Taiwan Chipmakers Seek to Stay Ahead of the Game

Photo: Micron

While Taiwan’s semiconductor industry continues to grow, China poses a formidable long-term challenge. 

For years, industry analysts have cautioned that Chinese competitors in the semiconductor sector would steadily erode the technology advantages of Taiwanese chipmakers, ultimately wooing away many of their customers with lower prices.

Despite China’s rapid progress in the semiconductor sector in recent years, Taiwan has thus far been able to leverage its considerable strengths to ward off that challenge. At the same time, local IC (integrated-circuit) makers know they will need to be vigilant to remain ahead of their Chinese competitors. As semiconductors are among Taiwan’s most important exports, it can’t afford to cede the industry to China.

In its Made in China 2025 plan, Beijing has targeted semiconductors as a strategic industry it aims to dominate. Since 2015, China has surpassed Taiwan in terms of annual output value for IC design, one of the main segments of the semiconductor industry. It is also closing the gap with Taiwan in another area, IC packaging and testing.

But overall, Taiwan retains important advantages over China in the IC sector. The total production value of the local IC industry is $82 billion, compared to China’s $32 billion. Further, Taiwanese IC makers serve premier global clients, like Apple, Qualcomm, Intel, and Nvidia. The Chinese IC industry relies heavily on government subsidies and domestic demand, especially for mobile devices (China is the world’s largest smartphone market).

Taiwan remains well ahead of China in IC fabrication, the mainstay of the industry. “This lead is because Taiwanese manufacturers have enormous advantages in technology and scale,” explains Lin Jian-Hong, a research manager at Taipei-based market-intelligence firm Trend-Force.

Leading Taiwan-based IC manufacturers Taiwan Semiconductor Manufacturing Co. (TSMC), United Microelectronics Corp (UMC), and Powerchip Technology Co. together accounted for 62% of semiconductor foundry sales in 2017, according to an August report in EET Asia.

Morris Chang, TSMC’s recently retired founder and chairman, said in a speech in June that TSMC would be able to stay five to seven years ahead of Chinese competitors in terms of technology development. TSMC is one of the few semiconductor companies in the world – along with Intel and Samsung – with the R&D prowess to continuously pack more computing power into ever-smaller and more energy-efficient chips.

Joen Yang, an industry analyst at the semi-governmental Market Intelligence & Consulting Institute, notes that among Chinese foundries, only Shanghai-based Semiconductor Manufacturing International Corp. (SMIC) can fabricate chips using advanced processes of up to 28 nanometers. But SMIC has yet to master the complex high-k metal gate (HKMG) technology process, whereas TSMC began mass producing 28nm HKMG chips in 2012.

In general, TSMC can better meet the standards of top global customers than can Chinese chipmakers, notes Mario Morales, vice president of semiconductor research at the International Data Corp. (IDC) in California. It’s not merely a question of technology. In the foundry segment, “there’s a service element that Chinese companies struggle with,” Morales says. “They haven’t built the same relationships TSMC has.”

Overall, Taiwan’s IC output value ranks third globally behind the United States and South Korea, according to the state-backed Industrial Technology Research Institute (ITRI). Within individual industry segments, Taiwan leads in IC packaging and testing with 50% of the global market, and in foundry manufacturing it has a commanding 70% market share. Further, Taiwan accounts for 20% of the world’s IC design value and is the number-four memory chip maker with 10% of the market.

ITRI predicts steady expansion across sectors this year. Overall output is expected to reach NT$2.61 trillion (US$87 billion), up 5.9% from 2017. IC packaging and testing is projected to hit NT$487.8 billion, a 2.3% annual increase, and the IC design segment is forecast to come to NT$641.7 billion, representing 4% growth. Chip fabrication is seen as reaching NT$1.48 trillion, an increase of 8.1% over 2017.

Paradoxically, China is an opportunity as well as a threat for the Taiwanese IC sector. Half of Taiwan’s IC-sector exports go to China, and over 50% of semiconductors worldwide are shipped to China for product assembly, according to TrendForce.

