Announcement

Collapse
No announcement yet.

Where is Taiwan as China rises in the global IC industry?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Where is Taiwan as China rises in the global IC industry?

    http://www.digitimes.com/print/a20050912PR205.html

    More diagrams can be found in the link.



    September 2005]


    As the focus of the global semiconductor industry turns to China, Taiwan players are benefiting from the influx of substantial business opportunities. However, as the semiconductor chain of its giant neighbor matures, aggressive competition is bound to begin.

    The market value of the global semiconductor industry reached US$200 billion in 2004, of which China contributed around US$34 billion, according to iSuppli. The research firm predicts that this value will grow to US$53.8 billion in 2006. As the migration of manufacturing bases for IT, communication, and consumer electronics production to China continues, international chipmakers all have their eyes on big pieces of this cake. With over 20% annual growth rate and the limited number and resources of local players, overseas suppliers are expected to benefit from over 80% of this.

    The rising place of the China semiconductor industry, however, is already posing a growing threat for Taiwan players. China is “cloning” the model that Taiwan’s semiconductor industry runs, especially the successful models that Taiwan’s pure-play foundries have established. Although the combined market share of Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC) will drop by three percentage points, the two foundries will still hold a solid 66% of the pure-play foundry market in 2005, according to IC Insights. The market share of Shanghai-based Semiconductor Manufacturing International Corporation (SMIC) has shot up from just 1% in 2002 to 8% in 2005.

    China's IC industry production value slowly gaining on Taiwan

    The gap between the value of semiconductor industry production in China and Taiwan will continue to close. The production value of China's IC industry was just 9.4% of Taiwan’s in 2001. This proportion rapidly grew to 20.4% in 2004, according to figures gathered by the China Center of Information Industry Development (CCID).

    The production value of the IC industry in China reached US$6.73 billion in 2004, of which packaging and testing contributed 51.8%, according to CCID. The large proportion of IC backend production indicates that, during the initial industry development stage, chipmakers mostly imported chips for packaging and testing in China. The high proportion can also be explained by the reliability of the packaging and testing industry that is ensured because most packaging and testing players in China are joint ventures with international vendors.

    Semiconductor production breakdown by sector, 2001-2004 (US$100 million)


    2001
    2002
    2003
    2004


    China
    Taiwan
    China
    Taiwan
    China
    Taiwan
    China
    Taiwan

    Design
    1.83
    36.97
    2.67
    44.79
    5.55
    57.64
    10.07
    76.69

    Manufacturing
    4.92
    91.67
    5.83
    114.70
    7.47
    142.46
    22.38
    188.82

    Packaging & testing
    8.27
    31.04
    14.88
    38.40
    30.38
    48.03
    34.90
    64.59

    Total
    15.02
    159.68
    23.38
    197.89
    43.40
    248.13
    67.34
    330.10


    Source: CCID, April 2005.



    *Ratio between China and Taiwan production shown in red
    Source: IT IS & CCID, April 2005.

    The proportion of IC backend production to overall production value dropped from 70% in 2003 to 51.8% in 2004. The proportion has eroded as the design and manufacturing sectors in China both enjoyed significant growth. According to CCID statistics, the production value of the manufacturing sector rocketed by 190% to US$2.24 billion in 2004, up from 2003’s US$747 million, thanks to the contribution from local foundries including SMIC, Hejian Technology and CSMC Technologies.

    The production value of China’s IC design industry grew 81.5% to US$1.07 billion in 2004, with over 400 companies established in the territory in the same year. The sector was relatively “quiet” before 1999 and it only started to blossom since then. The establishment of the Beijing IP Center (BJIPC) in 1986 marked the kick off for China’s IC design industry. In 1994, the ICCAD (the predecessor of CSIA-ICCAD) was established. In 1999, Huahong NEC, China’s first 8-inch fab, began production. In 2000, China's government enacted State Circular 18. In 2000, Semiconductor International Manufacturing Corp (SMIC) began production.

