The world depends dangerously on Taiwan for semiconductors

As China pressures the world to avoid official negotiations with Taiwan, leaders around the world are realizing how dependent they have become on island democracy.

Taiwan, which China considers a province, is being courted for its ability to produce cutting-edge computer chips. This is mainly due to Taiwan Semiconductor Manufacturing Co., the world’s largest foundry and chip maker for Apple Inc. smartphones, artificial intelligence and high-performance computing.

Taiwan’s role in the world economy existed largely below the radar, until it reached a recent highlight, as the auto industry suffered cuts in the chips used for everything from parking sensors to reducing emissions. With automakers such as Germany’s Volkswagen AG, Ford Motor Co. of the United States and Japan’s Toyota Motor Corp. forced to halt production and leave factories inactive, Taiwan’s importance suddenly became too great to ignore.

American, European and Japanese automakers are lobbying their governments for help, with Taiwan and TSMC being asked to intervene. Chancellor Angela Merkel and President Emmanuel Macron discussed the potential for shortages last year and agreed on the need to accelerate Europe’s effort to develop its own. chip industry, according to a French official with knowledge of the subject.

The auto industry’s appeals illustrate how TSMC’s chip-making skills have given Taiwan political and economic advantage in a world where technology is being involved in the great power rivalry between the U.S. and China – an impasse that will hardly be eased under the Joe Biden administration.

Taiwan’s control over the semiconductor business – despite being under constant threat of invasion by Beijing – also represents a bottleneck in the global supply chain that is giving new urgency to Tokyo’s plans for Washington and Beijing to increase self-sufficiency.

By mastering the chip manufacturing outsourcing model developed in the U.S., Taiwan “is potentially the single most critical point of failure in the entire semiconductor value chain,” said Jan-Peter Kleinhans, think technology and geopolitics project director tank based in Berlin Stiftung Neue Verantwortung.

The Trump administration exploited this critical point to deny Beijing access to technology. By banning access to all U.S. chip technology, including design, it was able to cut the supply of semiconductors from TSMC and other foundries to Huawei Technologies, preventing the advance of China’s largest technology company.

It also negotiated with TSMC the establishment of a $ 12 billion chip factory in Arizona. South Korea’s Samsung Electronics Co. is set to follow suit, with a $ 10 billion facility in Austin, Texas.

The “CHIPS for America Act” presented to Congress last year aims to encourage more factories to be established in the USA. Michael McCaul, a Texas Republican, plans to reintroduce the bipartisan bill this year with the goal of securing $ 25 billion in federal funds and tax incentives. McCaul said in a statement that he is working with colleagues in the House and the Senate “to prioritize that the remaining provisions of the CHIPS be converted into law as soon as possible.”

The news that Intel Corp., a former industry leader, was considering outsourcing the production of some chips to TSMC under its former CEO emphasized the need for a U.S. player that can manufacture at the forefront, said a team member. Foreign Affairs Committee who is not authorized to speak publicly.

The European Union intends to reinforce the bloc’s “technological sovereignty” through an armed alliance initially with up to 30 billion euros ($ 36 billion) of public-private investment to increase Europe’s share of the global chip market to 20% (without a target date) of less than 10% now.

It is also encouraging Taiwan to increase investments in the 27-country bloc, with some success. GlobalWafers Co. – headquartered in TSMC’s hometown, Hsinchu – has just increased its offer by Germany’s Siltronic AG to value the company at 4.4 billion euros, an acquisition that would create the world’s largest silicon wafer manufacturer in recipe.

This is not to say that Taiwan is the sole participant in the semiconductor supply chain. The United States still holds dominant positions, mainly in chip design and electronic software tools; Holland’s ASML Holding NV has a monopoly on the machines needed to make the best chips; Japan is a major supplier of equipment, chemicals and wafers.

But as the emphasis shifts to smaller and more powerful chips that require less power, TSMC is increasingly in a field of its own. And it has helped Taiwan to form a comprehensive ecosystem around it: ASE Technology Holding is the world’s largest chipmaker, while MediaTek has become the largest supplier of smartphone chipsets.

Tokyo is also trying to attract TSMC to settle in Japan. With 110 billion yen ($ 1 billion) set aside last year for investments in R&D and another 90 billion yen for 2021, part of that could go to a TSMC facility , which reports said the company is considering installing in Japan.

“TSMC is becoming more and more dominant,” said Kazumi Nishikawa, an employee working on technology issues at Japan’s Ministry of Economy. “This is something that everyone in the chip industry must find a way to deal with.”

China, in its five-year plan presented in October, is channeling aid to the chip industry and other important technologies in the order of $ 1.4 trillion by 2025. However, even this type of money does not negate the need to Taiwan. In fact, China has long used the island to gain talent in chip making; two key executives from China’s largest chipmaker, Semiconductor Manufacturing International Corp., used to work at TSMC: co-chief executive Liang Mong Song and vice chairman Chiang Shang-yi.

But with Washington impeding China’s progress, there is also speculation that Beijing could resort to the theft of the chip’s intellectual property, with Taiwan at the center of these initiatives.

Taiwanese cyber security firm TeamT5 has seen a steady increase in attacks on the island’s chip industry, corresponding to the tightening of US export controls in China. While it is not always possible to know whether these are Chinese state actors, “they are all attacking Taiwan’s semiconductor industry,” said Shui Lee, a cyber threat analyst at T5.

Fellow analyst Linda Kuo said the Taiwanese government was alarmed by a ransomware attack on TSMC in 2018 and announced plans for around $ 500 million to help the industry become more aware of cybersecurity issues.

The biggest concern is that TSMC’s chip factories could become collateral damage if China fulfills threats of Taiwan’s invasion if it moves towards independence.

TSMC’s capital expenditures of up to $ 28 billion this year suggest that it will remain ahead.

“Taiwan is the center of gravity of Chinese security policy,” said Mathieu Duchatel, director of the Asia program at the Institut Montaigne in Paris. Still, while Taiwan’s status in the global chip supply chain is an “enormous strategic value,” it is also a powerful reason for Beijing to stay away, said Duchatel, who has just published a policy paper on China’s semiconductor quest .

Assuming that Taiwanese forces would be oppressed during an invasion, “there is no reason for them to leave these facilities intact,” he said. And preserving the most advanced factories in the world “is in everyone’s interest”.

Despite all the moves to revive domestic chip manufacturing, it is optimistic to think that the supply chain for a product as complex as semiconductors could change in a short time, ASML CEO Peter Wennink told Bloomberg TV. “If you want to reallocate semiconductor construction capacity, production capacity, you have to think about years,” he said.

Meanwhile, geopolitics means that chip shortages could become a more regular occurrence, according to Joerg Wuttke, president of the EU Chamber of Commerce in China.

“This is going to get to the point where, actually, because of export controls, because of government intervention, there will suddenly be disruptions in the supply chain, not just because of capacity problems,” he told Bloomberg Television. “So it is better to prepare.”

– With the help of Natalia Drozdiak, Debby Wu, Ellen Proper, Birgit Jennen, Francine Lacqua, Matthew Miller and Gem Atkinson