MORRIS CHANG'S REMARKS TO AIT DIR

C O N F I D E N T I A L AIT TAIPEI 001160

SIPDIS

SIPDIS



STATE PASS USTR
STATE FOR EAP/TC,
USTR FOR ALTBACH AND WINELAND,
USDOC FOR 4431/ITA/MAC/AP/OPB/TAIWAN/JDUTTON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS,
AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: DECL: 03/31/2010
TAGS: ETRD ECON PREL PGOV TW
SUBJECT: MORRIS CHANG'S REMARKS TO AIT DIR


Classified By: AIT DIRECTOR STEPHEN M. YOUNG for reasons 1.5 (b),(d)


1. (C) Summary: Chairman of Taiwan Semiconductor
Manufacturing Company, Ltd. (TSMC) Morris Chang waxed
philosophical the need to preserve Taiwan's middle class and
democratic values, and was critical of President Chen's
unnecessary provocations of the PRC during a March 31
courtesy call. Chang told AIT Director Young that most
business people in Taiwan did not see any security threat
from economic integration with China. End summary.

The Father of Taiwan's Semiconductor Industry
--------------


2. (SBU) AIT Director Stephen Young called on TSMC founder
and Chairman Dr. Morris Chang to discuss the state of
Taiwan's economy and to learn more about views of the local
business community. TSMC (NYSE:TSM, LSE:TMSD) is the world's
larget dedicated independent semiconductor foundry, with
market capitalization of over US$50 billion. Chang invented
the "fab-less foundry" business model that now produces most
of the world's integrated circuits, is the recipient of many
awards for his contributions to the semiconductor industry,
and is widely considered the father of Taiwan's semiconductor
industry.


3. (SBU) Chang is a proud, loyal American who notes that,
although born in China, he lived in the United States from
age 18, when he entered Harvard University as a freshman,
until age 54, when, after 25 years working for Texas
Instruments (TI),he began living in Taiwan for the first
time. Even after spending most of the last 21 years in
Taiwan, he still refers to the United State as "home," and
said he plans to spend more time there (New York and Hawaii)
in the future. Dr. Chang stepped aside as TSMC CEO in July
2005, saying he believed that other executives in the company
had proven themselves ready to assume larger
responsibilities. TSMC independent board members are
comprised of luminaries such as economist Lester Thurow,
former British Telecom CEO Sir Peter Bonfield, and ACER
founder Stan Shih.

Semiconductors Enjoy High Margins
--------------


4. (C) Dr. Chang said his company currently only does
small-scale, older-technology production in China. TSMC's
production in China only accounts for 2-3% of its total
production. He added that production in China does not offer
any costs savings, since semiconductors are a capital and
technology intensive industry where labor costs are not a
major factor.


5. (C) The reason TSMC would like to build more production
facilities in China, Chang said, was to penetrate more
effectively the Chinese domestic market. China discriminates
against imported products, he said, especially in a strategic
sector like semiconductors, but Chang doubted that WTO tools
would be effective in dealing with this problem. He compared
the situation that TSMC faces in China with the situation TI
faced in Japan in the late 1960s and early 1970s. He noted
that the semiconductor industry remains very profitable, with
gross margins around 50% and net margins around 35-40%.

The President's Status Quo Ante
--------------


6. (C) Commenting on the frustration felt by Taiwan
President Chen Shui-bian over the KMT and PRC refusal to work
with him, Chang said the President had changed over the past
six years. At first, in his meetings with Chang, Chen was
open-minded, but over time, especially after the PRC
Anti-Secession Law in early 1995, Chen had become more of an
ideologue interested mainly in explaining his own point of
view.


7. (C) President Chen viewed the trend of economic
integration between Taiwan and China as a security threat,
Chang said, but few business people in Taiwan agreed with
that point of view. According to Chang, President Chen often
claimed that the cross-Strait status quo was constantly
changing, and that what the U.S. and China wanted was not the
status quo, but the status quo ante circa 1992. Chang noted
that the PRC was also changing, and, at present, was not
pushing for rapid reunification. He said that the President
should not be so eager for political negotiations. It would
be better if politics could be put aside for 20 years,
without raising provocative issues like changing the
constitution or independence.


8. (C) Current cross-Strait tensions were unnecessary and
put great pressure on Taiwan businesses, Chang observed. He
added that the welfare of the business community should be,
but seemed not to be, a major consideration in Chen's
policies.


9. (C) Chang agreed with the Director's comment that neither
Taiwan political camp had "covered itself in glory" on
cross-Strait issues, and added that what Taiwan really needed
was more emphasis on good governance. Chang noted how the
Taiwan media was filled with stories of unpunished
corruption, widening income gaps between rich and poor,
growing scarcity of good jobs, rising crime rates and an
unfair tax system. Chang suggested President Chen should
concentrate on these issues of most concern to Taiwan's
common people. Comparing himself to U.S. presidential
candidate John Kerry, Chang said he benefited from the unfair
tax system, but still believed it needed to be changed. In
particular, he cited the absence of capital gains tax and the
presence of tax exemptions for high tech investments as
unjustified.


10. (C) Chang argued that as Taiwan did not have as broad
and established a middle class as did the United States, the
growing sense of disillusionment with politicians was a
destabilizing trend. Chang said that, while he supported
more liberalized trade with the PRC, he could accept the need
for some restrictions. However, his friend Taiwan
businessman Terry Kao of Honghai was already doing
three-quarters of his production in Guangdong, employed over
200 thousand people there, and thus was far more eager for
liberalized trade and investment rules on the part of the
Taiwan government.


11. (C) Chang mentioned that he sometimes attended AEI
retreats in Beavercreek, which were also attended by the U.S.
Vice President and other government and industry leaders. He
said he was usually the only Chinese-American at these events
and so was often asked to give the "Chinese view" of issues.
Chang also mentioned that he met regularly with people from
the Brookings Institute and semiconductor industry
associations.


12. (C) Comment: Dr. Chang is certainly one of the most
influential Americans in Taiwan and has regular access to
President Chen. His observation about Chen becoming more
ideological in recent years is understandable in light of
events, but still disturbing for cross-Straits prospects. We
encouraged Chang to continue sharing his insights on such
issues with both sides of the political divide. End comment.
YOUNG