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2005-06-24 01:59:00
American Institute Taiwan, Taipei
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						C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 002743 



E.O. 12958: DECL: 06/23/2015


B. TAIPEI 2521

Classified By: AIT Director Douglas H. Paal, Reason 1.4 d


1. (C) Integrated circuit (IC) packaging and testing is a
key component in Taiwan's semiconductor economy with
approximately USD 5 billion in revenue in 2004. Despite
industry pressure, the Taiwan government still prohibits
packaging and testing firms from investing in the PRC
because it fears such investment will fuel a larger
migration of Taiwan's semiconductor industry. Several
firms have been accused of investing illegally in the
Mainland, including the United Test and Assembly Center
Limited (UTAC) case currently under investigation and
Taiwan's largest packaging and testing firm Advanced
Semiconductor Engineering Co. (ASE). Based on perceived
and real economic factors, many firms have developed
detailed plans for investing in the PRC once the Taiwan
government makes it legal. If the Taiwan government does
not permit packaging and testing firms to begin such
investment soon, Taiwan firms, which currently dominate the
global market, could face fierce competition from new PRC
rivals. End summary.

Essential Link in the Fabless/Foundry Model


2. (U) Packaging and testing is a key link in the
semiconductors supply chain. IC packaging and testing
firms take completed semiconductor wafers and turn them
into usable integrated circuits. These firms have played
an essential (but sometimes unacknowledged) role in the
successful development of the fabless/foundry model that
has allowed contract semiconductor manufacturers like
Taiwan Semiconductor Manufacturing Company (TSMC) and
United Microelectronics Corporation (UMC) to flourish.
Under this model, an independent integrated circuit design
house that does not have manufacturing facilities of its
own (and is thus "fabless") will hire a semiconductor
foundry like TSMC or UMC to produce its chips. The design
house then must hire a separate packaging and testing firm
to cut out the individual chips from the wafer produced by
the foundry and turn it into a completed integrated circuit
that are components of a wide range of electronic consumer
goods. The packaging and testing firms perform up to four
separate processes - bumping or wire bonding, testing,
cutting, and packaging.

3. (U) The industry is a major piece in Taiwan's prosperous
semiconductor economy. In 2004, Taiwan's packaging and
testing firms had revenue of NT$ 159.5 billion (about USD 5
billion), which accounted for almost 15 percent of Taiwan's
semiconductor industry revenue. With TSMC and UMC, Taiwan
has the world's top two semiconductor foundries. Their
success has helped enable Taiwan to dominate the packaging
and testing industry as well with five of the top ten firms

globally by revenue. These include number one Advanced
Semiconductor Engineering Co. (ASE) and number three
Siliconware Precision Industries Limited (SPIL).

Taiwan's Restrictions - Trying to Keep the Cluster



4. (C) Taiwan currently prohibits investment in the
Mainland by Semiconductor packaging and testing firms.
However, semiconductor manufacturing was liberalized in
2002, enabling TSMC to establish a fab near Shanghai, using
less advanced 0.25-micron technology. Taiwan firms
Powerchip and ProMos have also applied to the Investment
Commission to build manufacturing facilities in the
Mainland. Many firms are pressuring the Taiwan government
to permit investment in more advanced 0.18-micron
technology. However, Taiwan continues to delay
liberalization of packaging and testing investment. As
reported ref B, Mainland Affairs Council officials for the
third time this year told AIT/T that the investment in
packaging and testing would be approved within the next two
to three months.

5. (C) Packaging and testing has generally been seen as a
technologically less sophisticated process than the wafer
fabrication performed by foundries like TSMC and UMC. In
fact, until 1997, packaging and testing firms did not
qualify for space in Taiwan's science parks. According to
ASE Chief Financial Officer Freddie Liu, the reason that
packaging and testing investment in the Mainland has not
yet been approved is because the Taiwan government fears a
kind of domino effect that would encourage the transfer of
the entire Taiwan semiconductor cluster to the Mainland.

