same language.

Of course, industrial policy is also influenced by geopolitics, and in this case, the Taiwan Strait is a divide. In China, some people want reunification and use economic dependence as a tool to achieve that goal. In Taiwan, some people want to maintain good relations with China while preserving Taiwan's political identity.

By becoming a key member of the so-called "Red Supply Chain," Taiwan's semiconductor companies will be able to enjoy the enormous business opportunities in the Chinese market. Pragmatic measures can protect trade secrets, IP, and jobs (which should be protected as much as possible), and restrictions can be further relaxed, though not completely lifted.

However, time waits for no one. Taiwan will elect its next president in January 2016. With the election approaching, it is unlikely that the MOEA will change investment restrictions in the short term. Seizing the opportunities in the Chinese market requires balancing the risk of Taiwan companies being replaced by Chinese competitors. But rather than being excluded, it is better to fight.

From a practical standpoint, Taiwan really has no need to fear from relaxing or lifting the MOEA's current restrictions. Building a successful semiconductor industry requires more than just money. Tacit knowledge, management wisdom, and sustainable competitive strategies (not price competition, which has already caused vicious competition and harmed many Chinese chip makers) are the real keys.

Large sums of money will inevitably stimulate the development of the mainland semiconductor industry, but mainland companies also need to be alert to risks and face challenges, because as companies expand in scale, soft power such as management capabilities must also improve simultaneously. Through joint investment with the mainland, Taiwan's semiconductor companies will be able to reduce the risk of being replaced while also expanding resources to further extend their competitive advantages.