( Automotive Semiconductor Industry

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1 Recommended Industries for Foreign Investment in Taiwan ( Automotive Semiconductor Industry ITRI IEK PENG, Kuo-chu / 31 Tel: markpeng@itri.org.tw Client: Contractor:

2 Recommended Industries for Foreign Investment in Taiwan Automotive Semiconductor Industry 4 Automotive Semiconductor Industry 1-1 Industry Definition Scope of the automotive semiconductor industry: The three main categories of automotive semiconductor devices are ASIC, ASSP and MCU. Automotive semiconductor applications: Used in automobiles within electro-hydraulic, braking, active/passive safety systems and audio-video communications system modules. The automotive semiconductor industry is currently dominated by traditional car and semiconductor powerhouses such as the US, Japan and Europe. The top ten vendors are all IDM companies with integrated semiconductor design, manufacturing, packaging & testing operations. 1-2 Market analysis (1) Current global automotive semiconductor market and trends Automotive semiconductors must be developed in close cooperation with the car makers during development. Most take the form of a partnership with the large semiconductor companies in the leading car making nations such as the US, Japan and Europe. To ensure there are no issues with the quality, supply and delivery time of the devices during the design and manufacturing phases, the certification process is very long and the product lifecycle is longer as well. As Taiwan lacked a car market and car industry of sufficient size, it was difficult for it to break into the automotive semiconductor market. The growing size of the Chinese car market and industry combined with Taiwan's expertise in semiconductor foundries, packaging & testing however means that Taiwan now offers international automotive semiconductor IDM companies an attractive prospect for setting up joint ventures to supply the Chinese, Japanese, Korean and Northeast Asian markets. At the end of 2009 the global automotive semiconductor market shrunk by 21.8% to US$15.7 Billion compared to 2008 due to the global financial crisis. In 2010, the global economy is now on the mend and the automotive semiconductor market is also recovering and is expected to grow by 12.9% compared to 2009 to reach US$17.7 Billion. In the future, the trend towards eco-friendliness and strong car sales in emerging markets should continue to drive growth in the global automotive semiconductor market. After its slide in 2009, the global automotive semiconductor market can expect five successive.1.

3 New Opportunities. Invest in Taiwan years of growth between Based on the device types in the global automotive semiconductor market from 2009, ASSP and ASIC together accounted for the largest share at 35.0%. Micro components (incl. MPU and MCU) was the second largest category at 25%. Discrete and Sensors were in 3rd and 4th place with 12.7% and 9.8% respectively. (2) Current Taiwanese market and trends Taiwanese IC products are mainly concentrated in the 3C segment. In 2009, IT products accounted for 42.4% of the IC product applications design market in Taiwan, communications products accounted for 19.7%, while consumer electronic applications accounted for 36.5%. Other (including the automotive market) applications accounted for just 1.4%. If US, Japanese or European automotive IDM companies can be introduced to Taiwan, it will significantly expand the scope of development for the Taiwanese semiconductor industry. Not only will it help diversify products to avoid the risk of over-concentration in the 3C applications market, it will also help establish a complete value chain for the Taiwanese automotive semiconductor market. In 2009, up to 73.5% of the devices produced by the Taiwanese IC design industry were ASSP/ASIC, far higher than the average of 27.5% in the global semiconductor industry. Most of this was in the 3C segment where the Taiwanese semiconductor industry enjoys a strong presence. Micro-components however was relatively low at just 9% of the Taiwanese IC industry's output. Micro-components account for 25% of the automotive semiconductor market, a relatively high figure compared to the global market. 1-3 Investment Analysis for Overseas/Compatriot Businesses in Taiwan (1) Analysis of the current global and Taiwanese industry chain and gaps The vertical division of labor that developed in the Taiwanese semiconductor industry has enabled Taiwan to become the world leader in foundry, packaging and testing services as well as No.2 in design. The Taiwanese design industry also has a strong presence in 3C markets (computing, communications, consumer electronics). The automotive semiconductor market however is completely dominated by large US, Japanese and European IDM companies. Taiwan's design-oriented industry has been unable to achieve any effective progress in this market. (2) Areas suitable for overseas/compatriot investment in Taiwan Joint factory: Taiwanese foundries have extensive experience with joint ventures. For example: TSMC set up SSMC, VisEra and Xintec as joint ventures with its customers while UMC.2.

