SEMICONDUCTOR DESIGN - STAYING AHEAD OF THE PRC

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 001584 SIPDIS SIPDIS DEPT FOR EAP/TC E.O. 12958: DECL: 05/02/2016 TAGS: ECON EINV CH TW SUBJECT: SEMICONDUCTOR DESIGN - STAYING AHEAD OF THE PRC REF: TAIPEI 399 Classified By: AIT Deputy Director David J. Keegan, Reason 1.4 b/d Summary -------------- ¶1. (C) Integrated Circuit (IC) Design firms account for 25 percent of total revenue in Taiwan's highly successful semiconductor industry. Taiwan's IC design houses are second only to North American firms in revenue and technology, but they face increasing competition from Mainland China. Taiwan firms generally believe that they about five years ahead of the PRC competition technologically, but Chinese firms are catching up fast, often with help from Taiwan partners. Taiwan prohibits firms from engaging in IC design operations in the PRC, but many firms have offices in China for sales and after-sales services. Some Taiwan design firms claim there is no need to move core design functions to the Mainland. Nevertheless, Taiwan should rationalize its cross-Strait restrictions on the semiconductor industry to ensure that the regulations are both clear and enforceable. End Summary Number Two in the World -------------- ¶2. (U) IC design firms are a key component in Taiwan's highly successful semiconductor industry. Taiwan's semiconductor foundries, Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC) (reftel),provided the foundation for the "fabless- foundry" model in which IC design houses hire foundries to manufacture semiconductor chips under contract. IC design houses compete with integrated design manufacturers (IDMs), like Intel, Samsung and Micron, which design and manufacture their products from start to finish. ¶3. (U) Today, the IC design industry in Taiwan is flourishing. IC design houses accounted for 25 percent of total revenue for Taiwan's semiconductor industry in 2005 with sales of NT$ 285 billion (about US$ 8.9 billion). Growth for IC design firms at 9.3 percent in 2005 outpaced overall growth for the Taiwan's semiconductor industry, which was only 1.7 percent. Taiwan's Industry and Technology Research Institute (ITRI) and the Taiwan Semiconductor Industry Association estimate that the island's IC design industry will grow by 12.3 percent in ¶2006. ¶4. (C) Taiwan's IC design houses are second only to North American firms in revenue and technology. According to the Fabless Semiconductor Association, North American design houses generated 75 percent of the industry's total revenue in 2004 followed by Taiwan firms with 19 percent. The only non-North American firm among the top ten fabless companies for 2005 was MediaTek, a Taiwan design house. Executive Vice President Jessy Chen of Realtek, Taiwan's seventh largest design house, told AIT that on average Taiwan design houses are just three to six months behind their U.S. competitors in terms of technology. PRC Catching Up but Still 5 Years Behind -------------- ¶5. (U) Taiwan IC design firms see U.S. firms as their main competition, but many are focused on the China market and are determined to stay ahead of the rapidly developing IC design industry in the PRC. With relatively low barriers to entry, there are currently about 500 IC design firms in the Mainland. Most are very small, but the industry is growing rapidly. A Price Waterhouse Coopers Report on China's Semiconductor industry indicated that the total revenue of PRC IC design firms grew by more than 90 percent in 2004. ¶6. (C) Taiwan firms generally believe that they are several years ahead of their PRC competition. Realtek's Chen said that PRC design houses are five to six years behind Taiwan firms technologically. MediaTek Chief Financial Officer Yu TAIPEI 00001584 002 OF 002 Ming-to was less optimistic about Taiwan's advantage and told AIT he believes the PRC is three to five years behind Taiwan and catching up fast. Some observers have pointed out that PRC design houses may be able to leapfrog certain levels of technology and migrate directly to some of the most advanced technologies in mass production. ¶7. (U) Cooperation between Taiwan firms and PRC design houses may help them catch up. According to media reports, TSMC revealed in March 2006 that it would help Spreadtrum, SIPDIS a PRC design house, to migrate from 0.18-mircon technology to 90-nanometer technology. In a recent Financial Times article, a venture capitalist based in Shanghai estimated that as many as one third of China's viable design houses have links to Taiwan, citing the example of Actions Semiconductor whose chief executive is the brother of Realtek's chairman. Law and Economics Keeping IC Design in Taiwan -------------- ¶8. (C) Taiwan prohibits its firms from building design centers in the PRC. In order to service customers in the Mainland, many Taiwan IC design firms have offices in the PRC that are limited to sales and after-sales service. MediaTek, which has approximately 1,000 employees in Taiwan, employs a staff of 200 engineers and salesmen in the PRC. Realtek also has about 1,000 employees in Taiwan, but employs just 100 engineers in the PRC. Etron Technologies, Taiwan's eighth largest design house, has approximately 20 employees in the PRC out of a total staff of 332. Realtek's Chen claims that VIA Technologies has the largest PRC office among Taiwan design houses. According to Chen, VIA's Beijing office has approximately 1,000 employees compared to 2,500 based in Taiwan. Some have accused VIA of engaging in full-fledged design work in China. ¶9. (U) Some Taiwan design firms would like to expand their presence in the PRC, where even highly skilled labor can be less expensive than in Taiwan. In addition, some firms would like to move core design functions closer to their growing Mainland customer base. Nicky Yu, CEO of Etron, recently said that his firm's U.S. customers had warned him that they would not give orders to Taiwan chips companies that fail to establish a presence in China. He argued that Taiwan firms must more effectively integrate their services with the downstream operations of their customers in the Mainland. ¶10. (C) However, some Taiwan design firms dismiss the idea that they are under pressure to move core design functions to the Mainland. Realtek's Chen argued that labor cost savings are not as high for IC design as other industries, noting that the cost of hiring an inexperienced engineer in the PRC is 60 to 70 percent of the cost of hiring one in Taiwan. MediaTek's Yu claimed that the quality of engineers in the PRC was much lower. Yu also commented that MediaTek would keep core design operations in Taiwan because of concerns over protecting its intellectual property. According to Yu, MediaTek supports further liberalization for IC design firms only to clarify what activities are legal for Taiwan firms in the PRC. Comment - Ambiguity and Contradiction -------------- ¶11. (C) Taiwan's IC design firms are successfully competing for the rapidly growing semiconductor market in China, despite Taiwan government restrictions. However, the ambiguity and contradictions within Taiwan's regulations make business more difficult without doing much to maintain Taiwan's technological advantage. Taiwan firms cannot engage in design functions in the PRC, and yet the proliferation of cross-Strait IC design partnerships shows that the restrictions are not keeping advanced design technology out of the PRC. Taiwan should rationalize its cross-Strait restrictions on the semiconductor industry to ensure that the regulations are both clear and enforceable. End comment. YOUNG