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Letter from the President

Over the past 3 years, the US-Taiwan Business Council has produced a weekly summary of semiconductor news from Taiwan, China, and the US. This service has been free-of-charge and broadly distributed.

The Council is currently expanding into a suite of products that will extensively cover the semiconductor industry as it relates to Taiwan, China, and the United States. These products will include two weekly eBulletins, a quarterly analysis report, an annual analysis report, and an ongoing series of events that will include a large meeting in San Jose, California on September 15 and 16, 2003. An executive summary of the latest analysis report, the Annual Review 2002, is included below.

These services, however, will now be available to members only. If you are a member and wish to receive the full suite of products, please forward us your contact information. For our non-members, I hope you will consider membership in our organization as we continue to provide new solutions and services. Our 27 years of unmatched access and experience in the Taiwan market position us perfectly to empower companies in this rapidly developing and increasingly integrated U.S., Taiwan, and China market.

Rupert Hammond Chambers
President
US-Taiwan Business Council

Executive Summary
Semiconductor Report - Annual Review, 2002
January 1, 2003

Although a second straight year of economic hardship took its toll on many Taiwan semiconductor firms, they will likely look back on 2002 not as the year of the industry slump, but as the year when they were blocked from laying a foundation for the future. In 2002 the Taiwan government held fast to its independence-minded principles by keeping a lid on Taiwan chip investment in China, although it did finalize a framework for allowing such a move. Further foot dragging on the issue in 2003 could crimp attempts by Taiwan firms to compete with emerging Chinese chipmakers.

U.S. chip equipment makers will also likely look back on 2002 as the year when they were held back by government policies. European chip equipment makers gained a march on the potentially lucrative China market this year, whereas U.S. makers were unable to secure permission to export their technology to the world's fastest growing chip market, and they will likely increase lobbying pressure for more relaxed export rules in the future. The year ahead will be one of tough decisions in the U.S.; barring chip equipment exports to China means losing billions in export dollars - and jobs - while allowing it could help boost China's military.

For Taiwan's memory chipmakers, 2002 was another year of steep losses, and it became a time to reposition themselves with new partners and a time to complete or begin construction of advanced, 12-inch wafer fabrication plants. These new fabs may be the key advantage for Taiwan makers of dynamic random access memory (DRAM) chips in the coming battles against China during the next few years.

2002 was also a year in which foundry chipmakers allied themselves with major research partners to align chip manufacturing processes and work on future technologies, with examples including Taiwan Semiconductor Manufacturing Company (TSMC) and its deal with ST Microelectronics, Royal Philips Electronics, and Motorola, as well as Singapore-based Chartered Semiconductor's deal with IBM. These deals are part of the future of the semiconductor industry, where increasingly complex chips are developed on platforms designed by the world's top chip firms, and then mass-produced by foundries in Asia.

The chip design sector, arguably the hottest segment of Taiwan's semiconductor industry in 2002, did little to pave the way for a brighter future. Instead, companies remained in safe harbors, relying on the tried and true business of creating less expensive chips for mature products instead of striking out into new territory. If anything, these companies will have the hardest time in 2003, as Japanese firms consolidate following a wave of mergers and spin-offs, and return to the market with renewed vigor.

This report focuses on some of the major events and issues in Taiwan's chip industry during 2002 and on their impact on the year ahead. The key theme running through the report is China. The nation has overtaken the U.S. as Taiwan's largest trading partner, and it is increasingly a manufacturing base for Taiwan companies. In political, academic, and industry circles, the China question prevails; how can Taiwan benefit from the rise of China without being swallowed up by its most dangerous political rival?

Table of Contents
Letter from the President 1
About the US-Taiwan Business Council 3
Semiconductor Analysis 5
Introduction 5
In A Holding Pattern: Plans By Taiwan Chip Companies to Invest In China 5
Growing Technology Transfer Issues in China's Chip Industry
and How the U.S. Government Will Respond
7
Taiwan's 12-inch Advantage 9
Taiwan's Memory Chip Industry Repositions for the Future 9
The New Face of the Global Chip Industry 10
Chip Design Houses Struggle To Fend Each Other Off In 2003 11
Major Water Risks In 2003 12
Conclusions 12
Taiwan Semiconductor Industry/Government Contact Information 15
Biographies of Taiwan Government Contacts 25
United States Semiconductor Industry/Government Contact Information 39
Biographies of US Government Contacts 49
Suggestions of Sources for Taiwan Semiconductor Industry Information 63
Semiconductor Headlines: Third Quarter, 2002 65
Appendix: Trends in Trade and Investment 73

This report is available to our members starting January, 2003. To purchase a copy of this report (US$50 for non-members), use this order form.

If you have any questions about the report, please contact Judson Payne, the Council's Director of Corporate Affairs. You can also call us at (703) 465-2930, or email us at Council@us-taiwan.org.

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