Should TSMC Have Built a Foundry on the Mainland? A Case Study

Asianometry

Historical Context & Political Background

1999: China entered WTO, changed world economy forever
Exploding Chinese market attracted Taiwanese investors
Policy makers saw potential threat to Taiwan's semiconductor industry (crown jewel of high-tech sector)
2000: Chen Shui-bian (DPP) ended 50 years of Kuomintang rule, became president
- Previously illegal opposition party now in presidency
- Divided government: Kuomintang dominated legislature
- Clashed over almost everything
Chen's policies: pro-welfare, pro-environment
- Expanded Taiwanese social welfare budget
- Stopped construction of Taiwan's fourth nuclear plant
- Continued Li Denghui's path of cultural/educational changes
- Goal: remake Taiwanese society into own identity vs Chinese province
Business class uncomfortable with changes → continued capital flight across strait
Taiwan's economy struggled, unemployment rose to 5%

Until early 2000s: Taiwanese foundries limited to $50 million investments in mainland
1991 rule by Lee Denghui: "Don't rush, be patient"
- "Nice smile but sharp teeth"
- Investors not reporting cross-strait investments faced fines/imprisonment
- UMC president Robert Tsao prosecuted under this law
Central question: Should Taiwan allow semiconductor manufacturers to establish foundries on mainland?

Two new semiconductor foundries opened in China, sent shockwaves across Taiwan
Grace Semiconductor Manufacturing Company (Hongli)
- Co-founders: Wang Wen-yang (son of Formosa Plastics founder) & Jiang Mianheng (son of Communist Party General Secretary Zhang Zemin)
- Names alone shook foundations of Taiwanese semiconductor industry
Semiconductor Manufacturing International Corporation (SMIC)
- Founded by former TSMC vice president
- First of many major cross-strait defections
Both companies used "near unlimited bank accounts" for massive employee poaching
- Mainland firms offered 4-5x compensation packages vs Taiwanese firms
- Employees brought entire teams + proprietary technology to China
- Problem continues to this day

China's foundries had substantial cost benefits over Taiwan:
- Construction costs in Shanghai: 35% cheaper than Taiwan
- Water supply: 60% less cost
- Bulk gas: 30% less cost
Market opportunity: TSMC & UMC wanted first-mover advantage in China
- Major share serving local integrated chip designers
- Chinese market brand new with "infinite possibilities"
Frank Huang (PowerChip CEO): "China market is growing, Taiwanese companies can't miss out... we have to be there"

Morris Chang (TSMC CEO/Chairman/Founder) argued most forcefully for market entry
China's requirement: manufacture wafers locally to enter market
"Market for technology" - had to give China something to get something
Historical precedent: Taiwan's own technology transfer experience
- 1976: Taiwan called for help establishing domestic semiconductor market
- RCA won bid (7 companies), trained 37 engineers for over a year
- US allowed advanced technologies to flow to Taiwan for $10 million
- Different political/economic times, friendly US-Taiwan relations helped
Now Taiwan faced same situation but on other side
Taiwanese foundries' argument: Could be responsible
- Transfer older 8-inch wafer technology vs cutting-edge 12-inch
- US technology export restrictions prevented transferring latest fabrication tech anyway
- At time: 0.25 micron or smaller restricted
- US restricting technology transfers to China since 2003 (not new)

Management vs labor had different goals/views
Taiwanese employees vociferously opposed the idea
- Saw as management's attempt to pay them less
- Less investment in Taiwan = fewer jobs for Taiwanese in Taiwan
- Force workers to go abroad for work
Taiwanese Engineers Union estimates: Transfer of 8-inch wafer technology would cost Taiwan 30,000 jobs over next 2 years
Union VP led protest of 1,000 engineers: "We lost 6-inch production facilities already, going to lose 8-inch, then 12-inch. How much more can we lose?"
Real impact: Loss of learning opportunities ("walk before run")
Result: Highly paid executives/specialty engineers at top + poorly paid people at bottom
Hollowing out of middle class

Final decision: Taiwanese government allowed establishment of 8-inch fabs on mainland
Conditions: Foundry first had to invest substantial money to upgrade to 12-inch wafer capability
Political divisions: Extremely divisive, strange bedfellows
- DPP President Chen + his minister supported it
- Lee Denghui opposed it
- Head of Mainland Affairs Council opposed (unknown Tsai Ing-wen)
- Tsai: "Lifting ban on wafer investment like releasing two tigers. Once they eat up rabbits in China, they'll come back and eat Taiwanese rabbits"
Public opinion shift: 50-50 support → 27% support (1/3 said didn't know enough)

Opening marked start of friendlier cross-strait relations
Further supported during subsequent Kuomintang President Ma Ying-jeou administration
Financial success for foundries:
- 2007: TSMC built first fab on mainland (Shanghai)
- 2017: Second fab opened (Nanjing)
- Nanjing fab alone: $500 million revenue in 2019
- Made it 3rd largest foundry on mainland by itself
Relations chilled when President Ma left (least popular president on record)
Tsai Ing-wen cruised to 2016 victory

Economic impact: Hard to find clear support in data
- Some sectors gained, others lost (normal for any economy)
- Data extremely messy
Overall assessment: Move helped Taiwan economically/financially but at political cost
Many companies got richer
Improved mainland relations better for business (Taiwanese business class view)
Ironically gave assurance to continue investing in Taiwan itself
Societal/political costs extremely high:
- Taiwanese businesses continued investing in China
- Issue caught up with struggling economy problems
- Wages stagnated, house prices soared
- Young people moved to America/mainland
- Taiwanese people saw continued struggle
- Eventually culminated in momentous Sunflower Student Movement (2014)

Try for free