    For Taiwan, the output of the semiconductor industry exceeded US$33 billion in 2004, representing on-year growth of 34.2%. The IC design, manufacturing, packaging and testing sectors enjoyed on-year growth rates of 37.1%, 32.7%, 33.1% and 41.1% respectively. Compare with the IC industry in China, Taiwan attains a secure and stable contribution from various sectors with the core being placed on wafer manufacturing. The manufacturing sector has contributed a stable 57-58% of the overall production value during 2001-2004, while the IC design and package and testing sectors contributed 23% and 19-20% of the total, respectively, during the same time frame.



    Source: DigiTimes Research, July 2005.



    Source: DigiTimes Research, July 2005.

    Buoyed by the strong demand for digital entertainment and home-related products, IC design houses recorded growing demand for USB2.0, LCD driver and controller ICs and they enjoyed strong revenues and stable shipment growth. LCD driver ICs and ICs used in consumer electronics remained the chief growth driver. Chips for DVD players and handsets also performed well in the first half of 2004, however, when Samsung Electronics dumped its memory stocks in the market, prices for niche ICs dropped tremendously and Taiwan memory chip design houses encountered severe setbacks with a drop of more than 30% in average revenues.

    Stimulated by the strong orders for consumer electronics ICs, foundries reported utilization rates breaking 100% in the first half of 2004. However, as customers adjusted inventory levels and competitors such as SMIC offered aggressive prices, utilization rates at the Taiwan foundries dropped rapidly in the fourth quarter; leading the manufacturing sector to record on-year growth of just 29%. DRAM makers had a good year in 2004, thanks to the ramping output helped by improving yields at 12-inch fabs. Samsung Electronics, Hynix Semiconductor and Micron Technology, which continued allotting more capacity to flash memory and CMOS image sensor production, also helped supply lag demand in the first half of 2004.

    Taiwan's packaging and testing sector performed well in the first half of 2004, with many players reporting record-high revenues. However, players suffered a drop in utilization rates to below 80% in the third quarter of 2004 on average as inventory levels at customers did fall as much as expected.

    Tax and subsidies, two keys to growth in the IC industry

    China's government offers tax incentives for semiconductor players that help grow the industry. State Circular 18 created a tax rebate for chipmakers that produce chips domestically. Required to pay a standard 17% valued added tax (VAT), the Circular provides a rebate on net tax paid that exceeds 6%. This policy was amended in 2001 and companies designing and producing ICs domestically became eligible for a VAT rebate if their net VAT rate exceeded 3%. Also, companies that invest over 8 billion yuan and focus on 0.25-micron or more advanced processes enjoy tax-free status for five years followed by a 50% tax reduction for another five years.

    For example, if a company sells 10,000 ball grid array (BGA) packed ICs at a unit price of US$1 and a total cost of US$5,000. VAT due would amount to US$850 ([US$10,000-US$5,000] x 17%) and so the net tax rate would be 8.5% (US$850/10,000). According to the Circular, this company could enjoy a rebate of 5.5% immediately, (8.5%-3%=5.5%). If costs increased to US$0.85 per IC with the identical shipment volume and sales volume, the cost would become US$8,500. In this case, VAT due would amount to US$255 ([US$10,000-$8,500] x 17%) and the net tax rate would be below the limit at 2.55% (US$255/10,000), so no rebate would be available.

    State Circular 18 aims to promote domestic software and semiconductor sales and to encourage chipmakers to design and produce high-margin products. To be eligible for the tax rebate, semiconductor companies in China have to sell 80% of their chips domestically and they need to maintain a gross margin of over 30%, according to a rough estimate by some companies in China. However, in Taiwan, only a few fabless IC design companies can deliver a gross margin of 30%. For foundry companies, it is even harder to deliver such a high margin for their 0.35- and 0.25-micron services.

    In reality, it is difficult for semiconductor companies in China, whether indigenous or foreign funded, to benefit from the tax incentive schemes provided by the Circular. However, China has introduced a series of policies from 2001 to 2004 to complement the Circular. Some of these policies cover the use of the government’s development funds and the protection of intellectual property. These policies, along with incentives initiated by provincial and municipal governments, shape China’s strategy for the IC industry.