Under the Table or Just Around It


6. (SBU) Nevertheless, some Taiwan packaging and testing
firms have been accused of illegally investing in the
Mainland. The most widely publicized case is United Test
and Assembly Center Limited (UTAC), which has operated a
packaging and testing facility in Shanghai since 2003 and
recently announced a joint venture with China's
Semiconductor Manufacturing International Corporation
(SMIC) to establish another facility in Chengdu. Taiwan's
Ministry of Economic Affairs Investment Commission has
begun an investigation of UTAC's PRC investment. UTAC
claims that this investment is legal because it is not a
Taiwan company but rather headquartered in Singapore.

7. (C) UTAC was founded in 1995 in Taiwan. It established
operations in Singapore in 1997 and subsequently moved its
headquarters there and reorganized the firm with
registration under Singaporean law. UTAC currently has
more employees at its Singapore facility than in Taiwan -
about 1,500 in Singapore according to its Vice President
Winston Lau, compared to 773 in Taiwan. It also has more
capacity in Singapore. The MOEA Investment Commission
investigation may hinge on whether Taiwan individuals have
violated the law in holding UTAC stock.

8. (C) ASE is also rumored to have invested illegally in
the PRC. ASE's Liu told AIT/T that these allegations are
false. However, he did confirm that the company has
secured real estate in Songjiang, Kunshan, and Shanghai
with the aim of building plants there.

A Herd Mentality or Survival Instincts?


9. (C) Many other Taiwan firms have also developed
extensive plans for investment in the Mainland. FuPo
Electronics Corporation Vice Chairman Vincent Wang showed
AIT/T its study of market conditions in the PRC and
potential areas for expansion there. Megic Corporation
Chairman M.S. Lin told AIT/T that his firm has plans to
invest in the PRC. Lin commented that some of the
enthusiasm among packaging and testing firms to invest in
the Mainland could be based more on perceptions of industry
trends rather than economic reality. Both Megic and FuPo
specialize in packaging chips for TFT-LCD panels. Taiwan's
TFT-LCD manufacturing has not yet moved to the PRC to the
degree of many other information technology hardware
manufacturers. The most advanced and capital-intensive
TFT-LCD manufacturing processes are maintained in Taiwan,
suggesting less need for packaging and testing firms to
move there.

10. (C) Nevertheless, Megic's Lin pointed out that TSMC is
encouraging design houses to place orders for its fab in
Shanghai, providing more impetus for packaging and testing
firms to move there. As one component of the industry
establishes a presence in the Mainland others must follow
to remain competitive. Otherwise, PRC packaging and
testing firms will grow to meet the demand.

11. (C) When ASE's Liu outlined his firm's plans for
investment in the PRC, he underscored the need for cross-
Strait expansion in order for ASE to continue to grow. He
commented that Taiwan did not have adequate personnel or
land for ASE's planned growth. Liu pointed out that ASE
currently employs 30,000 employees in Taiwan and has
difficulty finding enough talented candidates for local
expansion. ASE's plans call for expanding to employ
200,000 in the Mainland by 2016. Liu emphasized that there
was no way to expand like that in Taiwan. He argued that
if Taiwan wants to preserve the IC packaging and testing
industry in Taiwan it should maintain tax benefits for
high-tech industries and open immigration policy to allow
firms like ASE to hire engineers from the PRC.

Comment - Time is Running Out


12. (C) Time is running out for Taiwan's packaging and
testing firms to maintain their strong competitive
advantage over PRC firms. Many observers believe that if
the Taiwan government does not approve packaging and
testing investment in the PRC by the end of the year it
will be too late. According to ASE's Liu, if Taiwan had
liberalized Mainland investment in the PC industry 20 years
ago, then Acer would be dominant in the PRC and there would
be no Lenovo. If semiconductor manufacturing had been
liberalized 10 years ago there would be no SMIC, only TSMC
and UMC. Now Taiwan is at a similar crossroads for
packaging and testing. If Mainland investment is approved
this year, Taiwan's firms like ASE and SPIL, which already
dominate the industry globally, will maintain that
dominance in the PRC's rapidly emerging semiconductor
cluster. If not, new PRC competitors will emerge and grow,
eventually threatening Taiwan firms at home as well as in
the PRC market. End comment.