After restricting Huawei access to high-end process chips, the U.S. may restrict SMIC in the next step. China has decided to develop its chip industry with a nationwide effort as a way to breakthrough. It will be announced in October’s 14th Five-Year Plan that an investment of 10 trillion yuan (US$1.5 trillion) will be used to fully develop the third-generation semiconductor industry. This big play has generated a motion in the industrial ecology.

In the past, China used nationwide efforts to foster the panels, LED (light-emitting diode) and solar-power industries. BOE Technology Group (BOE), a Chinese producer of interface devices, received about 30 billion yuan (US$4.4 billion) in subsidies each year. Blessings from the Chinese government severely damaged the industrial ecology of the panel industry. South Korea’s Samsung Display and LG Display (LGD) both suffered losses. Taiwan’s panel industry was most affected. AUO and Chi Mei Optoelectronics (CMO) were the earliest known tigers in the panel industry with AUO’s share price hitting a record sky-high price of NT$79.5 (US$2.74) in 2004. At that time, AUO and Chi Mei were known as the “trillion-dollar industry.”

Under China’s strong subsidy policy, BOE and Shenzhen Huaxing Photoelectric Technology (TCL) increased their investments. By the 10.5 generation, these two Chinese national teams have already beaten competitors in Taiwan and South Korea. AUO lost NT$19.185 billion in 2019 and at its worst, lost NT$8.828 billion in one quarter. At its lowest, AUO’s stock price had plummeted to NT$6.1, no more than one-tenth of the sky-high price back then. After CMO was sold to Innolux, the two companies merged and made a huge profit of NT$17.483 billion last year but the company saw its lowest stock price at NT$4.85 in March this year, which was a heavy burden for the company’s chairman Tuan Hsing-chien.

This year, China used the power of state subsidies to develop the chip industry, and the amount of subsidies originally used for panels, solar energy and LEDs has shrunk significantly. Recently, BOE’s two Gen 10.5 production lines have been unable to receive subsidies. This “tragic industry” caused by the subsidies to the Chinese national team over the past ten years is little by little showing signs of vitality.

This year, everyone slowly discovered offshore wind energy as TSMC (Taiwan Semiconductor Manufacturing) has agreed to buy the full production of 920 megawatts of power from Denmarks' Ørsted’s offshore wind farm under a 20-year fixed-price contract. This huge move, which represents the largest-ever contract of its kind within renewable energy, not only boosted the morale of the offshore wind power industry, but also reinvigorated the solar energy industry. In the past few months, the stock price of Motech Industries, a solar cell manufacturer which left everyone in a state of hopeless despair, rose from NT$3.84 to NT$29.45. Solar energy equipment supplier TSEC climbed from NT$4.2 to NT$28.5. Solar energy equipment manufacturer and distributor Hsinjing Holding jumped from NT$10.2 to NT$79.6. Danen Technology, a multi solar wafers producer which was once precarious, hiked from NT$1.41 to NT$18.15. These dying solar energy companies, like Motech, which saw a loss per share of NT$12.57 in 2017, delivered a net profit of NT$180 million in the second quarter (Q) of this year, and TSEC also earned NT$57.33 million in Q2. This signal of profitability is very precious. The stock price is ahead of the curve which means the massacre caused by China’s state subsidies seems to have gradually come to an end.

It was so unbearable to watch when the "panel double tigers'' were reduced to little kittens, but in recent months, the share prices of both AUO and Innolux have more than doubled, rising from NT$6.1 to NT$12.95, and from NT$4.85 to NT$10.6, respectively. In Q3, both companies witnessed record-high revenue and a positive gross profit margin. In order to avoid standard specifications and mass-produced standardized products, AUO and Innolux have splintered their markets into niche markets of limited-quantity diversified high-end products. After several years of suffering due to the subsidies of the Chinese state, a new pattern of operation has slowly emerged from these companies.

Epistar Corp., the largest manufacturer of LED in Taiwan which recorded losses in four of the past five years, has announced plans to merge with Lextar Electronics to establish EnnoStar with a focus on mini LEDs and microLEDs products and technologies. Epistar has always been a leading epi-wafer manufacturer on both sides of the strait, but with the huge subsidies given to MLS, Sanan Optoelectronics and other LED producers, these companies import MOCVD equipment almost at no cost. For example, in the first half of this year, Sanan Optoelectronics had a negative gross profit of 1.925 billion yuan but the net income after tax is 637 million yuan, which is of course the power of state subsidies. In the face of this huge mountain of hindrance, the Taiwanese manufacturers have realigned their strategy turning to the more superior mini LEDs.

Since 2000, Taiwan has always had the “four tragedy industries.” Taiwan has almost withdrawn from the markets, with the exception of DRAM, after the brutal slaughter in the era of the Ma Ying-jeou administration. The other three tragedy industries have progressively survived the bitter winter. When subsidies were fully shifted to the semiconductor industry, those companies that were already so miserable and could not get any worse having survived and sustained what remains of the “tragic industry,” seem to have a chance of rebirth.

(Hsieh Chin-ho is the Chairman of Investment Media and Chairman of Tsai Hsun Express Newspaper.)

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