Semiconductors are the indispensable foundation of all electronics and all products containing electronic components. They are also a critical component of Taiwan’s high-tech industry, whose 36 wafer plants account for 25 percent of the world’s output potential. The importance of Taiwan’s semiconductors is such, as Australian author Craig Anderson has noted, that if some country were to wage war on Taiwan, a global crisis in electronic goods would immediately ensue.
But Taiwan has placed its bets heavily on memory chips, with 40 percent of all its plants dedicated to the manufacturing of dynamic random access memory. And in the last five years, Taiwan’s DRAM makers have suffered heavy losses because of a global glut in DRAM, and because their competitors have taken to suing Taiwanese companies over copyright infringement as a competitive strategy.
Some observers are thus worried: If Taiwan’s memory chip manufacturers go out of business, over NT$400 billion (US$13.3 billion) in bank loans, and the rights and interests of over 600,000 shareholders, could be adversely affected. What is even worse is that if these companies fail, the nation’s competitiveness would suffer a serious blow. Things being what they are, what are the possible responses?
The first option is to adopt a laissez-faire approach, and hope that things will work themselves out—that an equilibrium level between supply and demand can be reached, so that the price of DRAM will better reflect production costs. But according to an authoritative international study, before 2015 DRAM demand will only increase at a compound annual growth rate of 2.6 percent, making it unlikely that a balance between supply and demand can be reached.
The second option is to have DRAM companies adapt to the situation and transform themselves. The problem with such an approach is that it would cause Taiwan to have a surplus of semiconductor companies, resulting in cut-throat competition that could drag down the nation’s entire semiconductor manufacturing industry.
A third option is to attract foreign investment on a large scale, to retire older plants and build newer ones that could produce chips 40 nanometers or less. This option would also involve investing in companies such as Elpida Memory Inc. of Japan and Micron Technology in the U.S., so as to offset the patent lawsuits brought by South Korean firms and to break through their containment strategy.
Estimates indicate, however, that it would require at least NT$1.5 trillion in capital for Taiwanese firms to compete with their South Korean counterparts and to maintain 30 percent of the global market share in memory chips.
In today’s world, the only nation or territory willing and able to invest in Taiwan’s DRAM sector is mainland China. The best option for the DRAM sector, then, is to attract foreign investment from the mainland.
In its latest five-year development plan, mainland China states clearly that it intends to become a world player in the semiconductor industry. If mainland China does not partner with Taiwan, it could end up forming an alliance with South Korea. And if this happens, Taiwan could end up being the biggest loser: In the race for DRAM supremacy, Taiwan could end up in fourth place, behind mainland China, Japan and South Korea.
If South Korea’s Samsung Group reaches a dominant position, it would be able to dictate terms to all down-stream companies; it would reap enormous benefits in the next 10 years, and all the electronics subsidiaries of the Samsung Group would end up even more powerful. The consequences for Taiwan are unthinkable.
To ensure economic stability, the government has no other option but to confront this enormous time bomb head on. If it cannot be defused, at least defense fortifications should be built to minimize the damage. But the best policy is to tap into the impulse for “creative destruction” and strengthen the nation’s competitiveness.
(This commentary originally appeared in the Economic Daily News Sept. 29.)
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