    China has established a development fund dedicated to the IC industry. The fund size is somewhere between 500 million and a billion yuan. China’s Ministry of Finance is planning to dedicate up to 100 million yuan per year to incubate domestic IC design talent. In addition to the incentive programs initiated by the central government, competition between provinces hoping to grow their own local semiconductor industry has become intense. For example, the Beijing offers rebates that are 1% rebate higher than those granted by the Shanghai government. The Shenzhen government has a similar scheme for interest loans granted by the Beijing government.

    The major incentive scheme in Taiwan is the “Statute for Upgrading Industries” and its subordinate terms. Articles 6, 8 and 9 of this statute are especially vital to the growth of several industries in Taiwan. Article 6 awards companies a rebate against tax of up to 20% of their investment in factory automation and environmental control, to be claimed over five years; for investments in R&D and employee education, the amount is up to 35%.

    Article 8 relates to tax deductions for investors. Investors of companies categorized as belonging to "upgrade" industries can enjoy a sales tax rebate of up to 20% of the invested amount and a personal income tax rebate of up to 10% of the amount, also over five years. Article 9 grants that, with the permission of the board, the invested company will enjoy tax-free revenues resulting from new investment for five years.

    Taiwan charges a higher sales tax rate than regional competitors, such as Singapore, Malaysia and China and its tax-incentive period is shorter than these countries. Taiwan clearly already lags behind its chief competitor China and it is mulling the launch of a nationwide minimum tax rate policy that will ensure all profitable companies pay tax. The policy will be adjusted according to the status of industry development.

    Although developed countries such as the US and Japan may offer less tax incentives to semiconductor companies, their well structured business environment, technology and talent pools can make up the difference. Taiwan’s semiconductor industry took an earlier step than China, but it may lose its edge without improvements in these areas and/or significant government support (such as tax and investment incentives).

    Summary of preferential tax policies in Taiwan and China

    Taiwan:

    A. Preferential tax policy

    1. Accelerated depreciation - Equipment and facilities for R&D, experimentation, quality control, power saving purposes, or clean energy is allowed to have a two-year accelerated depreciation. If after two years, the equipment and facilities have not yet been fully depreciated, the company is allowed to continue the depreciation for a year or more.

    2. Investment in automation equipment or technology – A company can have an income tax deduction from its investments in automation equipment or technology for five years. The tax-deductible sum ranges from 5-20% of the investments.

    3. Science-based industry – Beginning on January 1, 2002, a company importing equipment for its own use may be exempt from business tax and tariffs for the item, as long as no one in the country makes the same kind of equipment, and the Ministry of Economic Affairs endorses the import.

    If the equipment is resold or used for other purposes than its original use within five years of being imported, the company will have to pay back the exempted tariffs and business taxes. However, if the equipment is resold to other companies in science parks, export processing zones, or to any other companies that fall in the science-based industry category, then the seller of the equipment will still enjoy the tariffs and business tax exemption.

    Companies granted by the customs the status of bonded goods makers do not have to pay tariffs and business taxes for imported raw material. However, if their bonded goods are shipped outside the bonded areas, the companies will have to pay back the tariffs and taxes.

    B. R&D

    In order to encourage the private sector to develop new products, the government subsidizes 30% of the expense needed for the product development of the following eligible product types:

    - Products related to strategically important emerging industries.

    - The core technologies for the products are more advanced than the current technological level in the country.

    - The products have high market potentials and will come as a support for and stimulation to other related industries.

    C. Future measures

    1. The government’s Development Fund will work with banks to co-sponsor a low-interest loan program. There may be several loan schemes for different purposes: the purchase of new equipment, the upgrading of small-to-medium businesses, the private sector’s pollution control programs, the purchase of equipment for clean energy, the boosting of conventional industries, and research and development projects.

