Taiwan’s IC Design Sector
Ready for Chinese Investment?
Chinese investment is everywhere, but Taiwan's fabless semiconductor sector remains off limits. Some domestic IC design firms would like to see the policy change, but questions abound over whether it could be done without compromising national interests.
Ready for Chinese Investment?By Patty Yen
From CommonWealth Magazine (vol. 594 )
As Taipei was just starting to warm up in mid-March, a meeting held by fabless semiconductor firm MediaTek Inc. for its clients in Shenzhen was sizzling, the conference hall packed to capacity.
MediaTek used the forum to launch its top-of-the line 10-core processor, the Helio X20, and a more powerful variant, the X25, unmistakably declaring its intentions to move into the higher end of the handset chip market to challenge Qualcomm. The more than 600 smartphone brands and module makers gathered, including Lenovo, Xiaomi, Meizu Technology, Vivo, and TCL, were all completely on board.
MediaTek, which supplies half of the mobile phone chips used in China's market, has emerged as the world's third largest fabless semiconductor company and Taiwan's undisputed IC design king. Accounting for 70 percent of the domestic sector's output value, it is Taiwan's de facto national team.
When Lin Chuan assumes office as Taiwan's new premier (the head of the government's executive branch, who is appointed by the president) on May 20, the first serious policy challenge he will face is whether to open Taiwan's IC design sector to Chinese investment. MediaTek, which has received interest from Chinese state-owned Tsinghua Unigroup, will be the first test case.
'Playing on Half a Court'
Chinese companies are still prohibited from investing in Taiwan's IC design sector, but in a survey of its 20 IC design companies conducted earlier this year by the Taiwan Semiconductor Industry Association, 19 supported an opening to Chinese capital and one said it had no opinion. Why did they so overwhelmingly approve the idea?
Peng Mao-jung, a manager in the Electronics & System Research Division of the Industrial Technology Research Institute's Industrial Economics & Knowledge Center, says it has to do with the industry's structure.
Based on IC design output value, the United States has a 60 percent share, Taiwan has a 20 percent share, and China is close behind at 15 percent, but China is expected to catch up with Taiwan in one to two years,
That is not idle talk. In a ranking of IC design firms for 2015 by semiconductor market research firm IC Insights, MediaTek ranked third, but China's Hisilicon Technologies was sixth, and China's Spreadtrum Communications, owned by Tsinghua Unigroup, jumped to 10th on 40 percent revenue growth.
Even more telling, China's share of the global semiconductor market surpassed 30 percent in the third quarter of 2015, making it the world's biggest semiconductor market.
Peng explains that Taiwanese companies cannot match American companies' technology and have trouble entering Asia-Pacific and Korean markets. Squeezed for survival, these companies are left to rely on the Chinese market, and they want to exchange cooperation for market access. At present, nearly 50 percent of Taiwan's fabless semiconductor firms' sales go to Chinese clients, an indication of how dependent they are on China.
"Without the mainland market as part of globalization, it's like playing basketball on half a court," says David Ku, MediaTek's chief financial officer and spokesman. China is the world's biggest mobile phone manufacturer and exporter, and if it is excluded, all that's left of a global strategy is "half a world," Ku says.
The next three years will decide whether Taiwan's IC design sector survives. After 18 years of developing mobile phone chips and emerging as the world's third biggest fabless semiconductor firm and the one with the highest market share in China, MediaTek is adjusting its strategy. It is now preparing to migrate from the low- and medium-end smartphone chip market to the high-end and enter the Internet of Things battleground.
"5G is an arena where every big international player has to be. Taiwan lagged behind Japan and South Korea in developing 4G, and we can't fall more than six months behind advanced countries on 5G," says MediaTek Chairman Tsai Ming-kai.
If Mediatek loses its competitive advantage in new markets where China is setting the standards, such as 5G and the Internet of Things, it will be hard-pressed to retain its position as the world's No. 3 IC design house. That would be tantamount to Taiwan losing its IC design sector and would defeat the purpose of government efforts to protect it.
Unsure about their futures and ability to secure market share, fabless semiconductor executives could contemplate selling their companies. The chairman of NAND Flash controller supplier Phison Electronics Corp., Pua Khein-seng, may be one of them. He expects China to become the world's biggest market for NAND Flash controllers by 2017.
"If I cannot capture the market by 2018, and the company has no potential for growth for two to three years, I would really consider doing something – selling the company," Pua says with a serious look.
Protective of Their Technology
In free markets, companies tend to be even more careful than governments in protecting technology. "If you don't open the market because you're afraid Chinese investors will steal your technology, they will directly poach your people instead," Pua contends.
The many companies set up by Chinese capital in Zhubei have poached many Taiwanese engineers, and it is hard to believe those people did not take their technology with them.
"To have taken the company this far, we are definitely not stupid. There is no way I would cooperate with a Chinese design company in a similar field, because they are out to steal technology," Pua says.
"Do you really think MediaTek would cooperate with Spreadtrum?" unless there’s a problem "here," he asks, pointing to his brain.
