By Jens Kastner

TAIPEI - Taiwan is to open a large part of its core high-technology business, including semiconductor manufacturing, to investment from mainland China, a move that merely a year ago could have led to fist fights among Taiwan's lawmakers.

The island's Ministry of Economic Affairs (MOEA) announced the opening of Taiwanese panels and semiconductors together with 40 other sectors to mainland investment March 2. According to the MOEA's figures, after the new opening list comes into effect, 42% of Taiwan's manufacturing industry, 42% of the services industry and 24% of the public construction industry will be open to the mainland.

To counter criticism that the very technology on which the island's economic strength is based will be given to the other side of the

Taiwan Strait, the government maintains that it has thought up sufficient protective measures. Perhaps as surprising as the announcement, long-standing concerns that an opening of the sensitive high-tech sector to Chinese capital would infringe on national security have all but vanished.

Taiwanese businessmen have in the last two decades invested hugely in China, but mainland investment in Taiwan was not permitted until an opening was allowed to some sectors in 2009. The cautious first test of public acceptance covered 192 items that were considered neither too sensitive nor overly attractive, such as automobiles and plastics.

At that time, the chip and liquid-crystal-display manufacturing sector, in which Taiwan companies lead the world, was kept off-limits for Chinese capital. In terms of protection of intellectual property rights, the mood was that mainland Chinese could no be trusted. As a consequence, while the island's investment on the mainland reached a cumulative total of more than US$200 billion, only a few dozen mainland companies have invested a mere $140 million on the island. This yawning imbalance is likely to shrink with the new regulations coming into effect on March 7.

Taiwan's high-tech sector is not a little something. In 2007, the island's semiconductor industry overtook that of the US, second only to Japan, and the island's optoelectronics industry (involving electronic devices that source, detect and control light) represents a fifth of the global market share.

The Taiwanese economy, in effect, lives and dies with technology that drives products from Apple's iPad to Sony's PlayStation. On the Taiwan Stock Exchange, semi-conductor companies alone account for 19% of total market capitalization, and computer, electronics, communication and Internet, and optoelectronics businesses occupying another 31%.

Taiwanese chipmakers, led by Taiwan Semiconductor Manufacturing (TSMC) and United Microelectronics (UMC), are amongst the largest contract chip and electronics makers in the world, with the two together alone accounting for around 70% of the world's foundry production. TSMC employs more than 30,000 people generating US$14 billion in revenue last year. UMC, with 12,000 employees, had 2010 sales worth US$4.13 billion.

Foxconn, the world's largest maker of electronic components, has close to a million workers, many thousands in mainland China, toiling in its factories and in 2010 reaped to $60 billion revenue.

Many of the flat-panel TV and computer screens that are now ubiquitous around the world come from the likes of Taiwan's AU Optronics Corp and Chimei Innolux Corp. AU generated $11.2 billion in sales in 2009 and employs 43,000 in eight countries; CMI reported $1.3 billion in revenue related to thin film transistor liquid crystal displays in January alone.

The prerequisites the mainland investments must fulfill are considerable, and supposedly will not be possible to bypass concerning manufacture of computer chips, flat-screen LCD (liquid crystal display) panels, tools and machinery, electronic equipment, chip packagers and testers.

There must be "a complementary strategic collaboration among the cross-strait supply chain" and Chinese investors must not have board control over their Taiwanese partners.

Mainland companies will be allowed to acquire only a maximum 10% stake in existing Taiwanese technology companies and a maximum 49% stake in new technology-sector joint ventures.

Mainland companies will be barred from setting up wholly owned technology ventures in Taiwan.

Allowing mainland investors to buy into such industries would have been unthinkable a few years ago, when Taiwan's governments were far less Beijing-friendly than the current ruling Kuomintang (KMT). Now there appears to be only a few observers who see such access as a risk to Taiwan's de facto independence or to its national security. To most, the new regulations are nothing but a long due and practical measure.

"If we look at the LCD panel firms in Taiwan, they are big suppliers to Chinese TV brands," Li Chi-Keung, professor at Taipei's Tamkang University Graduate Institute of China Studies, told Asia Times Online, arguing that the change represented a cross-strait win-win scenario through the forging of strategic alliances. "In order to stabilize the component supply, it makes perfect sense that Chinese TV firms might be interested in investing in Taiwan's LCD makers."

According to Li, the restrictions Taiwan's MOEA has put in place are sufficient. "In recent years, many Chinese firms gained access to advanced technology through mergers and acquisitions of foreign enterprises. Under the strict limit on Chinese firms' percentage of share holding, technology leaks will be prevented."

Yang Yungane, professor at Taiwan's National Cheng Kung University, agrees. "The new opening is good to attract Chinese investment to Taiwan, and it facilitates cooperation between Taiwan's and China's high-tech industries." Nonetheless, he sees reasons for Taiwan not to let its guard down. "There could be political implications behind such cooperation," he said.

The political repercussions are foremost of the concerns troubling supporters of Taiwanese independence. Gerrit van der Wees, of the Formosan Association for Public Affairs, a Washington headquartered, non-profit organization that promotes the idea of Taiwan becoming an independent state, argues that the opening of Taiwan's high-tech industry to Chinese capital will give Beijing even more political leverage over Taiwan.

"High-tech investments in China are under direct control of the PRC government," van der Wees said. "Beijing will be able to entice or punish Taiwan at will in order to make Taiwan move in the direction of political integration with China."

Taiwan is not alone in sensing it has to adjust to new realities with the mainland's rise to being a global economic powerhouse, with other industrialized countries also considering the extent to which Chinese money should be allowed to flow into sensitive industrial sectors.

The United States apparently screens Chinese companies that seek to invest in the high-tech sector. Most recently, Chinese telecom giant Huawei Technologies Co, the world's No 3 maker of mobile telecommunications equipment, backed away from its acquisition of US computer firm 3Leaf Systems after a US government panel voiced security concerns about the deal because Huawei was founded by a former People's Liberation Army engineer. Huawei maintains ties with China's security services, and the acquisition has possible national security implications, according to legislators in Washington.

The US has significantly more reason than Taiwan to worry about Beijing steeling industrial secrets through investment channels, according to Wang Jhy-perng, a research fellow at the Association for Managing Defense and Strategies. In terms of military technology, Taiwan has nothing to fear as almost any weapon in its military's arsenal is US-made, said Wang. Nor does he see dangers ahead for Taiwan in pure business terms.

"Technology-wise, Chinese manufacturers have made intensive efforts," Wang said. "The technological edge Taiwan once had has shrunk significantly already, so the Taiwanese government had to adjust by means of these new regulations."

According to Wang, Taiwan's most precious asset can't be stolen - that is the island's ability to innovate. "Even if the Chinese will be allowed to invest, genuinely new technologies will still be thought up in Taiwan", he said.

Jens Kastner is a Taipei-based journalist.

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