    2. Medium-to-long-term loan plan - A total of NT$100 billion will be set aside from the postal savings for medium-to-long-term loans. Private investment projects exceeding NT$100 million each will be eligible for the loans.

    3. Investment from government - Investors can apply for investments from the government for up to 49% of the total capital.



    China:

    A. Incentives

    1. The government will set up a 500 million-1 billion yuan development fund for IC-related projects. The finance ministry will be in charge of doling out funds specifically for the IC industry, and will invest up to 100 million yuan each year to groom talent for the industry.

    2. There will be more tax incentives. Currently companies are given a two-year income tax exemption, and in the third year, they only have to pay half of the taxes. The tax-free period may be extended to five years, followed by another five years during which the income taxes will be halved. The government may extend the tax-free period to 10 years.

    3. Companies taking out loans for new investments will see the government shoulder 1% of the interests.

    4. The government will act as endorsers to help companies secure loans from financial institutions.

    5. Regional government will provide additional subsidies and tax exemptions.

    B. State Circular 18

    From June 24, 2000 to the end of 2010, chipmakers are required to pay a standard 17% valued added tax (VAT). The government provides a rebate on net tax paid that exceeds 6%. This policy was amended in 2001 and companies designing and producing ICs domestically became eligible for a VAT rebate if their net VAT rate exceeded 3%.

    IC related companies – foreign and domestic ones – could enjoy accelerated depreciation of their production facilities. Eligible domestic companies are those approved by relevant tax authorities. Foreign companies investing over US$30 million have to obtain the approval from tax authorities at the national level. For foreign companies investing less than US$30 million, approval by relevant tax authorities will be needed.

    Companies investing over 8 billion yuan or using the sub-0.25-micron technology will not have to pay tariffs and taxes for imported raw materials. They will also enjoy five years of tax-free status, and then another five years of halved taxes.

    For IC products that are certified by the government to be unable to be produced domestically are allowed to be manufactured overseas. When these products are shipped back to the country, they will enjoy a preferential tax status.

    Imported IC related technologies and equipment will be exempted from tariffs unless these items are listed as taxable items in the State Council’s Document 37 issued in 1997.


    Nobody can challenge China's cost superiority

    No matter for upstream or downstream semiconductor production, the establishment of a production spot must involve the development of a supply/demand framework and numerous other concerns including land, water, power, gas, equipment, construction, material and human resources.

    The cost of land in China is one-tenth to one-sixth of Taiwan’s. Since China is still a developing country this relatively low land cost is reasonable. However, the competitive packages that regional governments offer also need to be considered. The basic land cost in the Shanghai Zhangjiang Hi-Tech Park is about US$400,000-$500,000/acre (US$99-124/square meter), but the industrial parks usually sell land at half price, with the other half being subsidized by the local government. For industrial parks located in Suzhou and Kunshan, land that should be quoted at an average of US$100,000/acre land is quoted at just US$20,000-30,000/acre.

    How much cheaper is China?


    China's cost as a proportion of Taiwan's
    Remarks

    Land
    1/6-1/10


    Water
    0.4


    Power
    Equivalent


    Gas
    N/A
    Much lower than Taiwan

    Equipment
    Equivalent
    Tax free

    Construction
    0.62


    Material
    0.8


    Human resource
    0.5-0.7
    According to engineer level


    Source: DigiTimes Research, August 2005.

    In order to encourage investment in Taiwan, the government is encouraging industry to lease-buy land with an interest rate of around 4%, which is much lower than local banks usually offer. The lease-buy policy means that ownership of the land is transferred to the company after 20 years. Despite the fact that land costs in Taiwan are ten times higher than in China, this type of policy enables companies to reserve sufficient budgets for equipment and R&D investment.

    Water in China costs about 1.55-2.8 yuan per ton, about 20% of the cost in Taiwan. Power costs for both areas is the range of 0.289-0.865 yuan per a thousand watts, but the power supply in China is relatively unstable. For equipment costs, both regions are tax-free for imported equipment.

