Taiwan's chip vendors are to be allowed to invest in silicon factories on the Chinese mainland, but only after if their domestic factories are brought up to the state of the art.

Last week, Taiwanese premier Yu Shyi-kun said that the government had decided to liberalize "small scale and low level investments" on the mainland by Taiwanese companies. Initially, investment will be based around "used wafer manufacturing equipment (including 8 inch and below)." Investment in new equipment will be discussed after two years.

Before being allowed to invest in the mainland, however, manufacturers will have to have completed construction of their 12 inch wafers foundries and brought those plants to stable levels of basic production. The onset of 12 inch wafer lines offers much greater economies of scale than 8 inch wafer technology.

The Taiwanese government said it wanted to ensure its chip industry maintained a global perspective and remained competitive, while ensuring the country's core technologies did not flow to the mainland. By holding the carrot of allowing investment in China, a vast potential market with low labor costs, the government encourages domestic manufacturers to upgrade their Taiwanese plants. The government expects relocation to amount to three low level 8 inch plants.

By 2005, it expects more than eight 12 inch plants to be up and running in Taiwan. Thus, mainland production will be "an extremely small percentage" of domestic production.

China is tipped as the next big thing in silicon production. Investment in chip equipment in the country is expected to hit $7bn by 2003. The country's share of Asia Pacific investment in chip plants is expected to increase from 5% last year to 20%.

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