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SCMP Reporter

China may be gaining in its chip war with Taiwan, but the island should retain the technological high ground for some time yet.

Beijing's ambitious plans to gear up rapidly in semiconductor manufacturing have led to fears that Taiwan's crucial export industry will be 'hollowed out'.

Those fears may be a little premature, according to Chen Wen-chi, president of leading Taiwanese chip-design company Via Technologies.

'It takes a long time to build the infrastructure,' he said.

Via, which designs chips and farms out production, was not planning to switch from its main foundry, Taiwan Semiconductor Manufacturing Corp (TSMC), to a mainland rival, said Mr Chen.

'We will be happy to see more available foundries from China, but we have not studied any real business planning there yet,' he told fund managers at a Credit Suisse First Boston conference.

Mainland chip plants or 'fabs' can keep labour costs down with the salary of a mainland electronics engineer only a fifth of a counterpart in Taiwan. However, the fabs being built in Shanghai will not be sufficiently advanced to meet the needs of companies such as Via.

'We still think it is going to take a while. All the buildings in China are eight-inch fabs. We think in two years the benchmark will start moving to 12 inch,' Mr Chen said.

Twelve-inch silicon wafers will allow more chips to be produced from a wafer, slashing costs.

In addition, the mainland plants will be using 0.35 micron technology in chip production, while leading-edge foundries such as TSMC already are working with 0.18, 0.15 or even 0.13 microns. The smaller size means more integrated circuits can be fitted on a chip and faster computing speeds obtained.

'They are not yet going to be competitive with Taiwan,' said Manuela Mercandelli, a spokesman for Via.

Via, which is targeting revenues of US$1.5 billion this year, is the kind of customer the mainland would want to attract.

It has an equal 42 per cent market share with Intel for chipsets, which act as the nervous system in personal computers.

About 86 per cent of China's semiconductors had to be imported from Taiwan, South Korea, the United States and Japan, said Vijay Harjani, vice-president of Asian technology sales at CSFB.

China has faced restrictions from the United States and Taiwan on obtaining the latest chip-production technology.

But two key projects are pressing ahead, ironically with input from Taiwan.

Jiang Mianheng, son of President Jiang Zemin, is heading a US$1.63 billion joint venture with Winston Wang, the son of Wang Yung-ching, the tycoon behind Taiwan's giant Formosa Plastics.

The venture, Shanghai Grace Semiconductor Manufacturing, will begin production from a fab in Pudong's Zhanjiang Hi-Tech Park at the end of next year.

The second, and adjoining, project - the US$1.46 billion Semiconductor Manufacturing International - is being led by Richard Chang, another renegade Taiwanese chip executive.

The two projects are likely to have a total of 12 production lines, still well behind the more than 50 in Taiwan.

The mainland probably would have to focus on lower-end flash memory and networking chips, said Ms Mercandelli.

That is just the start, according to Pudong New Area director Hu Wei, who foresees US$10 billion being spent in the next five years to build 10 fabs.

Shanghai is lining up sweeteners for chip makers, such as generous tax breaks, priority on imports and exports and has even offered to pay 1 per cent of bank loan interest on semiconductor investments. There also is the attraction of the 400,000 engineers China is producing from colleges each year.

While chips are still mostly off the menu, the volume of lower-end electronic components China made last year took it past Taiwan to become the world's third-largest producer of information technology hardware.



Taiwan holds upper hand in chips battle