Taiwan’s six-year hunt for China’s undercover chip labs

In the spring of 2020, a Taiwanese engineer accepted a position as a chip designer at Blue Ocean Smart System, an American company located in Hsinchu, Taiwan's semiconductor hub. The position came with a lucrative salary that was twice the industry average, enabling him to fund his children's private education. However, after only a few months at Blue Ocean Smart System, the engineer noticed something unusual: there were no Americans in his office, and all communication took place with team members from Nanjing, China.

He began to suspect that the company was concealing its Chinese ownership behind a locally registered entity.

In August 2021, Taiwanese authorities conducted a raid on Blue Ocean Smart System, alleging that the company was illegally operating in Taiwan by disguising its Chinese ownership. The raid forced the Taiwan operation to shut down. Blue Ocean Smart System in Nanjing did not respond to requests for comment. The engineer, who was initially satisfied with his job, expressed his confusion over the inconsistencies he observed during his tenure.

In total, Taiwanese authorities have investigated 166 cases over the past six years for allegedly concealing ties to China, according to exclusive data provided by Taiwan's Ministry of Justice Investigation Bureau. An additional 67 China-related trade-secret probes in the technology sector have also been completed during the same period. The crackdown continues, with recent raids conducted just days apart in July and August of the same year.

Taiwan is a global leader in chip manufacturing, with companies like TSMC, Mediatek, and United Microelectronics Corporation producing over 60% of the world's semiconductors and 90% of the most advanced chips. However, this success has drawn unwanted interference from Chinese competitors accused of illegal investments and talent poaching. Taiwan's crackdown on these activities reflects a broader trend aimed at limiting China's access to critical technology worldwide.

The Cross-Strait Act and related investment regulations require Chinese companies to obtain government approval before operating in Taiwan. However, Chinese companies have circumvented these regulations by setting up shell companies or registering operations under non-Chinese nationals. In 2020, Taiwan intensified enforcement efforts following growing concerns over China's tech industry from both Taiwanese and U.S. authorities.

The Ministry of Justice Investigation Bureau, Taiwan's equivalent of the FBI, launched a special operation involving all of its 2,000 investigators to investigate Chinese-linked investments in the technology sector.

China has denounced these investigations as "political manipulation." In 2022, a spokesperson for China's Taiwan Affairs Office accused Taiwan's ruling party of "smearing and intimidating mainland enterprises in Taiwan" with the raids, claiming they were politically motivated attempts to obstruct cooperation and harm business interests. Taiwanese authorities, however, argue that these Chinese business activities pose a risk to national security.

In April, Taiwan's National Security Bureau published a report warning that China continues to use "indirect channels" to engage in "talent poaching, technology theft, and the acquisition of controlled goods" in order to obtain advanced chipmaking technologies and break through international technological containment. Industry insiders, such as John Chen, a board director at Taiwan-listed chip design company MicroIP, have reported that salary offers from Chinese companies often exceed five times those offered in Taiwan, with some reportedly reaching up to ten times.

The Tai Yuen Hi-Tech Industrial Park, located on the outskirts of Hsinchu, is home to 300 different tech companies. Recent raids in the park, conducted in May 2021 and involving a Taiwan-registered company linked to the Chinese networking equipment maker Gongjin Electronics, have highlighted the ongoing efforts of Chinese companies to tap into Taiwan's chip sector.