In just 15 years, the farmland of the Pudong district of Shanghai has disappeared under gleaming skyscrapers, monuments to, among other things, the fastest-growing semiconductor industry in the world. Within this charmed circle, the fastest-growing start-up is Semiconductor Manufacturing International Corp. (SMIC). In the five years since its founding, it has become the leading chip maker in China, the next big chip-making power in the world.

Ironically, China's ascendance in semiconductors is almost entirely attributable to assistance from Taiwanese technologists. SMIC itself was founded by a Chinese-American raised in Taiwan, and many of its employees are from Taiwan. Hundreds of them, just weeks off the airplane, are bedding down in the company's massive employee community, complete with gym, supermarket, beauty parlors, and a school for 1200 children.

SMIC is not the only foundry with roots in Taiwan that has set up shop here. A report by a U.S. chip industry group, the Semiconductor Industry Association, in San Jose, Calif., estimated that in the second half of 2001 alone, more than 3000 engineers left Taiwan to work in China's semiconductor industry. Far more have evidently arrived since then. In Pudong, where three of SMIC's foundries started operation two years ago, the Minnan dialect of Taiwan can be heard in local bars and restaurants.

You'd think the outflow of expertise from Taiwan to the mainland would make the Taiwanese very, very afraid. After all, they invented the foundry model—the manufacture under contract of chips by one company for another—and their government has spent hugely on incentives to secure so much of the global market.

The idea was for the foundries to grow, even at a loss, in order to attain economies of scale that would deter others from entering the business. And so far, the plan has worked. Taiwan controls nearly two-thirds of the worldwide sales of the US $20 billion foundry business, a business that is nearly a tenth of global chip sales. What's more, the fraction of chips made in foundries is projected to grow steadily for years to come.

Yet whatever their government may think, Taiwan's engineers aren't afraid about ceding that lead to the mainland; they're here in China, in the thousands.

"I seldom if ever talk to a non-Taiwanese person when I visit SMIC," says Michael G. Pecht, a mechanical engineering professor at the University of Maryland, in College Park, who has written extensively about Asian electronics industries. He adds, "I'm not talking to senior management, and I'm not talking to the factory workers—I'm talking to the people who know how to make things work and understand the technology."

In fact, besides being home to Chinese foundries that are at least partially staffed with Taiwanese workers, China also now boasts shimmering new fab facilities built and operated by Taiwan-based companies. Foremost among these is Taiwan Semiconductor Manufacturing Co. (TSMC), in Hsinchu, the contract chip-making giant founded in 1987 [see photos, "A Piece of the Action"].

It's tempting to look at the relationship between TSMC, the largest foundry chip maker in the world, and the smaller SMIC and see in it an ironic reversal of their respective countries' big-brother-little-brother status. Viewed from a global perspective, TSMC's worldwide sales of $7.6 billion last year dwarfed the $1 billion in sales of SMIC. But within China itself, SMIC is the bigger player, selling half the chips made there. So with the foundries, little brother is growing up fast, and big brother is acutely aware of it [see photo, "In the Chips"].

It is just one of the many twists in this complicated, high-stakes, fast-moving game. Even the basic parameters can be hard to fathom: China provides incentives; the engineers come from Taiwan to help staff local start-ups; Taiwanese companies feel compelled to set up subsidiaries in China to compete with the start-ups other Taiwanese are leading; then Taiwan's government passes laws to slow things down, partly because of acute diplomatic sensitivities but mainly out of concern that mainland China is going to eat its lunch.