Carlyle Group's Taiwan Gambit

Semiconductor acquisition tests island state's China policies

3 min read

Aftershocks are still being felt from the announcement two months ago that Taiwan-based Advanced Semiconductor Engineering Co. (ASE), the world’s largest semiconductor assembly and testing services provider, is an acquisition target of the Carlyle Group. The announcement at the end of November that the U.S. investment group would buy ASE for the equivalent of US $5.5 billion prompted complaints about top Taiwan companies falling into foreign hands. The main concern has been whether rules governing transfer of sensitive technology to mainland China would be circumvented.

Since taking office in May 2000, the scandal-plagued reform government of President Chen Sui-bian has been ­cautiously enunciating a new vision of the future in which Taiwan would remain permanently independent. Ironically, the opposition ”Pan Blue” coalition, which is led by the staunchly anti-Communist Kuomintang party, agrees with the leadership of the mainland People’s Republic in rejecting any moves in the direction of a ”two Chinas” policy. Accordingly, the opposition advocates looser restrictions on Taiwanese investment and tech transfer to the PRC, while the beleaguered government has sought to take a fairly tough line.

The Chen government has especially wanted to uphold two key restrictions. One limits a Taiwanese company’s investment in mainland China to 40 percent of its net worth. Another confines Taiwanese investment in Chinese semiconductor factories to those using techniques not more advanced than the 0.25-micrometer process, which was state of the art in the mid- to late 1990s.

Taiwan is home to the world’s top two semiconductor foundries. Because such companies are so crucial, any transfer by them of technology to the mainland is profoundly controversial [see ”Silicon Gold Rush,” IEEE Spectrum, June 2005].

In that sensitive political environment, acquisition of a top semiconductor company by a global investment house was bound to have big reverberations. One concern was that under standing rules, once ASE is in foreign hands, it will no longer be subject to the restrictions on tech transfers to the People’s Republic.

Startled by the announcement of the deal, President Chen lost no time paying a visit to ASE Chairman and CEO Jason Chang, at ASE headquarters in Kaohsiung, on 5 December [see photo, "Reassurances"]. Chang reportedly said that ASE had no plans to break the 40 percent investment ceiling and that the company needed a tie-up with a firm like Carlyle to keep prospering. ASE’s average annual growth has exceeded 20 percent in recent years, far above the assembly and test sector’s average global performance of about 10 percent. ”To maintain a high annual growth rate, ASE has no choice but to take part in the global integration of the semiconductor industry,” Chang told Chen.

Chang argued that by linking into Carlyle’s global network of semiconductor interests—which includes stakes in Freescale, Philips, and Toshiba—ASE would be able to further boost its production and secure substantial new orders in Japan. He promised that none of ASE’s factories would leave Taiwan following the conclusion of the deal, and he said that the company would invest US $3 billion in subsequent years in Taiwan, doubling the number of domestic employees, from 20 000 today to 40 000.

Still, Chang has made it clear that activities on the mainland will be key to ASE’s future. Last October the company asked for a green light from the Taiwanese government to take over Global Advanced Packaging Technology, in Shanghai, and make it a base for relatively low-end work. At the end of December, the Ministry of Economic Affairs approved the $60 million deal.

The ministry also approved plans by Taiwan’s Powerchip Semiconductor Corp. and ProMOS Technologies to establish 200-millimeter-wafer plants in China using 0.25â''µm process technology. The two companies specialize in DRAM.

Commenting on those three China investment plans, Minister of Economic Affairs Steve Chen said they will not have an adverse impact on Taiwan, as they were evaluated based on the principle of ”proactive liberalization with effective management”—the government’s formula for its strict tech transfer policies. However, responding to opposition and industry complaints about its China policies, Premier Tseng-chang Su said that the government would consider raising the 40 percent ceiling.

Some opposition law­makers argue, however, that the 40 ­percent ceiling should be scrapped altogether, to benefit not just high-tech industries but also traditional ones, such as glass, paper, food, rubber, and cement. Legislator Jihâ''chu Lee of the Kuomintang, ­claiming that Taiwan’s global competi­tors are already developing midlevel and high-end technologies in China, wants Taiwan to allow semiconductor investments on the mainland involving 0.18â''µm technology or even more advanced processes.

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