A different kind of bailout

In Taiwan, five manufacturers of computer memory chips are begging for government help. But unlike the US auto companies, the Taiwanese chip makers deserve to be saved.

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In Taiwan, five manufacturers of memory chips are begging for government help. The fortunes of the semiconductor industry traditionally track the health of the global economy and 2008 is no exception. The world has swiftly reined in its appetite for the kind of electronic devices that incorporate semiconductors, and every link in the production chain – from the high-end makers of semiconductor manufacturing equipment on down – is suffering. DRAM memory chips are at the low end of the semiconductor value-added pyramid, which means the market is now glutted with cheap chips selling for about half of what they cost to make.

A predictable argument has broken out among chip analysts and watchers of the Taiwanese economy that bears striking similarity to the US debate about the pros and cons of an auto bailout. On the conservative side, critics of a government bailout for the memory chip makers argue that five manufacturers are too many for a small country like Taiwan; that artificially propping up the industry will only prolong chipmaker agony and postpone a necessary economic reckoning; and that if chipmakers are rescued, next-in-line comes everybody else having a hard time in the current economic climate.

On the flip side, supporters of a bailout argue that allowing the industry to collapse because of global economic forces beyond Taiwan's control would be a huge strategic error. Korean memory chip makers would end up totally dominating the global market and would consequently be able to set prices as they pleased, with potential negative consequences for all the downstream Taiwanese industries that incorporate memory chips in their products. Just get us through this rough patch, argue the chipmakers, and we'll all be better off in the long run.

Five separate memory chipmakers in Taiwan does seem like a lot, and some kind of government-brokered consolidation might not be a bad idea. But there's a context to the debate in Taiwan that is not getting enough coverage in the chip-watching trade press, and that offers a sharp contrast to how the auto-bailout is viewed in the United States.

And that is the historic role of Taiwan's government in encouraging the semiconductor industry to develop in the first place. Taiwan's status as one of the world's great hubs of high-tech manufacturing is no accident of market forces. It is the result of canny policy – government incentives, tax breaks, and close linkages between the government and the private sector. By virtually any standard, it's been a phenomenal success. Decades ago, both government officials and private entrepreneurs realized that Taiwan's best bet to thrive in a highly competitive global economy would be go all in on high technology. The gamble worked.

Therefore, bailing out domestic chipmakers in Taiwan doesn't have to be seen in the same divisive political terms that bailouts in the United States get plugged into. There is a tradition in Taiwan of making strategic decisions for the benefit of the whole economy, and it is on that basis that one presumes the government is currently evaluating its options. In the US, however, the very idea of industrial policy has been so stigmatized by decades of market fundamentalist ideological domination that the only time strong intervention in the economy becomes palatable is when the economic circumstances are so dire that to do nothing is obviously more disastrous than doing something, even if there is no carefully thought out strategic blueprint to work from.

So now the US is in the position of being forced to bail out an industry – auto makers – that has consistently failed to position itself strategically vis a vis the future, while Taiwan is mulling over the benefits of helping out companies that are smack dab in the middle of the 21st century. By ruling the very concept of industrial policy out of hand, the US has manoeuvred itself into a quagmire where all it can do is flail about while reacting to the possibility of imminent disaster.