4 Recommended Industries for Foreign Investment in Taiwan Automotive Semiconductor Industry partnered with Infineon to set up UMC. The main factor was the customer's desire for a dedicated supplier to ensure that products are delivered on time and in the right quantity. R&D Center: Large international vendors can set up R&D centers in Taiwan so Taiwanese semiconductor designers, foundry capacity, packaging & testing services and production capacity can be harnessed to serve nearby customers in the Asia-Pacific region (China, Japan, Korea). Investors may wish to make the most effective use of capital by reducing product manufacturing to focus on product development and customer service. 1-4 Analysis of international advantages and industry opportunities for overseas/compatriot businesses investing in Taiwan (1) International comparison of overseas/compatriot investment advantages in Taiwan Taiwan has a complete semiconductor industry value chain in place. The industry is internationally competitive as the design industry has a solid foundation in the 3C segment and is ranked 2nd in the world by output. The industry is No.1 in the world in foundry technology and production capacity. The industry is No.1 in the world in packaging & testing technology and capacity. In terms of market, China has the advantage as its consumer car market offers the greatest potential. With its rapidly developing car industry, China enjoys the strongest market advantage. Technology-wise, Korea has the edge on Taiwan mainly due to the superior performance of the country's Samsung company. Other semiconductor companies in China, Hong Kong and Singapore are technologically no match for Taiwan. Production factors include details such as utilities, transportation, skilled manpower and cost of capital. Generally speaking, China and Singapore are slightly superior to Taiwan mainly due to lower utilities, transportation and cost of capital expenses. For the support system, the Taiwanese semiconductor industry is highly specialized and includes not only the world's largest semiconductor manufacturing, packaging & testing industry built also the world's second largest semiconductor design industry. The benefits of clustering are quite obvious as well and have given Taiwan a major advantage in the automotive semiconductor support system. Policy includes government incentives, tax deductions and encouraging foreign investment. China has the advantage here because in addition to the central government policies, the local government is offering incentives as well. In this area Singapore is slightly superior to Taiwan. (2) Opportunities or overseas/compatriot investment in Taiwan Taiwan is geographically located between two of the world's top auto markets (China and.3.

5 New Opportunities. Invest in Taiwan Japan). The well-developed industry value chain in Taiwan offers superior production factors compared to neighboring countries. If the US, Japanese and German IDMs can set up factories in Taiwan and quickly recruit talented semiconductor engineers, this will help increase the speed and reduce the cost of launching new products. Large international vendors can set up R&D centers in Taiwan so Taiwanese semiconductor designers, foundry capacity, packaging & testing services and production capacity can be harnessed to serve nearby customers in the Asia-Pacific region (China, Japan, Korea). Given Taiwan's intellectual property protection and professional division of labor, it should consider partnering with international vendors to enter the China market. Taiwanese foundries are no strangers to joint ventures. If a dedicated production supply relationship can be set up this will ensure that products are delivered on time and in the right quantity. 1-5 Production Costs, Taxations, and Investment Incentives (1) Production Costs Currently, there are 181 industrial parks, 9 export processing zones, 3 science parks, 6 free trade zones, 5 agricultural industrial parks and 4 environmental protection science parks in Taiwan. Also, the government provides quality and low cost business environment. EPZs, SIPs, FTZs, Pingtung ABP, and bonded factories(warehouses) are all considered bonded areas(i.e., tariff-free areas), meaning that raw materials, fuel, articles, semi-processed goods or machinery imported from abroad are all exempt from imported from abroad are all exempt from import duties, Commodity Tax, and Sales Tax. Zero-rate Sales Tax is applied on commodities and labor services exported abroad and on raw materials, fuel, articles, semi-processed goods or machinery purchased from a tax zone..4.

6 Recommended Industries for Foreign Investment in Taiwan Automotive Semiconductor Industry Types of Industrial Parks Science Parks Export Processing Zones Agricultural Biotechnology Parks Environmental Protection Science Parks Free Trade Ports Industrial Parks Descriptions Competent Authorities: National Science Council. Main Location: Hsinchu Science Park, Central Taiwan Science Park, and Southern Taiwan Science Park. Characteristics: Locations for development of high-tech industries. Promote Taiwan industry upgrade. Competent Authorities: Export Processing Zone Administration. Main Location: Taichung, Kaohsiung and Pingtung. Characteristics: Develop the cluster effects of the key industries and the cooperation of international marketing industry. Competent Authorities: Council of Agriculture, Executive Yuan, R.O.C. Main Location: Taichung, Kaohsiung and Pingtung. Characteristics: Speed the development of industrial clusters in agricultural biotechnology. Expand production of high value-added goods for export. Become centers of high-tech agricultural industry. Competent Authorities: Environmental Protection Administration, Executive Yuan, R.O.C. Main Location: Taoyuan, Tainan, Kaohsiung and Hualien. Characteristics: Seek out partners in the area of advanced environmental protection technology from around the world for creating model zones of low-polluting, high value-added industries that promote productivity livelihood, and the ecology. Competent Authorities: Ministry of Transportation and Communication Main Location: Keelung, Kaohsiung, Taichung, Taipei, and Taoyuan. Characteristics: Eliminate the barriers to the flow of goods, capital and people in international trade. It is hoped that with the integration of the supply chain and the convenience of harbors, enterprises can be more competitive. Competent Authorities: Industrial Development Bureau, Ministry of Economic Affairs. Main Location: Most Main cities Characteristics: Provides manufacturers with sufficient lands, avoiding the disturbances from the surrounding environment, boosting local economic development with industrial clusters economic effect and creating high add value production environment..5.

