Introduction

Amidst the complex interplay of global geopolitics, Taiwan’s packaging and testing industry finds itself at a pivotal moment, navigating a landscape marked by challenges and opportunities. The reverberations of Siliconware Precision Industries (SPIL) under Advanced Semiconductor Engineering (ASE) withdrawal from China in 2020 have echoed across the industry, sparking a series of strategic responses aimed at fortifying market positions and diversifying operational footprints. 

Other Taiwanese counterparts such as ASE, King Yuan Electronics (KYE), Powertech Technology Inc., and ChipMOS Technologies Inc., they successively divested their footholds in China. Even American companies like Qorvo and Skyworks Solutions, as well as South Korea’s SFA Semiconductor, also sold off their Chinese factories this year. This pivotal event prompted industry-wide introspection, pushing companies like SPIL to reassess their strategies in the face of evolving geopolitical dynamics.

SPIL’s strategic response has been multifaceted, reflecting a proactive approach to navigating geopolitical uncertainties. Beyond reinforcing its presence in Taiwan through expansions in key regions like Taoyuan, Changhua, and Kaohsiung, SPIL has embarked on bold ventures into new territories such as the Philippines, South Korea, and Malaysia. These strategic expansions underscore SPIL’s commitment to diversification and risk mitigation in an increasingly uncertain global landscape.

The broader industry has mirrored SPIL’s actions, with other players also undertaking strategic realignments to adapt to geopolitical shifts. This collective response highlights the industry’s resilience and adaptability in the face of challenges posed by geopolitical tensions.

Against this backdrop, the following sections delve deeper into the intricacies of Taiwan’s semiconductor sector, examining key developments such as King Yuan Electronics’ sale of King Long Technology and the impact of Xi’s New Quality Productive Forces strategy on the industry. Through these explorations, we gain insights into how Taiwanese semiconductor firms are navigating geopolitical challenges while positioning themselves for future growth and success.

King Yuan Electronics’ Sale of King Long Technology

On April 26th, 2024, King Yuan Electronics, a global leader in semiconductor back-end testing, announced the sale of its subsidiary, King Long Technology, operating in China for nearly 15 years, for a staggering 21.72 billion yuan. Established in Suzhou, China, in 2002, King Long Technology strategically catered to the burgeoning demand for IC packaging services in the region.

Leveraging its robust infrastructure and expertise, King Long emerged as a formidable revenue driver, contributing up to 30% of King Yuan Electronics’ total revenue last year. With a net profit of 1.9 billion yuan, accounting for 30% of the parent company’s profits, King Long’s performance surpassed expectations, prompting initial plans to list the subsidiary on the prestigious Chinese Science and Technology Innovation Board.

However, in a surprising turn of events, King Yuan Electronics opted to divest its Chinese subsidiary, sparking speculation and debate within the industry. The decision reflects King Yuan Electronics’ proactive approach to risk management and strategic positioning in the face of geopolitical uncertainties. By divesting its Chinese subsidiary, the company aims to optimize its operational efficiency and focus on core competencies, thereby enhancing its competitiveness in the global semiconductor market.

This strategic realignment underscores the company’s commitment to fortifying its high-end product testing capabilities in Taiwan, thereby enhancing its competitive edge in the global semiconductor arena. As the industry navigates the complexities of geopolitical tensions and economic uncertainties, King Yuan Electronics’ decision highlights the importance of adaptability and strategic foresight in maintaining a leadership position in the semiconductor ecosystem.

Exploring the Rationale behind the Rush to Sell

Amidst the tumultuous currents of global geopolitics, the semiconductor industry finds itself navigating uncharted waters, where every strategic maneuver carries profound implications for market dynamics and competitive landscapes.

The rush to divest from Chinese subsidiaries by Taiwanese semiconductor giants like King Yuan Electronics is not merely a knee-jerk reaction to geopolitical uncertainties but a calculated response to shifting tides in international relations. Prior to 2018, the siren call of the Chinese market beckoned global semiconductor behemoths, luring them with promises of untapped potential and boundless opportunities.