As a result, “IC design firms simply cannot ignore this market,” says TrendForce’s Lin. Indeed, Taiwanese IC design firms, who focus primarily on consumer electronic products, rely heavily on sales to China-based original equipment manufacturers (OEMs) and brand vendors. Compared with other major markets, China is more easily accessible for Taiwanese companies because of geographical proximity, a shared language, and the relative strength of local competitors.

“The China market is the base for Taiwanese IC design firms,” Lin says. “Although they want to diversify their clients to reduce the risks associated with depending on a single market, they first have to build themselves up in China.”

In contrast, American companies are the chief customers for Taiwanese foundries as well as the IC packaging and testing operations. Still, Chinese fabless IC design houses have been the fastest-growing revenue source for Taiwanese foundries and IC packaging and testing companies over the past decade, according to TrendForce.

Ominous outflow 

Taiwan also retains a clear advantage over China in its semiconductor talent pool, notes Peng Mao-jung, a manager at ITRI’s International Strategy Center. Taiwan has many more seasoned industry veterans with rich management experience, he says.

Recently, however, China has been stepping up efforts to poach talent from Taiwan to help it vault up the IC industry value chain. After Taiwanese regulators rebuffed their attempts to invest in some high-profile IC firms here, Chinese chip-makers changed their strategy and began targeting local engineering and managerial talent directly.

In October 2017, SMIC appointed former TSMC senior R&D director Liang Mong-song as its co-chief executive. Liang worked at TSMC from 1992 to 2009 before moving to South Korea to take a university teaching job and later an executive position with Samsung. TSMC sued Liang in 2011 for intellectual property rights violations, alleging that Liang leaked information about its then cutting-edge 28nm process technology to his new Korean employer. In August 2015, Taiwan’s Supreme Court ruled in TSMC’s favor, and banned Liang from working at Samsung until the end of that year.

In July this year, leading silicon wafer maker GlobalWafers told Nikkei Asian Review that China’s headhunting of local IC talent was its top concern. The Hsinchu-based chipmaker said that Chinese firms were approaching the company’s teams in Taiwan and Japan with stratospheric compensation packages: four to five times the pay here and double or triple the going rate in Japan.

The effort to grab Taiwanese IC talent – and sometimes to acquire their former employers’ trade secrets in the process – comes as Beijing doubles down on its push for semiconductor self-sufficiency, which the Chinese Communist Party sees as integral to national security. In 2014, Beijing announced that it would spend up to RMB 1 trillion (US$145 billion) over the next decade to reduce reliance on foreign-made chips and strengthen its advanced manufacturing capabilities. A state-backed fund ended up raising RMB 139 billion toward that endeavor. In May, The Wall Street Journal reported that China was set to roll out a new fund of roughly RMB 300 billion for the domestic IC industry.

Given China’s lofty IC ambitions, its current engineering talent pool cannot come close to meeting industry demand. An August report in the state-run Global Times says that China currently has just over 400,000 of the 720,000 engineers needed for its burgeoning semiconductor industry. Citing a new industry white paper, the report states that every year just 30,000 graduates with the requisite skills join a semiconductor company after finishing their studies.

Some observers have seen a mainly political agenda in China’s poaching of Taiwanese tech talent. “China’s attempt to attract Taiwan’s capital and talent, especially hi-tech and young students, has clear political intentions,” Taiwan’s Vice Premier Shih Jun-ji said at a March press conference, in a reference to Beijing’s newly announced “31 Measures” to lure Taiwanese capital and talent.

Some departure of talent to China is inevitable, analysts say. “Taiwan is not a growing job market, while China is making heavy investments in the semiconductor industry,” says IDC’s Morales. ITRI’s Peng agrees that “the cross-border movement of talents is a normal phenomenon and is good for industrial development in the long run.”

