SEMICONDUCTOR ENTREPRENEUR EXPLAINS TAIWAN

C O N F I D E N T I A L SECTION 01 OF 02 TAIPEI 000244

SIPDIS

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STATE PASS USTR
STATE FOR EAP/TC
COMMERCE FOR 3132/USFCS/OIO/EAP/WZARIT
TREASURY FOR OASIA/LMOGHTADER

E.O. 12958: DECL: 01/31/2017
TAGS: ECON EINV ETTC PGOV PREL TW CH
SUBJECT: SEMICONDUCTOR ENTREPRENEUR EXPLAINS TAIWAN
STRENGTHS

REF: 06 TAIPEI 4164

Classified By: AIT Director Stephen M. Young, Reason 1.4 d


1. (C) Summary: Powerchip Semiconductor Chairman Frank
Huang told the AIT Director on January 30 that Taiwan
semiconductor firms will keep their global competitive
advantage of cost-effective production. He commented
that Chinese competitors in the industry will not be the
threat to Taiwan firms that many had expected. Huang
opposes restrictions on semiconductor investment in the
PRC because he believes Taiwan firms will limit
investment in order to protect corporate secrets. He
foresees improved economic prospects after 2008 with
improved cross-Strait relations regardless of who wins
the presidential election that year. End summary.


2. (C) AIT Director Young met with Powerchip
Semiconductor Corporation Chairman Frank Huang on January
30 to discuss Taiwan's economic prospects and the future
of the global semiconductor industry. Powerchip is
Taiwan's largest maker of dynamic random access memory
(DRAM) chips and Taiwan's third largest semiconductor
manufacturer overall. It operates three 12-inch wafer
manufacturing facilities in Taiwan and recently entered
into a US$14 billion joint venture with Japan's Elpida
Memory Inc. to build four more. Its revenue rose 79
percent in 2006 to US$2.8 billion, while profits were up
325 percent.

Taiwan's Hi-Tech Competitive Edge Will Continue
-------------- --


3. (C) Huang believes Taiwan will stay competitive and
maintain its prominent place in the global semiconductor
industry. He explained to the Director that in logic
chips, Intel is still on top globally and no one at this
point is in a position to challenge it. However, in DRAM
chips, Taiwan, Japanese, South Korean and U.S. firms are
all producing technologically similar products.
According to Huang, in earlier stages of the DRAM
industry, technology was more important, but now cost-
effective production is the key to profitability. This,
he said, is an area where Taiwan excels. Huang commented
that Japanese firms in the industry are less competitive
because they don't fear elimination like their smaller
and newer Taiwan competitors and in turn their employees
are less motivated. He further explained that in DRAM,
brand names don't matter because memory prices vary only
slightly between companies. Using his other firm, Umax
Technologies, as an example, Huang described how he had
been able to build a fairly successful brand name in
scanners. However, eventually he was unable to compete
with larger companies like HP, which have more capital
and brand recognition.

China's Semiconductor Challenge Has Faded
--------------


4. (C) Turning to China's role in the semiconductor
industry, Huang expressed confidence that Taiwan firms
would maintain their advantages over Chinese competitors
both in technology and profitability. He noted that five
years ago many industry observers talked about the rapid
advance of China's Semiconductor Manufacturing
International Corporation (SMIC) and the possibility that
it might eventually eclipse Taiwan Semiconductor
Manufacturing Company (TSMC),the world's largest contract
chip manufacturer. However, as Huang pointed out, these
predictions have not materialized; TSMC has maintained and
strengthened its domination of the contract chip making
market, while SMIC has not been as profitable as many
expected. Huang commented that Richard Chang, the
Taiwan-born Chairman of SMIC, "is no Morris Chang," TSMC's
Chairman. If SMIC couldn't catch up with Taiwan in the
past few years, it will take many more years, he said.

Lift the Restrictions - Taiwan Firms Will Stay
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5. (C) Huang argued that restrictions on semiconductor
investment were unnecessary and instead Taiwan should let
semiconductor manufacturers decide how much to risk on
investment in the PRC. He emphasized the difficulty
semiconductor firms have retaining employees in the
Mainland. Because employees frequently leave to work for
competitors, it is almost impossible to protect corporate
secrets there, he said. Because of this danger, Huang

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believes Taiwan semiconductor firms will not invest more
than 20 percent of their capacity in China. He implied
that Powerchip would not move quickly to begin
construction of a semiconductor plant in the PRC since
receiving approval from the Ministry of Economic Affairs
in December 2006 (reftel). He backed away from media
reports that Powerchip would build its China plant in
Suzhou, noting that he was looking at inland locations as
well. Away from China's more prosperous coastal
provinces, employee turnover might not be as high.

Powerchip Open to Takeover Possibility
--------------


6. (C) When the Director asked if Taiwan stocks were
undervalued, Huang agreed strongly. He believes that
improved relations with China would help increase values
by attracting more U.S. investment. Huang commented that
Powerchip was open to the possibility of being acquired
by a foreign investor in a deal similar to Carlyle
Group's recent proposal to buy Advanced Semiconductor
Engineering. However, he reported that Powerchip was not
currently in discussions with any potential buyers.

Economy Will Improve After 2008 Election
--------------


7. (C) Huang expects economic conditions in Taiwan to
improve after the 2008 election as a result of improved
relations with the PRC. He believes that the Democratic
Progressive Party (DPP) will be more flexible on cross-
Strait relations after President Chen Shui-bian leaves
office. Huang praised the DPP for taking action when
necessary, singling out Premier Su Tseng-chang for moving
quickly when a problem appears. He called the DPP
"street smart" with the ability to get things done. In
contrast, he characterized the Pan-Blue parties as well-
educated elites. According to Huang, their tendency is
listen to a problem, talk, and then make proposals.
However, he stated that his firm did not look for active
government support. Instead, Powerchip lobbies for
policies that will allow the firm to compete in the
global market.

Comment
--------------


8. (C) Dynamic innovators like Frank Huang make it easy to
look toward Taiwan's economic future with optimism. An
American-educated MD, he shifted from medical research to
Taiwan-based hi-tech entrepreneurship in the roaring eighties,
and has built a multi-billion dollar operation in the past
twenty years. Neither he nor Powerchip show any signs of
slowing down any time soon. When the Director asked Huang
how long his joint venture with Elpida would last, he lowered
his voice conspiratorially and whispered "Forever!"
YOUNG