The Carlyle Group goes shopping in Taiwan

Why does one of Washington's major players want to buy a semiconductor company?


Andrew Leonard
November 30, 2006 5:29AM (UTC)

On Friday, the Carlyle Group, every conspiracy theorist's favorite military-industrial-complex punching bag, announced it was organizing a $6 billion bid for a Taiwanese semiconductor packaging firm, Advanced Semiconductor Engineering. ASE is the largest semiconductor testing and assembly firm in the world, and if the deal goes through, it will be the biggest ever foreign buyout of a Taiwanese corporation.

So far, most commentary on the bid has focused on its relevance to the China market. For this reason alone, the deal offers up a fascinating slice of state-of-the-art globalization. Taiwanese semiconductor companies are currently prohibited by Taiwan's government from moving their newest technology to China. This is to avoid a "hollowing out" of the semiconductor industry that might leave Taiwan economically vulnerable to the mainland.

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However, if you aren't a major player in China, then your long-term prospects in the semiconductor industry are limited. ASE may be No. 1 in the world at the moment, but No. 2 and No. 3 are headquartered outside of Taiwan and are rapidly expanding their operations in China.

The beauty of the Carlyle deal is that if the buyout is completed, ASE will no longer be a Taiwanese company. It would delist from the Taiwan stock market and be free to frolic in China to its heart's desire. The prospect has many people in Taiwan nervous, because if such a strategy makes sense for ASE, then why wouldn't it also be a logical move for Taiwan's high-profile semiconductor manufacturers, such as Taiwan Semiconductor Manufacturing Corp. and United Microelectronics Corp.? And what's to stop a foreign buyer like Carlyle from losing interest in its new toy a few years down the line, and selling the asset to someone else, including, conceivably, a Chinese buyer?

No one ever promised that life in the global economy would be easy, and even though Taiwan, which has benefited as much as any nation in the world from open trade and the mobility of capital across borders, has a right to be nervous, one is also tempted to say, well, them's the breaks. But there's another potential angle to this story that hasn't gotten any coverage yet, so far as I've seen.

In February 2005 a Pentagon advisory group, the Defense Science Board, released a very strongly worded report decrying the offshoring of semiconductor manufacturing as a threat to the defense capability of the United States. The report singled out the fact that Taiwan's semiconductor foundries are now responsible for some of the most advanced manufacturing processes in the world, and that, in crunch time, the U.S. might not be able to make the chips it would need to keep its top-of-the-line military equipment running. There was even an undercurrent suggesting that the companies rushing to offshore their manufacturing operations to Taiwan and China were unpatriotic.

"There is no longer a diverse base of U.S. integrated circuit fabricators capable of meeting trusted and classified chip needs," announced the report, titled "High Performance Microchip Supply." "From a U.S. national security view, the potential effects of this restructuring are so perverse and far reaching and have such opportunities for mischief that, had the United States not significantly contributed to this migration, it would have been considered a major triumph of an adversary nation's strategy to undermine U.S. military capabilities."

The Carlyle Group is studded with former Bush and Clinton administration officials and is notorious for its close relations with the defense industry. One might not be too far off in assuming that its actions can be viewed as a proxy for what senior members of the national security establishment might deem advisable foreign policy. From that perspective, going on a semiconductor company shopping spree could be seen as a sneaky way of bringing vital technology back into the fold and ensuring that the U.S. defense industry maintains some modicum of control over its supply lines.

It's the tried and true American capitalist way. If you can't beat 'em, buy 'em!

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Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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