However, “the Taiwanese government attaches great importance to the semiconductor industry and continues to encourage investment in it,” Peng says. “If we foster a friendly environment for the industry, top talent will stay in Taiwan and enhance our national competitiveness.”

Strengthening competitiveness

Vertical integration could raise the competitiveness of the local semiconductor industry and help to keep talent at home, says TrendForce’s Lin. He points out that each segment of Taiwan’s semiconductor supply chain has historically operated very much on its own. “Only by working together and effectively strengthening the industry ecosystem as a whole will individual Taiwanese semiconductor firms become stronger and obtain new competitive advantages in the future,” Lin says.

In some cases, consolidation may be beneficial for Taiwanese IC firms. In response to the growing challenge from China, Taiwanese chipmakers are looking for ways to make rapid technological advances and develop new application markets for their products. “China is encroaching very quickly on the areas focused on scale and low margins,” says IDC’s Morales. “Consolidation is natural for Taiwanese IC makers to maintain their competitiveness.”

Meanwhile, Taiwan’s chip packaging and testing firms face competition from local foundries as well, according to Semiconductor Engineering. In a May report, the industry publication notes that both TSMC and UMC have moved into IC packaging and testing in recent years. TSMC is targeting the premium market, with Apple as its foremost customer.

In February, shareholders of Advanced Semiconductor Manufacturing (ASE) and Silicon Precisionware Industries (SPIL), Taiwan’s two largest IC packaging and testing firms, approved a merger under which a new holding company will fully own the two enterprises, though operationally ASE and SPIL will remain separate entities.

In a joint statement, ASE and SPIL said that the deal would boost Taiwan’s IC industry “by enhancing efficiency and economies of scale as well deeply strengthening research and development and innovation capabilities, thereby providing customers with higher quality, more efficient, and well-rounded packaging and testing services.”

ASE and SPIL merged for financial reasons and to pool resources, observes TrendForce’s Lin. The deal’s origins lie in both companies’ bullishness about the market for IC products based on the SiP [system in package] format, he says. By incorporating multiple integrated circuits contained in a single module, SiP can perform all or most of the electronic functions in a portable electronic device.

The ASE-SPIL merger should accelerate the adoption of SiP technology while expanding the companies’ joint market share, Lin says. Further, ASE and SPIL together can develop products for 15-20 different clients, compared to a total of just 10 clients separately, he adds.

Overall, the deal should strengthen Taiwan’s position in the IC packaging and testing industry in the face of fierce Chinese competition. In recent years, Chinese packaging and testing service providers have acquired international companies and reduced the gap with their Taiwanese counterparts, notes MIC’s Yang.

In the premium IC packaging and testing technology segment, Taiwanese firms remain two to three years ahead of their Chinese rivals, she says. In particular, Chinese IC packaging and testing providers have nothing as advanced as Taiwan’s FOPLP (Fan-Out Panel Level Packaging) technology. MIC expects that Taiwanese companies will be able to bring FOPLP into mass production by 2020, well ahead of their Chinese rivals.

Yet in the long run, Taiwanese semiconductor makers other than TSMC will likely face headwinds because they have not invested heavily in the software or IP side of the industry. The ownership of industry-leading software and IP is one reason why U.S. companies retain leading roles in the highest value segments of the IC supply chain, says IDC’s Morales. “Intel and Qualcomm invest a huge amount in R&D,” he says. “And when you sell leading-edge, you charge premium for it.”

The high-end competition is also coming from South Korea. Morales points out that chipmakers Samsung and SK Hynix invested heavily in R&D early on. They then built up their respective technology and brands, eventually integrating an entire ecosystem of products in Korea with their technology.

“The Koreans are always looking at a very long window,” Morales says. “Samsung spends during downturns. It leads to innovation.”

In contrast, with the exception of TSMC, Taiwanese IC makers often forsake big R&D spending, which is not a viable long-term strategy, especially as the IC sector matures. “It’s a time when you need to spend more to maintain a competitive advantage, not less,” Morales says.