BUSINESS AND POLITICS BLEND IN TAIWAN UMC CASE

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 000710

SIPDIS

STATE PASS AIT/W
STATE FOR EAP/RSP/TC, EAP/EP ADN EB/IFD/OIA

E.O. 12958: DECL: 02/22/2025
TAGS: ETTC ECON ETRD TW CH
SUBJECT: BUSINESS AND POLITICS BLEND IN TAIWAN UMC CASE

REF: TAIPEI 539

Classified By: AIT DIRECTOR DOUGLAS H. PAAL, REASON 1.5 B/D


1. (C) Summary: Taiwan government charges that United
Microelectroncis Corporation (UMC) violated Taiwan
regulations in its relations with China chipmaker He Jian
have shaken business and political circles in Taiwan. The
ensuing public debate has included allegations of political
revenge, deliberate sabotage of talks between President Chen
and People's First Party (PFP) Chairman James Soong, shifting
signals on cross-Strait trade, and the need to liberalize
investment regulations. Taiwan's National Security Council
insisted to AIT on February 22 that the case was not about
investment regulations at all, but about corporate
governance. By all appearances, the crackdown on UMC is
another example of the Taiwan uneven mixture of business,
government, and politics into disjointed policy. A positive
outcome of the case is possible if it can spur liberalization
of regulations on investment in China needed to keep Taiwan
economically competitive. End summary.

Crackdown on One Company
--------------

2. (C) According to media reports, Taiwan's Ministry of
Justice Investigation Bureau (MJIB) raided the offices of
UMC on February 15 searching for evidence the company had
illegal investments or transactions with China-based
chipmaker He Jian Technology of Suzhou. Investment in chip
production without prior Taiwan government approval would
violate Taiwan's regulations. Investment in high-tech, or
sensitive technologies in China requires case-specific
approval from Taiwan's Investment Commission, under the
Ministry of Economic Affairs. Government auditors had also
noted the transfer of significant company assets from UMC to
He Jian and suspected financial impropriety. The MJIB
detained the head of He Jian, Taiwan national and former UMC
employee Hsu Chien-hua (he was released on bail on February
17).

Shock in the Business Community
--------------


3. (C) The massive raid on UMC, one of Taiwan's leading
companies, the world's second largest foundry producer of
integrated circuits, listed on the Taiwan and New York (as
ADR) stock exchanges, sent shock waves through local business
and political circles. The timing of the raid seemed to call
into question the Chen administration's promises to expand
cross-Strait economic ties. Several business leaders
expressed sympathy for the UMC position which they saw as
highlighting the need to update and clarify current
regulations. Some business leaders noted that Taiwan
businesses commonly used various methods to evade
restrictions on investment in China and wondered why UMC had
been singled-out and if the crackdown would be extended to
other companies. Minister of Economic Affairs Ho Mei-yueh
tried to calm the unease in the business community by stating
on February 17 this was not a change in policy, or an attempt
to discourage investment in China, and that all legal
investment in China would be protected. Premier Frank Hsieh
quickly issued a statement emphasizing that on-going plans to
liberalize investment in China would continue.

Speculation of a Political Motive
--------------


4. (C) Some media accounts saw it as no coincidence that UMC
Chairman Robert Tsao has been an outspoken supporter of
opposition PFP Chairman James Soong. The accounts viewed the
raid as political revenge, and used the term "green terror"
to evoke the image of Pan-green persecution of its political
opponents. Media that supported the ruling party speculated
the raid may have been a plot by the KMT to sabotage
cooperation between ruling party and the PFP. A more
sophisticated speculation was that the Chen administration
wanted political cover for liberalizing outdated rules. By
first highlighting the questionable activities of an
opposition-affiliated company, moves to regularize the
company's situation would make the administration appear
conciliatory towards the opposition (reftel reported a more
liberal policy on cross-Strait investment may be in the
works). Taiwan Semiconductor Manufacturing Corporation
(TSMC) Chairman Morris Chang has complained loudly to all who
will listen about the need for an investment policy that
allows Taiwan IC foundries to compete in China with their
Chinese rivals, and thereby retain Taiwan's commercial lead.


5. (C) UMC Chairman Robert Tsao responded to the media
reports with full-page ads in local financial newspapers on
February 18. The ads admitted that UMC helped He Jian
establish an eight-inch silicon wafer plant in China and that
UMC planned to merge with He Jian in the future, but denied
that UMC's assistance to He Jian violated Taiwan regulations
on investment in China. The ads claimed that Tsao had
established He Jian expressly to compete with China's biggest
chipmaker, Semiconductor Manufacturing International
Corporation (SMIC, the world's third largest IC producer
after TSMC and UMC). In his statement, Tsao claimed his
actions were in Taiwan's best economic interests since only
through investment in China could Taiwan chipmakers hope to
compete successfully with Chinese chipmakers. Although He
Jian started silicon wafer production only two years ago and
is still small scale, it has announced plans to invest more
than USD 10 billion over the next 10 years in a bid to become
China's largest silicon chip foundry.

NSC Says It Isn't So
--------------

6. (C) Taiwan's National Security Council (NSC) held a
ministerial-level meeting on February 22 to discuss the UMC
case and cross-Strait economic policies. It was widely
reported that the discussions included plans to liberalize
cross-Strait investment regulations and a method to
regularize UMC's situation. However, an NSC contact somewhat
incredibly insisted to AIT that the UMC case was not
primarily about cross-Strait investment, but rather about
UMC's lack of corporate governance in its transfer of assets
including capital, personnel, and patents to another company
without the approval of shareholders or the company's board
of directors.


7. (C) Comment: UMC is a world-class corporation with an
international outlook uncommon among Taiwan corporations. It
has met listing requirements on the New York (as ADR) and
Taiwan stock exchanges. Premier Frank Hsieh and economic
officials have insisted that this is an individual case that
will not affect on-going moves to liberalize investments in
China. While it is unclear whether it was business or
political rivals that first made allegations of UMC
impropriety, or whether it was government auditors who
uncovered questionable transactions, it is clear the case has
released widespread, pent-up criticisms of the current
restrictions on investment in China. The case has also given
the Chen administration leverage that can be used to pressure
the PFP and provide political cover liberalizing investment
regulations.


8. (C) Most significantly, the case may spur substantially
relaxed restrictions on cross-Strait economic exchanges,
possibly including investment in China in small flat panel
displays, IC packaging, and naphtha crackers. Taiwan may
also relax restrictions on cross-Strait banking. If the
government can find a way to regularize UMC's activities in
China without harsh punishment, it could portray
liberalization as a goodwill gesture to opposition parties.
If newly appointed Vice Premier Wu Rong-yi would then endorse
the liberalization, his reputation as an outspoken opponent
of tech transfer to China would undercut opposition to the
move. China is the world's fastest growing semiconductor
market and will remain so for the foreseeable future. From a
business point of view, it is vital to Taiwan's own
semiconductor firms that they participate as fully as
possible in China's market. End comment.

PAAL