The Ministry of Economic Affairs is planning to allow Taiwan's chipmakers to build eight-inch wafer fabs in China. The plan's supporters say it would give Taiwan better market footing and global deployment and that it would free up resources for the development of more advanced 12-inch wafer fabs.
In fact, those familiar with original-equipment-manufacture (OEM) chipmakers know that production close to the market is not necessary. Transporting chips is a straightforward exercise and shipping costs account for a negligible proportion of the total cost. The great distance between Tai-wan and the US has not stopped Taiwan's semiconductor producers, such as TSMC (台積電) and USMC (聯電), from rising to become internationally competitive OEM partners of the US. Taiwan is so much closer to China than to the US that the "market footing" argument holds little water.
Further, both Taiwan and China have joined the WTO. With the two nations operating under a multilateral framework to promote freer trade, Taiwan's chipmakers do not need to dodge tariff and non-tariff barriers to get access to China's market.
There is therefore no real argument for allowing eight-inch wafer fabs to move to China for market footing. The global deploy-ment argument, however, does have merit. Global deployment results from the strategic need to hedge against local risks. The 921 earthquake in Taiwan and the recent economic and social chaos in Argentina highlight the importance to companies of dispersing their production sites. Overseas investment by chipmakers should be seen as, among other things, a way of managing risk.
Where China-bound investment is concerned, however, there is an urgent and crucial need for the government to accelerate and broaden its thinking to achieve a holistic view of national security, the economy and industry. Both official and unofficial statistics indicate that a disproportionately large amount of Taiwan's outbound investment has been going to China. Rushing to lift bans on building eight-inch wafer fabs in China will exacerbate the excessive concentration of Taiwan's outbound investment in one country, thereby defeating the object of reducing risk but also putting Taiwan's national security and economy at risk. The reasons for this are numerous.
First, China is universally recognized as a high-risk country to invest in. Any Taiwanese busi-nessperson who doesn't believe that should try to buy insurance from an internationally-known insurance company to see if he or she can afford the costly premiums to cover the risks associated with investments in China.
Second, China is Taiwan's enemy and has hundreds of missiles aimed at Taiwan. How can Taiwan throw caution to the wind and step up its reliance on China under such circumstances?
Third, given its minuteness in relation to China, Taiwan has no hope of peacefully transforming China through economic activity. This is difficult for the US, let alone Taiwan.
Fourth, as has been reported, Taiwanese chipmakers' advanced 12-inch-wafer fabs have been unable to reduce defect rates to satisfactory levels and eight-inch fabs still dominate the nation's semiconductor industry.
Those in favor of allowing the building of eight-inch wafer fabs in China assert that such a liberal policy would help free up and redirect resources toward the development of 12-inch-wafer fabs in Taiwan. A look at several possible outcomes exposes the weak-nesses of this argument.
In the first scenario, Taiwanese set up eight-inch-wafer fabs in China but do not shut down their equivalent fabs in Taiwan. As a result, no resources are freed up but some resources are removed from Taiwan, adversely affecting the development of 12-inch-wafer-fab technology.
In the second scenario, Tai-wanese set up eight-inch-wafer fabs, but also shut down equivalent fabs in Taiwan. As a result, resources such as industrial land and low-skilled labor are freed up, but a portion of the resources required for the development of 12-inch-wafer fabs, such as high-skilled labor, management and capital, are deployed in China, as in the first scenario.
In the third scenario, eight-inch-wafer fabs in China give rise to "agglomerative effects," whereby the entire vertically integrated system of support firms are lured out of Taiwan's semiconductor industry. As a result, massive amounts of industrial land and low-skilled labor are freed up, but massive amounts of high-skilled labor, management and capital are redirected to China.
There is no guarantee that businesses will devote more resources to research and development to hasten Taiwan's upgrade to 12-inch-wafer fabs. Indeed, the upgrade could even be slowed as investment in China extends the life of eight-inch-wafer fabs. The third scenario would rapidly narrow the gap between China's and Taiwan's semiconductor industries and thus threaten Taiwan's economy and national strength.
The best way to induce chipmakers to accelerate efforts to upgrade is to directly expose them to the pressure of global competition, with the government blocking efforts to lengthen the life of these firm's lower-end technologies. To survive, Taiwan's chipmakers would thus be compelled to direct more resources into R&D to maintain competitiveness by upgrading technology, instead of seeking easy solutions by choosing low-cost venues, such as China, to temporarily extend their product life.
Once R&D becomes a widely practiced activity in Taiwan and the nation develops an unquestioned record of technological innovation, outbound investment and technology transfer will no longer be a sensitive policy issue. Instead, such developments will be viewed as normal phenomena in the cycle of global technology innovation and transfer.
Unfortunately, Taiwan is no longer in a virtuous cycle with respect to technology development and transfer. If it were, the imbalances caused by the paradox of sagging domestic investment on the one hand, and booming China-bound investment on the other, would not continue to plague Taiwan's economy. Yet, in precisely these circumstances, the economics ministry is planning to lift the ban on chipmakers building eight-inch-wafer fabs in China. Where is the holistic thinking in that?
Hwan C. Lin is an associate professor in the economics department of the University of North Carolina at Charlotte and a member of the North American Association of Taiwanese Professors.
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