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Lower-tech legacy chips have wide use in cars, displays

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Chinese firms aided by government support, executives say

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Taiwanese firms consider shifting to more advanced chips

By Wen-Yee Lee

TAIPEI, Feb 10 (Reuters) - When Taiwan's Powerchip

Technology entered a deal with the eastern Chinese city of Hefei

in 2015 to set up a new chip foundry, it hoped the move would

help provide better access the promising Chinese market.

Nine years later, however, that Chinese foundry, Nexchip,

has become one of its biggest rivals in the legacy chip space,

leveraging steep discounts after Beijing's localisation call

forced Powerchip to give up the once-lucrative business making

integrated circuits for Chinese flat panels.

Nexchip is among Chinese foundries quickly winning market

share in the crucial $56.3 billion industry of so-called legacy

or mature node chips made on 28 nanometre technology and larger,

a trend that prompted the Biden administration to initiate an

investigation and is alarming Taiwanese industry.

These Chinese foundries, which include Hua Hong and SMIC,

are threatening the long-held dominance of Powerchip, UMC

and Vanguard International in the market

for chips used in cars and display panels by slashing prices and

embarking on aggressive capacity expansion plans.

Taiwanese foundries are then forced to retreat or pursue

more advanced and speciality processes, executives in Taiwan

said.

"Mature-node foundries like us must transform; otherwise,

Chinese price cuts will mess us up even further," said Frank

Huang, chairman of Powerchip Investment Holding and its listed

unit Powerchip Manufacturing Semiconductor Corporation

, which the company was reorganised into in 2019.

UMC told Reuters that the expansion of capacity globally

had created "severe challenges" for the industry and that it was

working with Intel ( INTC ) to develop more advanced, smaller chips and

diversify beyond legacy chipmaking.

Trade tensions between Washington and Beijing may ease

the pain a bit, executives in Taiwan said, as companies hoping

to secure supply chains and seek chips made outside China.

U.S. President Donald Trump, however, has said he plans to

impose tariffs as high as 100% on semiconductors made outside

the United States.

Vanguard International declined to comment. SMIC, Nexchip

and Huahong did not respond to requests for comment.

CHEAPER, MORE AGGRESSIVE

Blocked by the U.S. in recent years from pursuing high-end

chip technology, Chinese foundries doubled down on legacy chips

and have undercut Taiwanese rivals on price because of strong

funding support from Beijing and their embrace of lower margins,

Taiwan chip executives say.

Chinese companies dramatically increased legacy chip

production capacity in recent years. According to TrendForce, in

2024, China's share of global mature node manufacturing capacity

was 34%, while Taiwan's was 43%.

By 2027, China's share is projected to surpass Taiwan's,

while South Korea and the U.S., with single-digit shares, are

expected to decline.

Consultancy SEMI forecasts that out of 97 new fabrication

plants starting production from 2023 to 2025, 57 are in China.

Although Taiwanese foundries can still compete on factors

such as process stability and better production yield rates,

one executive working at a Taiwanese chip designer said Chinese

foundries had since 2023 become more aggressive in pitching

business.

That person, and a second one working at another Taiwanese

chip designer, said Chinese customers - especially in

consumer-focused sectors such as panels - were increasingly

asking Taiwanese chip designers to hire Chinese fabs to make the

chips, in line with a call from Beijing for Chinese companies to

localise supply chains.

Both people declined to be named because of the sensitivity

of the matter.

Chinese government-related companies, such as China

Mobile and China Telecom, have also been issuing stricter

requirements on using China-made components, they said.

China Mobile and China Telecommunications Corporation, and

China's Ministry of Industry and Information Technology, did not

respond to requests for comment.

THE TRUMP EFFECT

Galen Zeng, a senior research manager at global market

intelligence firm IDC, said Taiwanese chip designers and

foundries were likely to specialise their processes and

diversify away from legacy chips, although their profitability

would still be hit by Chinese competition in the medium-term.

Powerchip's Huang said they plan to reduce their work on

display driver and sensor chips, which are largely used in the

Chinese market, and shift focus towards 3D stacking, a technique

that integrates logic and DRAM memory chips to improve computing

performance and reduce power consumption.

The company remains Nexchip's second-largest

shareholder, with a 19% stake, but does not play an active

management role.

"For chips that will be used in China, we won't be able to

do the business... We must exit, otherwise, there's no way to

survive," Huang said.

Some respite could come from efforts by Washington to curb

China's chip industry growth, alongside worsening relations

between Beijing and other countries that force customers to

split supply chains into China-for-China and non-China networks.

Huang told Reuters that they were already seeing some

orders that would have gone to China being directed to their

Taiwan sites and expect that to accelerate.

An executive from a chip design company in Taiwan, who spoke

on condition of anonymity because of the sensitivity of the

situation, said they had been receiving more orders from

international customers asking to make chips outside China since

2023.

"Some customers will tell us that no matter what, they

don't want us to tape out chips in China; they don't want 'Made

in China,'" the executive said.