Pua insists companies will protect their own technologies and carefully select their partners, choosing enterprises upstream or downstream from them in their supply chains or with partners who can simply provide capital or help with branding.
Even if opening up to Chinese investment is necessary for the IC design sector's survival, National Taiwan University electrical engineering professor Lin Tsung-nan said in an interview with CommonWealth Magazine that the government should set restrictions to ensure that Taiwanese owners can maintain operating control of their enterprises, especially considering how vulnerable they may be.
Big Taiwanese IC design companies tend to have highly diffuse ownership, meaning their stock is distributed among many shareholders, with very few heads of Taiwan's publicly listed companies owning more than 10 percent of their company's stock.
Taiwan Semiconductor Manufacturing Co. (TSMC) Chairman Morris Chang, for example, holds only 0.4 percent of TSMC's shares, compared with 70 percent in the hands of foreign investors. In MediaTek's case, board directors and supervisors hold less than 3 percent of the total shares.
Under such circumstances, Chinese investors could easily take control of publicly listed companies they prize simply by sweeping up 10 to 20 percent of the outstanding shares.
"Opening up doesn't mean ceding control. There's a big distance between allowing Chinese investors into the stock market and (them taking) control," says Weltrend Semiconductor Inc. Chairman Sam Lin.
If Chinese investors really want to take control of a company, Taiwan's government can intervene through investment reviews or restrictions.
Taiwan's government has restrictive policies at its disposal. Citing the example of Tsinghua Unigroup seeking a 25 percent stake in MediaTek, PwC Taiwan Deputy Chairman Michael Huang says the government not only has the right of review, it can prohibit Chinese investors from having a controlling interest in or becoming managers of a company, limit the number of seats they have on the board, or bar them from soliciting proxies. These are all tools the government has at its disposal to help Taiwanese enterprises maintain management control.
Using Subsidiaries to Cooperate Safely
Soon-to-be premier Lin Chuan is not a stranger to the semiconductor sector, having served as chairman of Vanguard International Semiconductor Corp. He has cited three principles for assessing Chinese investment in the sector: 1) Is it mutually beneficial? 2) Is it unfavorable to Taiwan's businesses? 3) What is its impact on national security?
Lin is leaning toward having IC design firms establish a firewall by first splitting up IC design companies before allowing Chinese investors to buy into the company, such as Taiwan's financial holding companies have done. Taiwanese panel maker AU Optronics Corp. has also used the strategy, collaborating on a display panel factory in China with InfoVision Optoelectronics (Kunshan) Co. through a subsidiary it established in Kunshan.
PwC Taiwan's Huang says spinning off subsidiaries that distance themselves from national security issues or advanced technology and then have them enter into joint ventures with Chinese capital can serve as a firewall that protects the company. It gives the company the flexibility to go on the offensive or retreat while protecting trade secrets.
The IC design sector has seemingly figured this out, aggressively spinning off non-core businesses in recent years to have them stand on their own. In 2013, MediaTek spun off its fixed line broadband communications business into Hong Kong-based EcoNet (HK) Limited, which then established a branch in Suzhou a year later. MediaTek also set up automotive chip subsidiary Autochips Inc. in Hefei in 2013. Phison, meanwhile, set up a subsidiary in Hefei called Hefei Core Storage Electronic Limited. These subsidiaries are wholly owned by their parent companies and are at the starting line waiting for the starter's gun to fire.
The government wants advanced technology to remain in Taiwan, and hopes it can be managed on a case-by-case basis. When authorities in February approved TSMC's application to establish a 12-inch wafer plant in Nanjing, for example, it was because TSMC pledged that by the time the Nanjing plant was completed in three years, the company's technology in Taiwan will have been upgraded.
From a national standpoint, MediaTek's Ku suggests that if Taiwan wants to attract investment from around the world, including China, it could set up a specialized high-level unit similar to the Committee on Foreign Investment in the United States (CFIUS). The panel would go beyond the simple review of documentation in assessing foreign investment applications and conduct "substantive reviews" and share responsibilities with the Investment Commission to assess the potential economic benefits and national security risks before deciding on whether to approve a Chinese investment.
"We're damned if we open up and damned if we don't," Phison's Pua says. Ultimately, the only way for Taiwan to remain a player in the industry is to constantly upgrade, regardless of its ties to China.
Taiwan has many examples to draw upon from its industrial past. In 2008, the flat panel investment sector was not opened to Chinese investment, and China opted to work with South Korea instead to move up the value chain, preventing Taiwan from punching its ticket to gaining a higher perch in the industry.
Opening up the LED sector, on the other hand, allowed Chinese investors to master key technologies while Taiwanese LED players failed to up their games, leaving them between a rock and a hard place.
In a free economy, only by persevering on their own, protecting their technologies, and upgrading their operations and innovating can businesses be competitive. It is a formula that Taiwanese companies can ill afford to ignore in considering partnerships with foreign, and especially Chinese, investors.
Translated from the Chinese by Luke Sabatier