The inside story on wafer production in mainland China

I HAD THE OPPORTUNITY to talk about wafer manufacturing in mainland China with the representative of the Taiwanese Electrical and Electronics Manufacturers Association (TEEMA) that I recently interviewed.

We talked about the regional spread of semiconductor related activities in China. To make the point that Shanghai and Beijing are not the only important location for wafer foundries, he mentioned six and eight inch foundries in Shenzhen. The eight inch wafer facility there is a cooperative venture between Hon Hai and a branch of the regional Shenzhen government. In reflecting on the interview, I found it interesting that this foundry receives relatively little media attention, though, a year and a half ago, it was the focus of rumours that UMC might circumvent Taiwanese restrictions to invest in mainland China.

We raised the topic of the TSMC foundry being built in Shanghai. This TEEMA representative expects the TSMC facility to manufacture predominantly for markets outside of China. For the moment, the vast majority of wafers bought in mainland China are imported - the figure of 97% was mentioned. That makes the mainland market a great potential for foundries in China. Lower transportation costs, not to mention the other incentives available to foreign enterprises willing to transfer their technology to mainland China, will give newly established foundries in China a definitive edge over their competition. That potential, after all, is one of the reasons wafer foundries are growing like mushrooms on the mainland.

Despite their potential, foundries like SMIC, AMSC and SIM BCD grow more modestly because they have relatively few established clients and have yet to establish their reputations to attract new clients. Already the leading wafer foundry worldwide, TSMC is beyond these difficulties, and that makes their Shanghai facility a leader among wafer foundries on the mainland.

On the other hand, the technological sophistication that TSMC aspires to comes at a cost. The cost of a more advanced wafer foundry puts enormous pressure on that foundry to direct its efforts at more lucrative wafer markets. Manufacturing wafers for markets where profit margins are thin is just not a cost effective means to achieve a return on earlier investments. The Chinese market predominantly involves wafers of lower technological content, and price competition in these markets is fierce. For that reason, the TSMC facility is not likely to manufacture wafers for the mainland Chinese market, said this TEEMA representative.

That is interesting, given that earlier Taiwanese restrictions on movement across the straits were relaxed because, Taiwanese entrepreneurs said, the technology that would be moved to mainland China was outdated.

When I asked about other Taiwanese restrictions on the movement of semiconductor technology across the straits, this TEEMA representative mentioned something else of interest. He said that the Taiwanese government was concerned about allowing Taiwanese engineers go to mainland China because the government was concerned about whether innovations from mainland Chinese facilities would return to Taiwan or not.

From my perspective, this demonstrates difficulties of Taiwanese economic adjustment more than it does concern about intellectual property protection in China. In its efforts to adjust to the threat that China poses for Taiwanese manufacturing jobs, the Taiwanese government launched a campaign to transform Taiwan into a regional research headquarters. That campaign involves, for instance, offering tax reductions to corporations that establish R & D activities in Taiwan. It also involves marketing the image of Taiwan as a place of innovation.

Evidently, the government is concerned that if manufacturing facilities move to mainland China, even if those facilities are older and more mature, Taiwanese engineers in mainland China will continue to innovate, and the Taiwanese government wants to label those innovations Taiwanese. I suddenly imagine Taiwanese government officials negotiating with entrepreneurs, restricting their access to mainland China unless they vow to register innovations on the mainland under the auspices of Taiwanese research laboratories.

The Taiwanese are certainly not the only ones making efforts to promote innovation. I know that National Semiconductor will eventually apply for patents in mainland China because the Chinese government is offering them tax incentives if they do. That paints an interesting picture of two governments locked in competition, throwing tax incentives around to gain a foothold in the world of intellectual property. It is difficult to predict how successful either government will be, but together, they are certainly changing the way intellectual property moves around the world. µ