The announcement by Taiwan Semiconductor Manufacturing Company (TSMC) to build a 12-inch wafer manufacturing facility in Nanjing, China heralds the establishment of a cluster of semiconductor industry in China as well as a takeoff of China's semiconductor industry in coming years.

Although the planned capacity of 20,000 12-inch wafers a month for the new facilities will account for only a 2.5% of TSMC's total production capacity, it comes as a boost to China's ambition to raise its self-sufficiency in chip production. China has said that it wants to ramp up the self-sufficiency rate for production of chips to 70% by 2025.

TSMC chairman Morris Chang has pointed out that in view of the rapid growth of China's semiconductor market, TSMC has to establish a 12-inch wafer fab and a design service center in China to provide closer support to its customers there and to further expand business opportunities.

Revenues generated from the China market accounted for 6% TSMC's total sales in 2014 and are expected to increase to 8% in 2015, making China the third largest market for TSMC trailing after only the US and Taiwan.

Increasing presence of other semiconductor firms in China is another reason for TSMC moving to China. Intel has tied up with Spreadtrum Communications to produce NAND flash chips in China, while Samsung Electronics and SK Hynix already have their own fabs in China producing NAND flash and DRAM chips, respectively.

Fellow Taiwan-based companies United Microelectronics Corporation (UMC) and Powerchip Technology are already moving forward with their plans to cooperate with local partners to build 12-inch wafer fabs in China.

But the competitiveness is actually not an issue for TSMC as its planned facilities in Nanjing is scheduled to begin volume production of 16nm process technology in the second half of 2018, while UMC and Powerchip are not allowed by Taiwan's laws to invest in their most-advance process technologies at their 12-inch JV fabs in China.

A more significant outcome that will come with TSMC's 12-inch fab in Nanjing is that upstream and downstream partners of TSMC, including equipment and semiconductor material suppliers and IC backend service companies, will also flock into Nanjing to form a large-scale semiconductor cluster there, duplicating the successful establishments of the science parks in Taiwan and bringing a boom to China's semiconductor industry.