US embassy cable - 05TAIPEI2743

C O N F I D E N T I A L SECTION 01 OF 03 TAIPEI 002743 
 
SIPDIS 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: DECL: 06/23/2015 
TAGS: ECON, EINV, ETTC, CH, TW, Cross Strait Economics 
SUBJECT: IC PACKAGING AND TESTING - PRESSURE BUILDING TO 
MOVE TO PRC 
 
REF: A. TAIPEI 343 
     B. TAIPEI 2521 
 
Classified By: AIT Director Douglas H. Paal, Reason 1.4 d 
 
Summary 
------- 
 
1. (C) Integrated circuit (IC) packaging and testing is a 
key component in Taiwan's semiconductor economy with 
approximately USD 5 billion in revenue in 2004.  Despite 
industry pressure, the Taiwan government still prohibits 
packaging and testing firms from investing in the PRC 
because it fears such investment will fuel a larger 
migration of Taiwan's semiconductor industry.  Several 
firms have been accused of investing illegally in the 
Mainland, including the United Test and Assembly Center 
Limited (UTAC) case currently under investigation and 
Taiwan's largest packaging and testing firm Advanced 
Semiconductor Engineering Co. (ASE).  Based on perceived 
and real economic factors, many firms have developed 
detailed plans for investing in the PRC once the Taiwan 
government makes it legal.  If the Taiwan government does 
not permit packaging and testing firms to begin such 
investment soon, Taiwan firms, which currently dominate the 
global market, could face fierce competition from new PRC 
rivals.  End summary. 
 
Essential Link in the Fabless/Foundry Model 
------------------------------------------- 
 
2. (U) Packaging and testing is a key link in the 
semiconductors supply chain.  IC packaging and testing 
firms take completed semiconductor wafers and turn them 
into usable integrated circuits.  These firms have played 
an essential (but sometimes unacknowledged) role in the 
successful development of the fabless/foundry model that 
has allowed contract semiconductor manufacturers like 
Taiwan Semiconductor Manufacturing Company (TSMC) and 
United Microelectronics Corporation (UMC) to flourish. 
Under this model, an independent integrated circuit design 
house that does not have manufacturing facilities of its 
own (and is thus "fabless") will hire a semiconductor 
foundry like TSMC or UMC to produce its chips.  The design 
house then must hire a separate packaging and testing firm 
to cut out the individual chips from the wafer produced by 
the foundry and turn it into a completed integrated circuit 
that are components of a wide range of electronic consumer 
goods.  The packaging and testing firms perform up to four 
separate processes - bumping or wire bonding, testing, 
cutting, and packaging. 
 
3. (U) The industry is a major piece in Taiwan's prosperous 
semiconductor economy.  In 2004, Taiwan's packaging and 
testing firms had revenue of NT$ 159.5 billion (about USD 5 
billion), which accounted for almost 15 percent of Taiwan's 
semiconductor industry revenue.  With TSMC and UMC, Taiwan 
has the world's top two semiconductor foundries.  Their 
success has helped enable Taiwan to dominate the packaging 
and testing industry as well with five of the top ten firms 
globally by revenue.  These include number one Advanced 
Semiconductor Engineering Co. (ASE) and number three 
Siliconware Precision Industries Limited (SPIL). 
 
Taiwan's Restrictions - Trying to Keep the Cluster 
--------------------------------------------- ----- 
 
4. (C) Taiwan currently prohibits investment in the 
Mainland by Semiconductor packaging and testing firms. 
However, semiconductor manufacturing was liberalized in 
2002, enabling TSMC to establish a fab near Shanghai, using 
less advanced 0.25-micron technology.  Taiwan firms 
Powerchip and ProMos have also applied to the Investment 
Commission to build manufacturing facilities in the 
Mainland.  Many firms are pressuring the Taiwan government 
to permit investment in more advanced 0.18-micron 
technology.  However, Taiwan continues to delay 
liberalization of packaging and testing investment.  As 
reported ref B, Mainland Affairs Council officials for the 
third time this year told AIT/T that the investment in 
packaging and testing would be approved within the next two 
to three months. 
 
5. (C) Packaging and testing has generally been seen as a 
technologically less sophisticated process than the wafer 
fabrication performed by foundries like TSMC and UMC.  In 
fact, until 1997, packaging and testing firms did not 
qualify for space in Taiwan's science parks.   According to 
ASE Chief Financial Officer Freddie Liu, the reason that 
packaging and testing investment in the Mainland has not 
yet been approved is because the Taiwan government fears a 
kind of domino effect that would encourage the transfer of 
the entire Taiwan semiconductor cluster to the Mainland. 
 