However, the winds of geopolitics shifted with the dawn of a new era in U.S.-China relations, marked by escalating trade tensions and regulatory uncertainties. The successive volleys of bans and tariffs unleashed by the United States rattled the global semiconductor industry, forcing companies to reassess their strategic priorities and risk profiles.

In tandem with these geopolitical tremors, the Chinese government embarked on a concerted effort to bolster its indigenous semiconductor ecosystem, a move aimed at reducing reliance on foreign entities and nurturing homegrown champions. This strategic imperative posed formidable challenges for foreign semiconductor companies operating in China, compelling them to navigate an increasingly hostile business environment fraught with regulatory hurdles and competitive pressures.

For King Yuan Electronics, the decision to divest its Chinese subsidiary and repatriate funds to Taiwan represents a strategic pivot towards resilience and agility in the face of geopolitical headwinds. By consolidating operations in Taiwan, the company not only insulates itself from the vagaries of international politics but also capitalizes on the island’s robust semiconductor ecosystem to bolster research, development, and production capacities.

The exodus of Taiwanese semiconductor firms from China mirrors a broader trend sweeping across the industry, where companies are reevaluating their foothold in the world’s largest semiconductor market. Following in the footsteps of SPIL and other industry stalwarts, Taiwanese competitors are shedding their Chinese assets in a bid to navigate treacherous waters fraught with uncertainty and regulatory scrutiny.

Insights gleaned from industry insiders paint a poignant picture of the challenges and opportunities confronting semiconductor players in China. Faced with relentless price competition and state-sponsored support for local rivals, foreign companies find themselves locked in a David-versus-Goliath battle, where survival hinges on strategic agility and innovation.

In essence, the rush to divest from Chinese subsidiaries underscores the intricate interplay between geopolitics and corporate strategy, where every move is scrutinized through the lens of global power dynamics and economic imperatives. As the semiconductor industry charts a course through turbulent waters, companies must remain vigilant, adaptive, and forward-thinking to navigate the complexities of an ever-changing geopolitical landscape.

Xi’s New Quality Productive Forces Strategy

Xi’s New Quality Productive Forces strategy has significantly impacted the landscape of the semiconductor industry, particularly in China, prompting a strategic realignment among Taiwanese packaging and testing giants.

The emergence of this strategy has reshaped the competitive dynamics of the semiconductor industry, with the Chinese government emphasizing the development of new quality productive forces. This focus has led to a shift in the competitive landscape, with subsidies and resources prioritized for domestic players.

Taiwanese firms, facing mounting cost pressures and the risk of losing orders, find themselves compelled to divest their Chinese factories to maintain competitiveness and secure market share. This strategic maneuver not only facilitates cost optimization but also aligns with the objectives of Xi’s initiative.

Looking ahead, China’s commitment to intensifying support for local suppliers is poised to reshape the competitive landscape further. With a push towards enhancing domestic self-sufficiency across critical industries, including semiconductors, the rationale for maintaining operations in China is diminishing rapidly.

In recent years, China’s semiconductor packaging and testing industry has witnessed intensifying competition, leading to a phenomenon known as “involution,” which has become one of the reasons for Taiwanese companies to withdraw. Take Tongfu Microelectronics, one of the buyers of King Long in this deal, as an example. Last year, the company’s revenue reached 100 billion New Taiwan Dollars, far surpassing that of King Long. However, after deducting subsidies from the Chinese government, the net profit was only 270 million yuan, just a fraction of King Long’s. This illustrates the severity of price competition in the Chinese semiconductor market.

Moreover, the strategic migration of leading Microcontroller Unit (MCU) and panel driver IC companies from Taiwan to Chinese Wafer Fabrication underscores the evolving dynamics of the semiconductor value chain, with an emphasis on consolidating production processes within China’s borders.

In light of these developments, Taiwanese semiconductor firms are compelled to reassess their strategic priorities and adapt to the shifting geopolitical and economic landscape. As the semiconductor industry navigates the complexities of Xi’s New Quality Productive Forces and China’s technological ambitions, companies must embrace agility and innovation to thrive in an increasingly competitive environment.

