CHIPS: China-Taiwan Chip Ties Grow with $3 Bln TSMC Plant

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Bottom line: TSMC’s plan for a $3 billion Nanjing chip plant marks the latest in a nascent but growing string of China-Taiwan tie-ups in the chip space, which could gain momentum under Beijing’s recent aggressive program to develop the industry.

TSMC to build $3 bln chip plant in Nanjing

After years of disappointment for failing to fulfill its potential, China high-tech chip sector has suddenly come to life over the last year with a flurry of deals that hint Beijing is taking the lead to promote the sector. The latest of those is one of the biggest and most significant yet in terms of technology, with word that Taiwan’s TSMC (Taipei: 2330; NYSE: TSM), the world’s leading contract chip maker, will build a $3 billion state-of-the-art 12-inch wafer plant in the city of Nanjing.

The move is particularly significant because TSMC is the clear global leader in high-tech microchip production, with a client list that includes most of the world’s major companies like Qualcomm (Nasdaq: QCOM) and Apple (Nasdaq: AAPL). The deal also marks the latest in a nascent series of tie-ups between China and Taiwan in the chip-making space, a potent combination that could someday counter current powerhouses in South Korea and Japan.

I’ve been following China’s chip industry for quite a while now, and can say with authority that the flurry of new deals announced over the last 2 years is probably equal to or greater than all the major deals combined over the previous decade. The new momentum is coming from Beijing, which has decided to take matters into its own hands after years of failure by local governments to build up any major players.

Beijing’s efforts appear to be centered on several fronts, including its formation of a major fund to invest in the sector, and also its informal mandate for Tsinghua Unigroup to go on a global shopping spree in pursuit of technology. That spree saw Unigroup last month announce plans to buy a quarter of Taiwan’s Powertech (Taipei: 6239) for $600 million, in the largest cross-Strait deal to date between the former Cold War rivals. (previous post)

That particular deal was facilitated largely by a recent relaxation in Taiwanese restrictions on investment in its chip sector by Chinese firms. Taiwan has also been relaxing restrictions on technology transfers by its companies to the mainland, which may be one of the major drivers behind this latest big investment by TSMC in the new state-of-the-art Nanjing chip plant.

Government Incentives

According to the latest reports, strong local incentives were also a major factor in helping Nanjing to win the coveted plant, which has been officially approved. (English article; Chinese article) The investment would be TSMC’s most advanced plant in China to date, and would complement its lower-tech complex that has been operating in nearby Shanghai for more than a decade. One of the reports points out that even though technology at the new plant is quite advanced, it is still far behind technology used in TSMC’s main facilities in Taiwan.

This particular move is certainly a big win for China’s chip sector, which languished for years after several big investments in Beijing and Shanghai failed to gain much traction. The move complements other big recent investments in the space, which include a $5.5 billion upgrade by Intel (Nasdaq: INTC) of its chip plant in the northeast city of Dalian, and billions more of new investments in global companies by Unigroup.

But most intriguing is the potential for more cross-Strait tie-ups. Such pairings would bring together Taiwan’s chip sector that has cutting-edge technology but is too small to be a global player, with China’s huge financial resources and big stable of gadget makers who are the main buyers of microchips. Improvement in cross-Strait ties is the main driver of this particular move, and I expect we’ll see a growing number of similar tie-ups and increasingly large investments in the next few years if relations remain stable.

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