Under the Table or Just Around It 
--------------------------------- 
 
6. (SBU) Nevertheless, some Taiwan packaging and testing 
firms have been accused of illegally investing in the 
Mainland.  The most widely publicized case is United Test 
and Assembly Center Limited (UTAC), which has operated a 
packaging and testing facility in Shanghai since 2003 and 
recently announced a joint venture with China's 
Semiconductor Manufacturing International Corporation 
(SMIC) to establish another facility in Chengdu.  Taiwan's 
Ministry of Economic Affairs Investment Commission has 
begun an investigation of UTAC's PRC investment.  UTAC 
claims that this investment is legal because it is not a 
Taiwan company but rather headquartered in Singapore. 
 
7. (C) UTAC was founded in 1995 in Taiwan.  It established 
operations in Singapore in 1997 and subsequently moved its 
headquarters there and reorganized the firm with 
registration under Singaporean law.  UTAC currently has 
more employees at its Singapore facility than in Taiwan - 
about 1,500 in Singapore according to its Vice President 
Winston Lau, compared to 773 in Taiwan.  It also has more 
capacity in Singapore.  The MOEA Investment Commission 
investigation may hinge on whether Taiwan individuals have 
violated the law in holding UTAC stock. 
 
8. (C) ASE is also rumored to have invested illegally in 
the PRC.  ASE's Liu told AIT/T that these allegations are 
false.  However, he did confirm that the company has 
secured real estate in Songjiang, Kunshan, and Shanghai 
with the aim of building plants there. 
 
A Herd Mentality or Survival Instincts? 
--------------------------------------- 
 
9. (C) Many other Taiwan firms have also developed 
extensive plans for investment in the Mainland.  FuPo 
Electronics Corporation Vice Chairman Vincent Wang showed 
AIT/T its study of market conditions in the PRC and 
potential areas for expansion there.  Megic Corporation 
Chairman M.S. Lin told AIT/T that his firm has plans to 
invest in the PRC.  Lin commented that some of the 
enthusiasm among packaging and testing firms to invest in 
the Mainland could be based more on perceptions of industry 
trends rather than economic reality.  Both Megic and FuPo 
specialize in packaging chips for TFT-LCD panels.  Taiwan's 
TFT-LCD manufacturing has not yet moved to the PRC to the 
degree of many other information technology hardware 
manufacturers.  The most advanced and capital-intensive 
TFT-LCD manufacturing processes are maintained in Taiwan, 
suggesting less need for packaging and testing firms to 
move there. 
 
10. (C) Nevertheless, Megic's Lin pointed out that TSMC is 
encouraging design houses to place orders for its fab in 
Shanghai, providing more impetus for packaging and testing 
firms to move there.  As one component of the industry 
establishes a presence in the Mainland others must follow 
to remain competitive.  Otherwise, PRC packaging and 
testing firms will grow to meet the demand. 
 
11. (C) When ASE's Liu outlined his firm's plans for 
investment in the PRC, he underscored the need for cross- 
Strait expansion in order for ASE to continue to grow.  He 
commented that Taiwan did not have adequate personnel or 
land for ASE's planned growth.  Liu pointed out that ASE 
currently employs 30,000 employees in Taiwan and has 
difficulty finding enough talented candidates for local 
expansion.  ASE's plans call for expanding to employ 
200,000 in the Mainland by 2016.  Liu emphasized that there 
was no way to expand like that in Taiwan.  He argued that 
if Taiwan wants to preserve the IC packaging and testing 
industry in Taiwan it should maintain tax benefits for 
high-tech industries and open immigration policy to allow 
firms like ASE to hire engineers from the PRC. 
 
Comment - Time is Running Out 
----------------------------- 
 
12. (C) Time is running out for Taiwan's packaging and 
testing firms to maintain their strong competitive 
advantage over PRC firms.  Many observers believe that if 
the Taiwan government does not approve packaging and 
testing investment in the PRC by the end of the year it 
will be too late.  According to ASE's Liu, if Taiwan had 
liberalized Mainland investment in the PC industry 20 years 
ago, then Acer would be dominant in the PRC and there would 
be no Lenovo.  If semiconductor manufacturing had been 
liberalized 10 years ago there would be no SMIC, only TSMC 
and UMC.  Now Taiwan is at a similar crossroads for 
packaging and testing.  If Mainland investment is approved 
this year, Taiwan's firms like ASE and SPIL, which already 
dominate the industry globally, will maintain that 
dominance in the PRC's rapidly emerging semiconductor 
cluster.  If not, new PRC competitors will emerge and grow, 
eventually threatening Taiwan firms at home as well as in 
the PRC market.  End comment. 
 
 
PAAL