Wednesday, February 21, 2007

To Stop A Tech Deal

Taiwan shows how hard it is to control sales to China
Jonathan Adams and George Wehrfritz
Newsweek International, April 4, 2005

It's no secret that the two firms share common DNA. The elder, Taiwan-based United Microelectronics Corp--the world's second-largest contract chipmake--owns the patents allegedly used by an up-and-coming Chinesecompetitor, He Jian Technology. In fact ex-UMC employees established He Jian in 2001 and UMC chairman Robert Tsao now admits to having coached the mainland start-up in the hope of acquiring it someday. The problem: this kind of technology transfer requires official approval. And UMC didn't get it. Last month Taiwanese prosecutors swarmed UMC headquarters and searched senior executives' homes. More than 20 He Jian employees visiting from the mainland were barred from leaving Taiwan, and prosecutors briefly detained He Jian head J. H. Shyu. After weeks of denouncing legislators critical of his firm as "clowns" and accusing prosecutors of practicing "white terror," Tsao flew out of the country. "I believe he's in the States on business right now," says UMC spokesman Alex Hinnawi, denying that Tsao's departure had anything to do with the probe.

The case highlights what many IT companies face as they rush into China. None can afford to stay out of this booming market. But China's rapid rise from a sweatshop economy to one built on high technology rests, in good part, on the strategy of acquiring the most advanced and sensitive technologies from eager foreign-investment partners. Governments the world over are struggling with ways to control technology transfer to China, without undermining their commercial interests. The record of Taiwan, one of the largest investors in China, shows how poorly those safeguard measures work in practice.

Over the last decade, China's IT manufacturing base has grown from infancy to surpass Taiwan's in size; it's now the world's third largest. Its semiconductor foundries are considered only a generation or less behind Taiwan's a gap measured in months, not years. All of China's top chipmakers are believed to have received technology, seed money or senior managers from across the Taiwan Strait.

That's precisely the outcome Taiwanese regulators had hoped to prevent. They banned investment in Chinese chips to protect Taiwan's edge as a global leader in wafer-making, a position the government invested billions in RD to establish. It eased restrictions in 2002 (shortly after He Jian was established) but still has a rigorous approval process for China investments.

Critics of the policy point to the UMC probe as the latest evidence that government restrictions are hard to enforce, and all too easy to dodge. To thrive over the long term, they argue, Taiwanese chipmakers must aggressively embrace the opportunities China offersnot stand back as foreign rivals unconstrained by their own governments grab them first. "The best course," says Daniel Heyler, a semiconductor industry analyst for Merrill Lynch in Hong Kong, "is to be actively involved [in China] and benefit from its growth."

The costs of not doing so loom larger by the day. Take the large silicon discs that foundries churn out. Each must be cut, tested and packaged. Because Taipei prohibits its world-beating testers from setting up shop on the mainland, millions of MADE IN CHINA chips now move to Taiwan for processing, then back to China for assembly into products like cell phones and computers. The cost: a week's delay plus air freight.

Worse, of the four global leaders in chip testing, one is American and another Singaporean. Both companies recently set up shop on the Yangtze River Delta, intending to cut Taiwan out of the loop. "If you follow government restrictions, you'll lose ground against your competition," says Frank Huang, chairman of the Taiwan Semiconductor Industry Association. "Some people think maybe UMC did the wrong thing according to the law, but they did the right thing in terms of the market."

That lesson applies to nations beyond Taiwan. South Korea has imposed controls on cell-phone and flat-screen-television technology, which is under threat from China. In addition to concerns about the loss of information technology industries to China, the United States fears that dual-use technology could expedite China's military modernization. A 2004 RAND study on technology transfers to China concluded that any attempt to put tighter controls on U.S. exports would be "both detrimental to the U.S. economy and impossible to enforce in this global economy."

Many in Taiwan are reaching the same conclusion. The government proposed a Technology Protection Law two years ago, but it has languished ever since in a legislature controlled by the business-friendly opposition. Even Prime Minister Frank Hsieh recently suggested that it may be time to rethink. Companies like UMC will find a way into China and the best thing governments might do is to simply get out of the way.

With Hideko Takayama in Tokyo and B. J. Lee in Seoul

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