CHIPS: TSMC Offers New Tech Route to Taiwan for China

Bottom line: New remarks by TSMC Chairman Morris Chang could signal a revival of several stalled mainland investments in Taiwan’s microchip sector, with new focus on creating mechanisms to prevent IP theft.

TSMC remarks hint at revival of China-Taiwan chip deals

New reports are citing one of Taiwan’s most influential technology executives saying he welcomes investment from China, offering a tantalizing new path to the island for Chinese high-tech firms who so far have been rebuffed in such moves. The new signals are coming from the chairman of leading Taiwanese high-tech chip maker TSMC (Taipei: 2330), who is saying he could accept a Chinese investor as a strategic stakeholder as long as the company doesn’t require a place on his company’s board.

Before we go any further, let’s review the extensive background to this story between Taiwan and mainland China, former Cold War rivals whose relations warmed considerably under an 8 year presidency by a very China-friendly Taiwanese administration. But that honeymoon came to an abrupt end this year with the election of a far more skeptical and independence-leaning president, Tsai Ing-wen, who just took office last month.

Even before she took office, Tsai expressed big reservations about a series of recently announced investments in 3 Taiwanese chip-makers by companies affiliated with Tsinghua, China’s leading sciences university in Beijing. All 3 deals would have seen the Tsinghua affiliates buy 20 percent of the Taiwan companies, the maximum allowable under current law. But Tsai indicated she might step in to kill the deals after taking office. (previous post)

Against all that backdrop, these new comments from TSMC Chairman Morris Chang look rather significant. Chang has almost god-like status in Taiwan’s tech realm, and was an early visionary who pioneered the contract manufacturing model for high-tech chips that power most of today’s computers and consumer electronics. TSMC is the undisputed global leader in its space, and has a client list that includes the likes of global telecoms chip leader Qualcomm (Nasdaq: QCOM) and smartphone giant Apple (Nasdaq: AAPL).

Chang is not a person to make comments lightly, especially in such a politically sensitive environment, and his latest thoughts almost certainly were vetted to at least some extent in advance by officials from Tsai’s government. According to the reports, Chang is quoted saying the Taiwan government officially allows mainland companies to invest in its chip sector, which is technically true. But he adds that it’s best that such tie-ups don’t include giving board seats to those mainland stakeholders. (Chinese article)

Chang made his comments at a press conference following TSMC’s annual board meeting, and added that he personally would welcome an investment in his company by a mainland firm. He specifically cited the danger of intellectual property (IP) theft as a reason for not giving such a mainland investor a board seat.

Coming Compromise?

Chang’s remarks seem to offer a sort of compromise to the current stalemate between China and Taiwan in terms of investment by the former in the latter’s high-tech industry. Taiwan isn’t the only one that’s skeptical of investment from China, whose companies have a reputation for stealing IP from their business partners.

Similar concerns in the US have killed other recent proposed deals that would have exposed technology from leading US memory chip maker Micron (Nasdaq: MU) and hard disk drive maker Western Digital (Nasdaq: WDC) to Chinese buyers. (previous post) Another new deal that would see Chinese appliance maker Midea (Shenzhen: 000333) buy 30 percent of German robotics firm Kuka (Frankfurt: KU2) is also running resistance over similar concerns.

In this case Chang’s remarks look like a starting point for new dialogue, since Tsai has been in office for less than a month and has received a chilly reception from Beijing so far despite making relatively cautious remarks on future cross-Strait ties. Chang’s signal should probably get a positive reception from China’s high-tech community, and we could see some behind-the-scenes discussions begin soon. That could result in a revival of the 3 previous Tsinghua deals with new mechanisms suggested to prevent IP theft, though I doubt we’ll see any actual cross-strait investments in the high-profile TSMC anytime soon.

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