Taiwan's TSMC eyes first China chip plant

By CNN's Kristie Lu Stout and reports

TAIPEI, Taiwan (CNN) -- Taiwan made-to-order chipmaker TSMC is marching toward the Mainland to assess sites for its first China plant.

The move comes amid intense price undercutting by Shanghai-based rival SMIC, and ahead of a Taiwan government meeting that may lift the ban on chip investment in China.

Taiwan currently forbids investment in Chinese firms in strategic industries such as semiconductors in order to avoid dependence on China.

Shopping in Shanghai

During a recent trip to Shanghai, TSMC number-two executive Tseng Fan-Chen browsed for potential plant sites.

But the Taiwan chip foundry says it has yet to secure a solid plan for Mainland investment.

"They need to start with something," said Dan Heyler, the Asia Pacific head of semiconductor research at Merrill Lynch.

"This is very much a long-term effort in China. Designing semiconductors will have to be fostered by having local-based production and support."

Industry observers say TSMC must push forward its investment plans in China to compete with rivals such as SMIC (Semiconductor Manufacturing International Corp), China's first contract chipmaker.

SMIC, which started production two months ago, said its order book is full despite the global chip downturn.

SMIC is able to sell chips at low prices since it purchased used equipment at rock-bottom rates during the severe chip slump, according to the company's chief executive officer, Richard Chang.

Richard Chang is one of two Taiwan tycoons to break ranks and head semiconductor factories on the Mainland.

The other is Winston Wong, estranged son of Formosa Plastics tycoon Wang Yung Ching.

Wong has set up Shanghai Grace Semiconductor with the backing of Jiang Mian-Heng, the son of Chinese president Jiang Zemin.

Shanghai Grace looks likely to become SMIC's main China rival, once its new factory reaches completion.

Easing chip rules

The Taiwan government is expected to lift a ban on Taiwan chipmakers investing in China as early as December 13, when officials plan to review the chip investment restrictions.

A relaxation in Taiwan's chip policy follows a string of recent moves to ease rules on tech investment in the Mainland.

In November, the government approved investment in China for laptop PCs and advanced mobile handsets.

China has offered a rare ray of light in an otherwise gloomy chip market. Global semiconductor demand shrunk 32 percent to $138.8 billion in 2001, according to chip trade group WSTS.

WSTS estimates that the chip market will grow slightly higher to $142.4 billion in 2002.

The China chip market however is anticipated to reach $10.8 billion this year from $8.46 billion last year, according to China's Center of Information Industry Development (CCID).

The research firm expects that the Mainland semiconductor market will surge a further 23 percent next year.

Reuters contributed to this report.