    Costs for human resources in China are about 0.5-0.7 of those in Taiwan. Although the human resource cost is not a critical factor for wafer production because of the highly automated nature of front-end production, the case is different for IC backend production players. The average salary for an assembly worker working on a production line averages 800 yuan, about a quarter of the equivalent salary in Taiwan. For overseas assembly workers in Taiwan, the average monthly salary is NT$16,000 (just over US$500), while local workers are paid an average of NT$25,000 (under US$800)

    The workforce in China does not just offer a lower average cost, the individual employees are also cooperative and have proved the quality of their work. For R&D professionals (mainly graduates from leading institutions), the average salary for Chinese engineers is less than half of the equivalent in Taiwan.

    Fatal weakness of Taiwan's IC industry: No longer a talent-breeding cradle

    A chipmaker can acquire sufficient equipment and funding, but it will not be successful without valuing the importance of professionals. The success of Taiwan’s semiconductor industry has been helped by substantial support from the Industrial Technology Research Institute (ITRI) Electronics Research & Service Organization (ERSO). Taiwan’s semiconductor industry was led by a group of foreign-educated professionals during the initial stage. However, the falling numbers of Taiwan students enrolling in foreign institutes and the declining birthrate pose potential threats to local semiconductor industry growth.

    According to statistics gathered by the Institute of International Education in the US, Taiwan is no longer in the top five regions when it comes to enrollment in US institutions. The enrollment for Taiwan students has continued declining over recent years. The number of students peaked at 37,581 in 1994 and dropped below 30,000 to 28,930 in 2002. From 1994 to 2002, the number of Taiwan students enrolling in the US dropped about 15%, but the proportion of students from Taiwan in the total dropped 43% to 4.8% in 2002, down from 1993’s 8.4%.

    The number of Taiwan student enrollments in the US in 2003 is a good indicator of the trend. The total number of students enrolling in US institutions in 2003 grew 6.4% on year to 582,996. India replaced China as the region with the largest number of foreign students enrolling at 12%, China contributed 10.8%, South Korea 8.4%, and Japan 8% (Japan was the first-ranked region from 1995 to 1999 until it was replaced by China in 2000). Taiwan was ranked fifth. Despite losing the top spot, China has continued to report ramping numbers of overseas student enrollments since 2000. The number of enrollments has grown by three times within a decade to 61,765 in 2004, up from around 20,000 in 1995.

    In 2004, the total number of students enrolling in the US was 572,509, a drop of 2.4% on-year. Taiwan lost its spot in the top five with enrollments dropping 7% to 26,178. Enrollments from India grew 7% to 70,000, from China they dropped 5% to 60,000, from South Korea they grew 2% to 52,484, Japan dropped 11% to 48,350, and enrollments from US-neighbor Canada grew 2% to top Taiwan’s with 27,017.



    Source: Institute of International Education, April 2004.

    China, on the contrary, reports escalating number of students studying abroad since 1997 with a large proportion remaining in the US to find a position at an international institute or company. As the China semiconductor industry develops, these graduates have begun drifting back to their home land, either establishing new companies or joining existing corporations. The China government is encouraging this migration with attractive packages to attract professionals back to the country. The Shanghai government, for example, grants IC design houses established by overseas-educated Chinese a six million yuan establishment fund once approved by the Ministry of Information Industry.

    The foundation for China's futures workforce is an enormous 7.18 million people in higher education and 1.6 million in research institutes. Together with graduates and professionals returning from overseas, the workforce in China is now drawing the attention of many enterprises. These groups of professionals have already extended their penetration from the core of Beijing to the delta region of Shanghai, Nanjing and Hanzhou, which has a populatin of about 200 million population and more than a hundred institutes. Cities like Xian, Chendou and Chongqing are now also emerging as areas with high concentrations of highly educated professionals and this has encouraged companies such as Intel and SMIC to establish production bases in these areas.

    In the early years of Taiwan's development, most Taiwanese students who studied abroad took Ph.D. courses. In recent years, the trend has been to focus on one- or two-year master courses instead. Students are now tending not to take postgraduate or more advanced education abroad because of cost and cultural concerns. Many also now believe that local institutes are competitive with those abroad.

