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Executive Summary
Semiconductor Report - Annual Review, 2003
January 1, 2004

It has been a stellar year for Taiwan's chipmakers. In 2003, the industry's top company returned its best growth since the end of the Internet bubble in 2000, with Taiwan Semiconductor Manufacturing Company's full year sales hitting NT$201.9 billion (US$5.94 billion), up 25 percent year on year, while rival United Microelectronics (UMC) logged 26 percent growth to NT$84.86 billion (US$2.50 billion).

Moreover, it was not just Taiwan's crown jewel chipmakers; the entire industry grew in 2003. Taiwan's top integrated circuit (IC) design houses posted slimmer, but stellar sales for 2003, with a few new up and coming firms to mix with its top moneymakers. In semiconductor packaging and testing, Taiwan's top firm, ASE, is poised to become the largest in the world in 2004 after returning to profitability last year. Finally, in computer dynamic random access memory chips (DRAM), almost all of Taiwan's firms returned to profitability for at least a portion of the year.

The coming year looks even better. Government statisticians in Taiwan see the industry growing to NT$1 trillion (US$29.42 billion) a year in 2004, up 20 percent from a forecast NT$800 billion (US$23.54 billion) last year, according to an October report by Taiwan's Industrial Development Bureau (IDB). A number of massive semiconductor plant projects are on tap - enough to make Taiwan the top destination for semiconductor tools in the world at US$5.6 billion (NT$190.28 billion), according to Semiconductor Materials and Equipment International (SEMI), the world's largest chip equipment industry trade group. The new tools should make Taiwan the undisputed heavyweight of cutting edge, 12-inch semiconductor-wafer fabrication plants (fabs), which can reduce production costs by about 30 percent.

Nevertheless, there are serious challenges to Taiwan's prosperity, of which the threat from China appears to be the most potent. New chipmakers in China - mostly built by Taiwan companies with Taiwan cash and intellectual property - are beginning to grab market share from TSMC and UMC, and in the process posing a serious threat to Taiwan's national defense. In fact, all the pieces are starting to fall into place for China's semiconductor firms. The U.S. seems poised to throw open the export doors in 2004 and allow leading-edge manufacturing tools to be exported to China for the first time. China's high value-added tax (VAT) for foreign chips remains intact, and that is a convincing factor for more and more IC design firms, who are choosing to have their chips fabbed in Chinese foundries instead of in Taiwan.

Taiwan workers are also continuing to flood to the mainland, helping start-ups achieve technology victories in a fraction of the amount of time and at a fraction of the cost needed had they developed - and patented - the technology themselves. The only trouble with this particular approach is a lawsuit that TSMC launched against China's top foundry chipmaker, Semiconductor Manufacturing International Corporation (SMIC). TSMC has accused SMIC of industrial espionage and intellectual property theft, and has requested a jury trial in California, home to the vast majority of its top customers. The suit itself is detailed and thorough, and it will be interesting to see how U.S. courts handle the complaint.

This report will briefly chronicle the banner year Taiwan chipmakers had in 2003, offer a glimpse of what is in store for 2004, and examine the threat China's growing semiconductor prowess poses to Taiwan's national defense. It will then close with a detailed discussion on the TSMC vs SMIC intellectual property lawsuit, since it has implications not only for all of China's top chipmakers but also for their rivals in Taiwan.

Table of Contents
Letter from the President 1
About the US-Taiwan Business Council 3
Semiconductor Analysis 5
Introduction 5
The State of Taiwan's Chip Industry 6
China Chipping Away At Taiwan's Security Umbrella 7
TSMC Files Suit against SMIC 11
Looking Forward 13
Conclusion 14
Taiwan Semiconductor Industry/Government Contact Information 15
Biographies of Taiwan Government Contacts 25
United States Semiconductor Industry/Government Contact Information 35
Biographies of United States Government Contacts 47
Sources for Taiwan Semiconductor Industry Information 65
Semiconductor Headlines: Fourth Quarter, 2003 69
Appendix: Trends in Trade and Investment 77

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