In a five-story factory nearly the size of three football fields, technicians clad in spacesuit-like attire work around the clock producing silicon chips at Taiwan Semiconductor Manufacturing Co.
The company, the world’s largest contract chip maker, is a source of pride in Taiwan. It’s what people point to when they say the “Made in Taiwan” label is no longer a symbol of shoddy umbrellas, sneakers, radios and trinkets the island was known to churn out.
But TSMC and other companies in Hsinchu, Taiwan’s Silicon Valley, are beginning to feel the heat from neighboring China. Some observers say it’s just a matter of time before this island’s high-tech lead is eclipsed by the Communist mainland 100 miles to the west.
“Taiwan’s chip advantage over mainland China can only be maintained for the next five or 10 years,” said Darryl Cheng of Yuanta Core Pacific Securities in Taipei. “After that it will be increasingly hard to keep it up.”
Hong Kong-based analyst Warren Lau of investment bank Macquarie agrees, noting that by the end of 2005 China accounted for more than 20% of global chip consumption, making it the largest chip buyer in the world.
The growing mainland market will force more foreign companies to invest in China to take advantage of its burgeoning chip demand, Cheng said.
The issue of Chinese inroads is a major worry for many Taiwanese. The countries split amid civil war in 1949, and tension between the two remains palpable, underscored by Beijing’s threats to attack if Taipei moves to formalize its de facto independence.
China’s growing abilities also are a serious concern for Taiwan’s government, which has imposed restrictions on technology transfers to China.
“China is now employing a policy of using business to encircle Taiwan,” said Huang Chin-tan, executive secretary of the Ministry of Economic Affairs’ Investment Commission. “We have to remain vigilant.”
Still, mighty TSMC’s market share dwarfs the 6.6% registered by China’s Semiconductor Manufacturing International Corp. -- the mainland’s largest chip factory, analysts say.
Leaders of Taiwan’s chip industry say they are confident that they’ll stay dominant in the outsourced segment of the $227-billion world semiconductor market.
In the Hsinchu Science Park, Taiwanese companies such as Powerchip Semiconductor Corp. and Advanced Semiconductor Engineering still give the island a large advantage, making memory chips and other components for a range of devices including PCs and mobile phones.
The park’s preeminent tenant is TSMC, which produces logic chips for tech firms that don’t want to spend about $3 billion to build and equip their own chip fabrication plants, known as “fabs” in industry parlance.
Its customers include Texas Instruments Inc. and graphics card maker ATI Technologies Inc.
“Our biggest competition does not come from China,” said TSMC spokesman J.H. Tzeng. “Our biggest competition is ourselves.”
The numbers suggest he’s right -- at least for now.
The Taiwan Semiconductor Assn. says that in 2005 Taiwanese chip companies had revenue of $35 billion -- more than seven times the mainland’s total. “The size of their foundry market has very little implication for us at this point,” Tzeng said.
But in Taiwan’s government corridors, officials affiliated with President Chen Shui-bian’s Democratic Progressive Party have imposed severe limits on the transfer of semiconductor technology to China.
The party worries about Taiwan’s estimated $100 billion in Chinese investments and its overwhelming trade surplus with the mainland -- $58 billion in 2005. The party doesn’t want the island’s economy to become too dependent on China.
Politicians say a further deepening of the economic relationship -- including enhanced technology transfer -- could give China unhealthy political leverage over the island in any future confrontation.
Critics say the Taiwanese restrictions are shortsighted because they mean lost business for Taiwanese companies struggling to compete with foreign firms in the rapidly expanding Chinese chip market.
Even TSMC itself has set up a foundry in Shanghai -- with Taiwanese government approval. Tzeng said the company would like to make further Chinese investments, including the provision for more advanced technology than currently allowed.
“We have made an application to the government,” he said. “However, we still haven’t received any approval.”
Meanwhile, companies around the world are growing closer to China.
Earlier this year, Germany’s Infineon Technologies announced that it would transfer its 90-nanometer standard memory chip technology and 300-millimeter silicon wafer production know-how to SMIC, providing the Chinese company with the technological base to produce more chips with more computing power for less money. Infineon is spinning off its memory-chip business into a stand-alone company called Qimonda.
The 300-millimeter wafers can accommodate 2 1/2 times as many chips as the 200-millimeter variety Taiwan allows for export -- a huge money saver for chip makers -- and smaller circuits mean enhanced performance and, ultimately, much more valuable chips.
Still, Yuanta’s Cheng says SMIC’s access to the technology does not necessarily mean it will be able to mass-produce better chips more economically and certainly not with the profit margins of TSMC, which has been using 300-millimeter and 90-nanometer processes for several years.