vnunet.com Asia news wrap: 9 January 2006

Asia news wrap: 9 January 2006

Taiwanese authorities have indicted the chairman of one of the world's largest chipmakers on breach of trust charges.

Prosecutors allege that Robert Tsao, chairman of United Microelectronics Corp (UMC), authorised an illegal investment in a Chinese company. The company's vice chairman, John Hsuan, and another executive were also charged.

Under Taiwanese investment law, breach of trust charges can result in a maximum jail term of five years. Tsao and Hsuan have resigned and were replaced earlier today before news of the charges was made public.

"UMC believes that the indictment of Bob Tsao and John Hsuan is of a purely political nature and caused by the special nature of the relationship between Taiwan and Mainland China. These indictments in no way reflect on the honesty and integrity of Tsao or Hsuan," the company said in a statement released today.

Although there are strong business links between China and the neighboring island of Taiwan, political relations between the two are extremely unfriendly.

Taiwan's government restricts the size of local companies' investments in China, as well as the level of technology that can be transferred, citing security concerns.

Attracted by cheap labour and access to the large Chinese market, Taiwanese companies have used various methods to work around these restrictions, such as investing in China indirectly via chains of offshore shell companies.

As a result, it can be difficult for Taiwan's government to prove that illegal technology transfer or investment has taken place.

The breach of trust charge faced by UMC executives is based on their alleged failure to inform shareholders of their actions, not on a violation of Chinese investment rules.

UMC is the world's second largest contract chip maker behind local rival, Taiwan Semiconductor Manufacturing Co.

Contract chip makers, sometimes referred to as pure play foundries, do not design or market chips themselves, but instead make them to order for other companies which lack manufacturing facilities. Notable UMC clients include graphics chip makers ATI and Nvidia.

Local sources say that the charges are not expected to have any serious short-term impact on UMC's business or customers as the alleged transgressions occurred in 2001, and Taiwan's Chinese investment rules have been relaxed somewhat since that time. 

But a successful prosecution is likely to make UMC and other companies follow the government's remaining investment restrictions more closely in the future.