The Next Steps for Taiwanese Semiconductor Companies

The strategic landscape for Taiwanese packaging and testing companies is evolving rapidly, necessitating a proactive approach to stay competitive in the face of mounting challenges. Consequently, Taiwanese semiconductor firms must adopt agile strategies to thrive amidst evolving geopolitical dynamics.

As Taiwanese firms grapple with the repercussions of geopolitical tensions and the shifting dynamics of the semiconductor industry, they are compelled to explore avenues to widen the technological gap with their Chinese counterparts. Emphasizing quality and innovation, Taiwanese companies are strategically positioning themselves as preferred partners for customers with stringent quality requirements, thereby leveraging their technological prowess as a key differentiator in the market.

For King Yuan Electronics, the divestment of its Suzhou factory marks a pivotal juncture in its strategic trajectory. Moreover, Taiwanese semiconductor testing facilities are exploring alternative avenues for growth and expansion in response to the challenges posed by the Chinese market.

In tandem with this strategic move, the company has unveiled ambitious plans to ramp up its capital expenditure by a staggering 70% this year. This bullish outlook underscores King Yuan Electronics’ confidence in future opportunities, particularly in burgeoning sectors such as High-Performance Computing (HPC) and Artificial Intelligence (AI). The company’s strategic investments in higher-level testing systems underscore its commitment to catering to the evolving needs of its American clientele, thereby solidifying its position as a leading player in the global semiconductor ecosystem.

Furthermore, as Taiwanese semiconductor testing facilities grapple with the challenges posed by the Chinese market, they are exploring alternative avenues for growth and expansion. Apart from repatriating funds and technology back to Taiwan, these companies are eyeing new opportunities in emerging outsourcing destinations such as Southeast Asia or Mexico. The emergence of friendly outsourcing options presents a strategic opportunity for Taiwanese firms to diversify their operational footprint and mitigate risks associated with geopolitical uncertainties.

In contrast, China’s nearshore outsourcing strategy represents a concerted effort to counter US-China trade tariffs by incentivizing the aggregation of low-tech or labor-intensive industries within its borders. This strategic shift has seen a proliferation of industries such as furniture and hardware relocating to Mexico, facilitated by the United States-Mexico-Canada Agreement (USMCA). The tariff exemptions afforded by this agreement have fueled a surge in productivity, positioning these industries as vital exporters to the United States from Mexico.

Conclusion

Amidst the intricate tapestry of global geopolitics, the semiconductor industry finds itself in a whirlwind of uncertainty, prompting a profound reassessment of strategic priorities among Taiwanese giants like King Yuan Electronics. In response to escalating geopolitical tensions, it is imperative for Taiwanese semiconductor firms to adopt a proactive stance and explore alternative strategies that balance risk mitigation with continued growth and innovation.

While the rush to sell off Chinese subsidiaries may appear prudent in the face of uncertainty, it is essential for Taiwanese companies to carefully evaluate the long-term implications of such decisions. Instead of wholesale divestment, companies should consider near sourcing and friend-sourcing as viable alternatives. Near sourcing allows firms to maintain a strategic presence in China while leveraging the country’s proximity to key markets and access to a skilled workforce. Friend-sourcing, exemplified by partnerships with US-based suppliers, offers an opportunity to diversify supply chains and mitigate risks associated with geopolitical tensions.

Furthermore, Taiwanese semiconductor firms can capitalize on emerging opportunities in other regions, such as Southeast Asia or Mexico, where friendly outsourcing options are available. By diversifying their operational footprint, companies can reduce dependency on any single market and mitigate risks associated with geopolitical uncertainties.

Additionally, Taiwanese industries should prioritize investments in research, development, and innovation to maintain a competitive edge in the global semiconductor ecosystem. Embracing new technologies and market trends will position Taiwanese firms as leaders in the industry, regardless of geopolitical challenges.

As President Xi Jinping emphasizes the development of new quality productive forces, Taiwan’s semiconductor industry must remain agile and adaptive. By harnessing innovation and strategic foresight, Taiwanese firms can navigate the dynamic geopolitical landscape and emerge stronger, solidifying their position as global leaders in the semiconductor ecosystem.