US embassy cable - 05TAIPEI710

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, Cross Strait Economics 
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