TAIWAN APPROVES LIMITED CHIP TESTING INVESTMENT IN

UNCLAS SECTION 01 OF 02 TAIPEI 001511

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/TC, EAP/EP

E.O. 12958: N/A
TAGS: ECON ETRD EINV KIPR PGOV CH TW
SUBJECT: TAIWAN APPROVES LIMITED CHIP TESTING INVESTMENT IN
CHINA

REF: 06 TAIPEI 04164


1. (SBU) Summary. On June 28, Taiwan's Vice Minister of
Economic Affairs chaired a joint committee meeting to give
final approval to the applications of four of Taiwan's
leading semiconductor packaging and testing firms to invest
in China. The four companies' planned investment totals USD
99.6 million, and their stock prices have risen recently on
speculation that investment approval was imminent. Two of
the four firms could begin operations in China by the end of
this year, with the other two anticipating starting
production in the third quarter of 2008. These cases have
received considerable media attention as a gauge of how the
Ministry of Economic Affairs (MOEA) may in future use 'active
management' mechanisms to facilitate further expansion of
high-tech investment in China. It is too early to know
whether other restricted industries, principally up-stream
petrochemicals and telecommunications, will be encouraged by
these approvals to lobby the MOEA's Investment Commission to
use similar means to open up investment opportunities in
those sectors. End Summary.

FOUR LEADING TESTING/PACKAGING COMPANIES TO LAND IN CHINA SOON


2. (SBU) In April 2006, Taiwan's MOEA announced the removal
of simple semiconductor packaging and testing from a negative
mainland investment list, an announcement that received
considerable attention at the time. Subsequently, Advanced
Semiconductor Engineering (ASE),in a joint venture with
Suzhou-based NXP Semiconductors, as well as Greatek
Electronics, Inc. (Greatek),Walton Advanced Engineering,
Inc. (Walton),and Siliconware Precision Industries Co.
(SPIC) all submitted applications to invest in China. The
investments would be limited to simple integrated circuits
packaging and testing. On June 28, MOEA conducted a final
review of the applications, and subsequently approved all
four. ASE (the world's largest chip packager, whcih
purchased 60 percent of NXP) plans to invest USD 21.6 million
in china, while Greatek, Walton and SPIC have stated they
will invest USD 30 million, USD 18 million, and USD 30
million, respectively. ASE and SPIC both already have
investments in China and expect to begin mainland packaging
/testing operations by the end of this year. Greatek and
Walton could start production by the third quarter of 2008.

FIRMS PROMISE MORE INVESTMENT AND JOBS IN TAIWAN


3. (SBU) As a requirement for approval of the investments
(see para. 4),the firms must provide estimates of the
amounts they will invest in Taiwan and the corresponding
number of jobs created. Reportedly, Siliconware plans to
invest more than NTD 20 billion (approximately USD 606
million) in Taiwan and create 6,000 jobs in 3 years, Walton
will increase domestic investment by NTD 10 billion
(approximately USD 303 million),creating 100 jobs; and ASE
plans for an additional NTD 40 billion (approx. USD 1.2
billion) of investment in Taiwan. In total, the four
companies plan to invest NTD 75 billion.

ACTIVE MANAGEMENT AS A MEANS TO REGULATE INVESTMENT


4. (U) On December 14, 2006, MOEA announced a policy review
regarding China-bound investment projects that exceed USD 100
million (or USD 200 million cumulative value or USD 60
million for re-investment projects) or are in technologically
strategic areas, such as construction of wafer foundries,
thin-film-transistor liquid crystal display (TFT-LCD) panel
manufacturing, or chip testing facilities. The resulting
'active management' guidance related to such high-tech
investment requires applicants to provide information
regarding 'counter-balancing' investment in Taiwan, as well
as the company's global strategy, and the impact on domestic
employment of its planned investment (reftel). In addition,
the measures require applicants to allow the government to
send lawyers, accountants, or other experts to check Taiwan
enterprises in China when necessary.

EVERYBODY IS WATCHING


5. (SBU) Considerable media attention has been focused on the

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fate of these four applications, especially since Economic
Vice Minister Shih Yen-Shiang at a press conference on June
25 confirmed the applications were under final review.
Previously the review process had been quite low-profile, and
contacts at ASE and SPIC expressed their surprise that MOEA
would make such a public disclosure. However, an Investment
Commission source explained the Vice Minister was merely
stating the facts in the face of media speculation. Despite
the apparent interest of MOEA in quelling rumors, the
announcement set off a spate of stock speculation the same
day, as investors took the news as an indicator of further
liberalization of Taiwan investment in China's chip industry.
ASE's stock gained 1.48 percent, Greatek's 3.39 percent and
Walton's 5.09 percent (although SPIC, Taiwan's second largest
chip testing/packaging firm, declined by 1.79 percent).
Market analysts characterized the expected approval of the
four investment applications as a catalyst for capital to
flow into chip testing and packaging stocks.

COMMENT


6. (SBU) Taiwan's 'active management' mechanisms of high-tech
investment in industries such as small LCD panels and
integrated circuit testing and packaging appear to have met
some of the expectations of industry in liberalizing mainland
investment. The procedures are designed to give Taiwan
officials a means to protect Taiwan's economic development by
ensuring continued domestic investment and nominal job
creation. Whether or not the 'counter-balancing' investment
requirements will actually result in more jobs or real
economic growth is unknowable at present. However, the high
degree of market and media attention accorded these four
investment applications suggest that industry anticipates
MOEA will continue to open up additional opportunities for
Taiwan investment in China. Currently, much of the
investment there is not new but rather expansion of existing
projects or re-investment of profits earned in China.
Therefore, any channels for new investment will find many
takers. There is wide-spread speculation that the approval
of these chip testing/packaging projects could stimulate
other industries, such as up-stream petrochemicals and
telecommunications equipment manufacturing, to seek a similar
path to invest in China.
YOUNG