Mr. Howell responded that, in his opinion, Taiwan’s semiconductor industry is the most vulnerable. A “huge exodus” from Taiwan to the Mainland has already taken place, and hundreds of thousands of Taiwanese are how living in China, especially in the Shanghai area. Companies are springing up there that are run by Taiwanese managers and staffed in the main by Taiwanese engineers. The Chinese have figured out that even if companies can not be lured to the Mainland, individuals can be lured there and brought together, along with investment and other elements needed to create companies. “It’s a very attractive environment if you’re Taiwanese,” he commented. “You speak the language; and Shanghai is pretty nice, really; and opportunities are there for many Taiwanese that they may not see for themselves in the long run in Taiwan.” What Taiwan’s strategy was for responding might be, he said, has not yet become clear.

Comparing Costs in Taiwan, on the Mainland

In answer to a question about the extent to which cost levels differed between Taiwan and the Mainland, Mr. Howell said that labor costs for semiconductor manufacturing are about 40 to 50 percent lower on the Mainland and that the cost of water is lower as well. But these are very small components of semiconductor manufacturing costs; the main expenses are equipment and other items whose costs are equivalent or close to equivalent in the two locations and were in some cases lower in Taiwan.

In addition, the Taiwanese fabs on the Mainland have the extra costs associated with bringing in expatriates to work. Housing and education might need to be provided to hundreds of people coming from Taiwan, while those from Europe, the United States, and Japan have “expectations of a certain lifestyle,” and catering to these expectations raise labor costs. A 2002 Dewey Ballantine survey comparing costs in the United States, Taiwan, and China found manufacturing costs to be very similar in all three locations: “a little bit lower in China and little bit higher in the United States, but not that much if you take incentives out of the picture.”

Adding incentives, however, changes everything, as demonstrated by China’s erstwhile VAT policy, which pushed cost significantly lower. It was thus an artificial cost advantage created by the Chinese government that motivated companies to move from Taiwan to the Mainland. “Right away you got a 13-percent cost advantage just based on that,” Mr. Howell pointed out. “And there was a sense that you would have the market to yourself if you moved over there with advanced technology: Nobody could export into that market and meet that cost advantage. It sucked in just an incredible amount of investment, and people and skills and everything else.”

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