Taiwan's Big Squeeze

Tight space and poor infrastructure threaten its Silicon Valley

Miin Wu gazes enviously from his office window. The 53-year-old president of Taiwan semiconductor maker Macronix International Co. is looking at the army base across the street. Located just outside the Hsinchu Science-Based Industrial Park, the 10 hectares of barracks and training grounds would make an ideal site for Macronix' next semiconductor fabrication plant. Such a facility would go nicely with the three other fabs Macronix already operates in the park.

Wu is not holding his breath. While park officials are trying to get the military to move, Hsinchu's creaky infrastructure may not be able to support another plant anyway. "Even if [the government] gives you the land," Wu says, "they may not allow you to build because they have only so much power and water. We may have to look elsewhere."

More and more Hsinchu execs are reaching the same conclusion about Taiwan's Silicon Valley. And that has the government of President Chen Shui-bian scrambling for options. To be sure, the infrastructure problems won't spark a sudden exodus; having invested billions in the park, most companies aren't about to up and leave. But the devastating earthquake of 1999 prompted many Hsinchu executives to consider expanding in less quake-prone parts of Taiwan. Several are moving as far afield as Singapore.

The last thing Chen's embattled administration needs is for more high-tech firms to shift their operations overseas. Already, the nation is losing labor-intensive PC manufacturing to the mainland and other low-cost centers. With unemployment at a record 3% and the economy slowing, Chen needs to ensure that the capital-intensive makers of semiconductors and liquid-crystal displays don't leave, too. That means fixing Hsinchu or providing an alternative.

INNOVATION ROAD. Hsinchu is nothing less than the engine room of Taiwan's high-tech export machine. Over the past two decades, the government has nurtured the 605-hectare park, offering tenants cheap rent and low taxes. Today, Hsinchu, a campus of tree-lined streets with names like Innovation Road, is home to 289 high-tech companies that employ more than 102,000 people. Among its most prominent tenants: Taiwan Semiconductor Manufacturing Co. (TSMC) and United Microelectronics Corp. (UMC), the world's two biggest contract-chip manufacturers. Nearby are two top engineering schools and the premier state-backed research institute. Last year, Hsinchu companies generated $29 billion in sales and accounted for 13% of Taiwan's total trade.

Hsinchu has succeeded beyond anyone's expectations--and become a victim of its own success. "The government didn't plan for so much growth," says Thomas Chang, technology development czar at chipmaker Mosel Vitelic.

The biggest immediate concern is the power grid. Most of the park's electricity comes from government-owned plants outside Hsinchu. The juice flows along above-ground lines that are vulnerable to everything from lightning to stray kites. For chipmakers that depend on perfect conditions, a slight change in supply can cause heavy damage. On Feb. 10, TSMC suffered some $3 million in losses when the power failed at one of its Hsinchu plants.

A steady supply of water is another prerequisite of efficient fab operation--and Hsinchu's supply is erratic. When rain is sparse, companies must truck in water. The cost is not the problem, says Mosel's Chang. It's "the additional headaches."

Long term, executives like Macronix' Wu fret most about the shortage of real estate. With chipmakers upgrading from the current standard of 8-inch wafers to next-generation 12-inchers, companies need space to build new plants. UMC recently announced that it would invest $3.6 billion to build a 12-inch fab in Singapore. TSMC, in a joint venture with Philips, is building one there, too. Mosel Vitelic hopes to construct a fab in Canada or Europe.

All the problems are coming to a head. Last year, for the first time, the number of park tenants fell slightly. So Chen's government is getting serious about fixing the problems, building new power lines and putting existing ones underground. Park chief Huang Wen-Hsiung says the government is widening water pipes and building a new reservoir.

With space at a premium, there's a limit to how much the government can do. So it's encouraging companies to invest in a copycat park about 200 km south of Hsinchu, in Tainan. Both TSMC and UMC are building 12-inch wafer fabs there. "We don't like to see all the fabs in one park," says H. Steve Hsieh, vice-chairman of the National Science Council. "We should spread out."

But critics say the new park lacks the critical mass of engineers that makes Hsinchu successful. Another concern: a high-speed train that is supposed to slice through the park. In mid-February, worries about vibrations caused memory chipmaker Winbond to cancel plans to spend $3.75 billion on two fabs. Other chipmakers sympathize. "We put billions of dollars into these things," says Frank Huang, chairman of Powerchip Semiconductor Corp., which has one fab in Hsinchu and is building two more. "A fab will be a disaster if at the end you find problems."

EXTORTION? Ironically, some official efforts to improve Hsinchu have caused even more problems. Last year, industry executives say, local officials hoping to improve traffic flow around the park asked companies to contribute to an infrastructure fund. But park tenants that didn't contribute say they were issued tickets for environmental offenses as punishment.

The central government isn't about to give up. Under a new initiative, it will provide companies all the tax benefits and regulatory relief conferred on Hsinchu tenants--and they can set up anywhere in Taiwan. "The whole island is a science park," declares Ho Mei-yueh, vice-chairwoman of Chen's Council for Economic Planning & Development. Besides, says her boss, CEPD chairman Chen Po-Chi, the government originally meant for Hsinchu to be a place for research and development, not production. "Maybe," he says, "the park will return to its original design."

That sounds good to Charles Hsu, the 42-year-old founder of eMemory Technology Inc., a year-old designer of flash semiconductors. He wants to move his 25 employees to the park from the other side of town. Hsu knows about the infrastructure problems, but as a fabless chip designer, they don't affect him much. Moving to Hsinchu, however, provides intangible benefits. "If you say you work in Hsinchu park," he says, "people think you have a great future." The challenge for the government is to make certain Hsinchu itself does too.

By Bruce Einhorn in Hsinchu

    Before it's here, it's on the Bloomberg Terminal.