Return of TY Chiu

According to HuaHong NEC's website, TY Chiu has returned to Shanghai and the firm to take over as CEO effective February 1. Despite TY's past success in running fabs, I think HuaHong NEC will be hard to turn around. Still, given the state's strong support, HuaHong NEC will not collapse as many private IC firms surely will over the course of the current downturn.

Corruption Scandals and Taiwan's Tech Sector

Allegations keep coming out about various Taiwanese technology business leaders giving bribes to former First Lady, Wu Shu-jen (吳淑珍 or Wu Shu-zhen in pinyin romanization), while her husband, Chen Shuibian, was president. According to Next Magazine (台灣壹週刊), technology leaders, such as Hon Hai's Terry Gou (郭台銘 or Guo Tai-Ming) and TSMC's Morris Chang (張忠謀 or Zhang Zhongmou), were named in a February 3 affidavit by Wu (link here). Chang has denied any wrongdoing and TSMC has publicly donated to both the KMT and the DPP in the past (link). TSMC as the best run and probably most transparent company in Taiwan is the least likely candidate to be involved in such shenanigans. Another large tech firm is getting tainted by similar allegations. Quanta, the large computer contract manufacturer, appears to be under investigation for allegedly bribing the Chen family for land in the Longtan Science Park although the firm has denied it (link).

Shandong and Qimonda?

Infineon's supervisory board chairman hinted in a recent interview that a Chinese province had been interested in investing in Qimonda before it filed for insolvency (link here). I suspect the province was Shandong because the Shandong provincial government has been pushing for the creation of a large IC base in Jinan, the provincial capital.

Hejian in a New Light

News has come out that casts the prosecution of UMC executives over investments in Hejian, UMC's fab in Mainland China (link here), in a new light. Apparently, the Chen Shuibian administration allegedly tried to hit up Bob Tsao for political contributions and threatened to influence the outcome of the ongoing prosecution over the investment in Hejian if Tsao did not cough up the money. Essentially, the government's prosecution case claimed that UMC had violated Taiwan's investment laws by investing in Hejian, which is located Mainland China. What was strange about the prosecution is that it started in 2004 long after UMC's involvement in Hejian was publicly and widely reported, such as in an excellent article in WSJ on April 1 of 2002 (p. A8) by Jason Dean and Terho Uimonen. Given these reports, the Taiwanese government could not plausibly have not heard about UMC's reported investment in Hejian, but the government waited two years before bringing a case. With these new reports about demands for political contributions, the delay may be explained by the fact that Chen's administration never real wanted to prosecute as much as shakedown UMC.

Elpida Taiwan merger

Elpida apparently has been able to agree to a merger with Taiwan's Powerchip, ProMOS Technologies and Rexchip (link here). While the details have yet to emerge, this merger might mean that Elpida has agreed to some Taiwanese direct or indirect state representation on its board as the Taiwanese government had been demanding that. In return Elpida should receive some Taiwanese government assistance. On the optimistic side, this merger may be spell the end of Taiwanese state support for Taiwan's failed DRAM firms, but we won't know until the details of the merger are made public and maybe not even then.

The DRAM Debacle Part I

Years of over-investment, particularly in Asia, has led to the DRAM debacle. The global financial crisis has exacerbated what already was shaping up to be one ugly example of excess capacity. Kudos then to the European Commission for telling Qimonda to buzz off (link here). Of course, it appears that Infineon's wise decision to refuse to throw good money after bad played a key role in preventing a Saxony state-led bail-out for Qimonda.

In contrast to these wise choices, the Japanese government still seems to think that DRAM is a critical technology for the rest of its electronics industry (I guess they are stuck in the 1980s or maybe the 1970s) and is preparing to bail out Elpida (link here). At the very least Elpida is probably viable given its scale and technology so the Japanese government is not throwing money down some hole.

One cannot say the same thing about Taiwan's industry. Taiwan's DRAM makers have never attained the scale to support independent technology development so they have remained dependent on foreign partners for technology and been stuck in the low margin DRAM foundry business. Eight years ago two electrical engineering profs at MIT and I pointed out that Taiwan's DRAM sector was underperforming and would continue to fare worse than Taiwan's foundry and then-emerging TFT-LCD sectors given the levels of patient capital needed to attain the scale economies necessary to support continuous innovation in DRAM. The key problem is the mismatch between these capital requirements needed for a successful entry into the DRAM industry and Taiwan's financial system, which is geared more to supporting smaller scale investments with shorter time horizons (link to our early working paper here--the final version was published in Industry and Innovation later in 2003 due to the lightning speed at which academic journals review manuscript). Today Taiwan's government still won't face the facts and give up on this asset-destroying sector. Instead, the state has rolled over loans to the DRAM makers as it contemplates more comprehensive aid packages (to be detailed in my next post).

Of course, the Koreans are not completely blameless either. Some believe that the Korean government's willingness to back Samsung's massive investments irrespective of market prospects is what caused the DRAM glut in the first place (link here). Of course what Korea did Taiwan did as well except on a smaller more fragmented scale.

One has to feel sorry for Micron as it finds itself in the middle of this mess. According to an electrical engineering prof at a major West Coast university who has consulted with Micron intensively over the years, the firm has really made great strides in its manufacturing efficiency in recent years, but this consultant fears that this progress will be all for naught as Micron's overseas competitors receive massive state subsidies and push it out of the DRAM business. Then again, with rumors circulating that Micron is looking to buy Spansion, maybe Micron can still diversify away from this firestorm instead of being consumed by it.

TY Chiu and Other Details of the Expected Hua Hong NEC-Grace Merger

The news on the rumored merger of Grace and Hua Hong NEC is mixed. On the one hand, the media reports one unnamed Grace official as saying "There is already no road back from integration" i.e. it's a done deal (link here). On the other hand, there are still reports of several major issues holding it up. First, the shareholding of the two companies is complex and two state-owned entities,CEC and Shanghai Municipal SASAC, are the respective controlling shareholders in Hua Hong NEC and Grace. Of course, the shareholding structure of Grace is especially opaque so Shanghai SASAC or controlled investment arms of it may not own a controlling stake in Grace. Second, Grace has a lot of assets (fabs basically) but Hua Hong NEC has higher revenue so there are bound to be fights over how to value each firm's contribution to the new entity created by the merger.

In one potentially very good piece of news, it is also rumored that TY Chiu, currently President and COO of Silterra, will return to Shanghai to help run the new firm. If true, this piece of news is most welcome as TY is an excellent manager of fabs. Of course, the question is really whether or not TY will be given the freedom to run the firm as he sees fit. On this matter, there should be plenty of doubt for those who know Hua Hong's past well. After all, TY's last brief stint at Hua Hong as COO was not a successful one given the powerful constraints placed on Chiu and the rest of David N.K. Wang's management team by Hua Hong's state owners.