Both TSMC and UMC have made preliminary moves into China, sending representatives to scout locations near Shanghai. UMC has been more aggressive, selling used 200-mm production lines that many believe will end up in a still-undisclosed UMC venture in China.

The debate over whether to allow such fab investment has nearly paralyzed the Taiwan government, which has struggled to satisfy conflicting interests. By far, this is the government's most watched decision since it decided to open up high-tech-oriented exchanges with China, a longtime political rival. Such trade has been closely scrutinized, which has made it harder — but not impossible — for Taiwanese companies to set up operations in China, home to a cheaper talent pool and greater abundance of resources.

"We fear that if high-end companies like TSMC move there, then there will be no expansion opportunities in Taiwan," said Wen Hsu, vice president of the Taiwanese Professional Engineers Association. "We will not have better jobs, or better pay. If we want that, then we will have to go to China. I want to stay here. My family is here."

To Hsu, Taiwan's foundries starting up business in China is a death stroke to the island's future. Over the weekend, the engineers' group led nearly 1,000 people to protest the opening of investment, believing it will lead to more job losses. The island is already suffering from 5 percent unemployment, its highest ever.

"If we want to maintain our competitive position, we have to stay in Taiwan. If TSMC and UMC go there, then we lose that, inch by inch," he said. "We have lost 6-inch production facilities already. We are going to lose 8-inch and then 12-inch. How much more can we lose?"

Intense debate

The opposition of the engineers union adds another shade of complexity to an already intense debate. So far, the discussions have involved industry leaders, national security officials, China-Taiwan experts and politicians — all of whom have tried to assess the impact of allowing technology transfers — and often have come to different conclusions. "We would like to see five or even 10-year projections of semiconductor development in China so we can feel more comfortable," said Deng Chen-chung, vice chairman of the Mainland Affairs Council, one of the government agencies participating in the decision-making process.

Reliable projections will be hard to come by. According to the China Center of Information Industry Development, China's domestic semiconductor demand is expected to bound ahead for at least the next few years, from a $15 billion market in 2001 to $41 billion in 2005. Potential competitors have already moved in, sensing the huge opportunity for early movers. Semiconductor Manufacturing International Corp. (SMIC), a Taiwanese led firm, has established 200-mm wafer operations in Shanghai, and Grace Semiconductor Manufacturing Co. will follow with trial production by year's end.

That has upped the ante. Even though TSMC and UMC don't view the Chinese foundries as near-term competitors, they aren't discounting anything in the future. Making matters worse is the recent allegation that a former TSMC employee transferred sensitive plant schematics — and possibly process flow recipes — to SMIC, which is trying to lure Taiwanese engineers to China. SMIC has denied the report; TSMC, after an internal investigation, has filed suit against the person, who now works at SMIC.

One of the greatest twists in the debate is that few, if any, companies in Taiwan will bother to build more 200-mm wafer plants. "This is very old technology. By the time we move to China, and build the fabs, it will be even older technology. It's a meaningless argument," said Frank Huang, chairman of Powerchip Semiconductor Corp., which is in the process of ramping a 300-mm wafer plant. Huang also represents industry interests on the government panel charged with building a framework for the soon to come dtente.

Collectively, Taiwan is already ahead of the rest of the world in moving to 300-mm wafers. TSMC, UMC, and DRAM makers Promos Technologies Inc. and Powerchip already have 300-mm plants, while a few other Taiwan-based suppliers are planning them. That alone should keep many chip companies in Taiwan, as they seek the 30 percent savings and higher yields that come from using the larger wafers, supporters argue.

Mainland designs

The migration of Taiwan-based design houses to China is seen by some as a moot issue, which shouldn't have become tangled in the debate over investment in 200-mm fabs. Companies such as Via Technologies, Sunplus and Elan already have hundreds of engineers on the mainland. "It's just that most of the deals are under the table," said Rick Hsu, semiconductor analyst for Nomura Securities. "No matter how much resistance there is from other parties, the government has to let 200 mm go."

The more pressing problem, suggested Hsu, is drafting and executing a policy that takes care of the infrastructure issues that are a growing concern here. Right now, a water shortage in northern Taiwan is beginning to worry some of the top chip makers in the Hsinchu Science Park. In the town itself, smaller businesses have already had intermittent shutdowns because of an unusually dry spring.

"Before the water supply problem, we had the electricity issue last year. Before that we had floods and an earthquake. Now these last two are natural disasters that the government can't do anything about, but the water and electricity are problems that can be solved by the government," Hsu said. "But they don't seem to be really paying enough attention."