7 New Opportunities. Invest in Taiwan A. Land Rental Costs a. Hsinchu Science Park Rental Costs: Location Building Type/Floor Rental Cost Monthly m 2 Ping(3.3m 2 ) 1F F Standard Factory Building 3F F F Intellectual Property Center Main Building 197 1F Hsinchu 3. High-Rise Factory Building Public Facility ,600 Science Park 2F-7F Si-Soft Factory Building Du-Xing Factory Building 1F F F Service Building 2F F F Chunan Standard Factory Building(First Phase) 1F-5F Science Park Standard Factory Building(Second Phase) 1F-5F b. Southern Taiwan Science Park Rental Cost: Land Tainan Science Park Kaohsiung Science Park Each month NT$/m 2 and additional 5% business tax. Each month NT$/m 2 and additional 5% business tax. Building Tainan Science Park Kaohsiung Science Park Five phases. Each floor area ranges from 750m 2 to 946m 2. The rental cost is NT$/m 2 monthly. Two phases. Each floor area ranges from 960m 2 to 2040m 2. The rental cost is NT$/m 2 monthly c. Central Taiwan Science Park Rental Cost: Location Item Rental Cost (NT$/m 2 ) Monthly Land Only Public Facility Total Land Taichung Science Park Building 88 Huwei Science Park Land Houli Science Park Land Erlin Science Park Land B. Labor Costs Taiwan has a high-quality labor force of approximately 10 million people, of whom 35% have.6.

8 Recommended Industries for Foreign Investment in Taiwan Automotive Semiconductor Industry college or university degrees or higher. Each year around 320,000 students graduate from its colleges and universities, filling the human resource needs of commerce and industry. For person paid by the month, the minimum monthly wage required by law is NT$17,880; For person paid by the hour, the minimum hourly wage as set by law is NT$98/hr. Industry Average Salary(NT$) Mining and quarrying 49,674 Manufacturing 39,152 Electric power and gas supply 95,996 Water supply and remediation services 44,234 Construction 40,930 Wholesale and retail 40,154 Transportation and storage 48,068 Lodging, foods and beverages 27,171 Information and communications 62,013 Finance and insurance 67,513 Real estate 38,720 Professional, scientific, and technical services 49,969 Support services 31,596 Education services 22,195 Human health and social work services 54,072 Arts, entertainment, and recreation services 31,257 Other services 29,731 Source: Directorate-General of Budget, Accounting, and Statistics, Executive Yuan (2) Taxation A. Individual Income Tax Rate Income Tax Bracket (NT$) Tax Rate Progressive Different (NT$) 0-500,000 5% 0 500,001-1,090,000 12% 35,000 1,090,001-2,180,000 20% 122,200 2,180,001-4,090,000 30% 340,200 4,090,001 40% 749,200 Source: Ministry of Finance B. Business Income Tax Rate Income Tax Bracket (NT$) Tax Rate 120,000 and less Exempt from tax. 120,000 and higher 17% on the total taxable profit. Source: Ministry of Finance.7.

9 New Opportunities. Invest in Taiwan (3) Investment Incentives & Administrative Support A. Tax incentives a. Industrial Innovation Act According to the Industrial Innovation Act, which was practiced in 2010, 15 percent of a business' R&D spending would be deductible from its business income tax, but capped at no more than 30 percent of its business income tax. At the same time, the corporate income tax rate is reduced to 17%. b. Incentives Item R&D subsidies Biotech and Pharmaceutical Industry Importing machinery not manufactured domestically Income tax exemption on licensee fees paid overseas 1.7% or 2.25% preferential tax rate will be used when issuing remuneration for foreign tech services rendered Private sector participation in major public construction projects Content 15% of a company's R&D expenditures may be claimed as a deductable expense against the current fiscal year's payable business income tax. For biotech and pharmaceutical industries, 35% of R&D and employee training expenditures may be claimed as a deductable expense against the current year's payable business income tax. Imported machinery of a kind not yet manufactured domestically may enjoy tariff-free treatment. A company that imports new production technology or products from abroad that also uses the patent, trademark, or other special right owned by a foreign profit-seeking business may, with special approval by the Industry Development Bureau of the Ministry of Economic Affairs, enjoy tax exemption on the licensee fees paid to the foreign profit-seeking business If offshore for-profit enterprises which operate international transport services are contracted for construction projects, offer tech services, or are engaged in the rental of machinery and equipment within Taiwan experience difficulty in shouldering operating costs, such enterprises may apply for permission to be listed under a preferential tax rate bracket regardless if they have a branch or an agent in Taiwan. For industries engaged in international transport the preferential tax rate shall be 1.7%; For other industries the rate shall be 2.25%. Private sector companies that participate in major public construction projects may enjoy a five-year Business Income Tax exemption, investment tax credits, and exemption of tariff on imported construction machinery as well as deductions in House Tax, Land Value Tax, and Deed Tax. Profit-seeking businesses that invest in private-sector organizations that participate in major public construction projects also receive deductions on their Business Income Tax. B. Investment with government participation Item Scope of investment by Development Fund content Primary targets are the information, telecommunications, aerospace, biotechnology, agricultural technology, digital content, and cultural creative industry sectors. Investment plans for domestic SMEs. Investment ceiling Publicly-held shares are not to exceed 49%..8.