    During the early days, Ph.D. students could enjoy a better living standard in the US with the average scholarship amount of US$250-300/month. Most tended to stay in the US after graduation because, at that time, they could only earn a monthly salary of NT$3,000 (US$80) here in Taiwan.

    Things change as time goes on. A Ph.D. graduate now can enjoy an average salary of over NT$60,000 (US$2,000)/month in Taiwan as an assistant professor with a Ph.D. degree. Including the year-end bonus, subsidies and allowances, a Ph.D. graduate can now enjoy an annual package of around US$30,000. Although a Ph.D. graduate could enjoy a significantly higher amount of about US$45,000-60,000 as an assistant professor in the US, when considering the living standards and tax rates in both regions, graduates can make a better living in Taiwan.

    Taiwan's low birthrate, which bodes ill for the future workforce, is another hidden threat to the local semiconductor industry. The birthrate in Taiwan has dropped by more than 33% to only 210,000 in 2004, down from 320,000 in 1997. The rise of the optoelectronics industry, which has emerges as a new focus, means that the semiconductor industry is not the only choice for professionals. The situation maybe aggravated further, especially as young couples now tend to be unwilling to bear the heavy obligations and cost of raising children. As companies have moved to China, the Taiwanese professionals that have been forced to move with them and establish lives and careers away from home are creating another problem – how many of these people will remain in China for good? In recent months, China has also begun promoting higher education to Taiwanese “compatriots” at the same cost as for domestic students. The students that attend these courses may have a high probability of remaining in China to find work. All this adds up to a “leaky” workforce with insufficient replenishment.

    Faced with the rise of China, the two most frequently discussed issues in Taiwan have become how to increase the island's involvement in the establishment of new standards and how to preserve its own distinct role in the standards process. China is no longer just the world's factory that produces at low cost, but it is now a big pie that everyone is eyeing. It has become an international market and Taiwan players are now under pressure to create brands that can compete effectively against all-comers. Deep-pocketed overseas enterprises may have had a relatively slow start, but they are strengthening their China partnerships and Taiwan is at a critical point in deciding how to adjust its deployment in China to meet the next wave of growth. The decisions are not to be made lightly and the risks are considerable.

    Taiwan's semiconductor industry has built it competitive edge with professional division of labor, a complete industry supply chain and advanced management experience in digital-related and CMOS process designs. As international IDMs have set up shop in China, there's no doubt that Taiwan sees a huge business opportunity. However, the lack of professionals in high frequency, wireless communication, analog IC and system design, together with immature sales channels and relatively poor market sensitivity are limiting factors. Rising competition from China, Singapore and Korea foundries, and the rapidly growing IC design houses in Europe and Israel are also major threats.

    China has already proved that its 1.3 billion population is a significant consumer market that is going to grow fast. However, the market demands are different to the industry's traditional target markets in North America, Japan and Europe. Designs need to be more down-to-earth to meet market demand and new problems require new solutions, one-size will definitely not fit all. The presence of the IDMs in China is an opportunity for Taiwan's IC design houses not only to increase their exposure in China, but also to get closer to the international markets outside of China. For wafer production, chipmakers that migrate their bases to China are driven by the huge domestic market demand, rather than the low human resource cost. For testing and packaging industry players, the situation is different. Currently Taiwan's major testing and packaging houses need to hire imported labor in Taiwan at a relatively high rate because the local labor force is insufficient. High land costs have also pushed IC backend production to relocate production bases to other regions like Malaysia, the Philippines and China. However, local packaging and testing houses are still banned from directly investing in China, and only a relaxation in related policies will help open the local players improve their global competitiveness.

    How semiconductor industry players strengthen partnerships between these regions depends much on the government’s foresight. With the Chinese language advantage, together with the huge domestic market demand and the talent-breeding institutes in China, Taiwan players need to better utilize the advantages they were born with to compensate for the small size of its own domestic market.
Working...
X