Taiwan and geopolitics of microchips
If semiconductors are the “new oil,” then Taiwan’s dominance in making tiny chips packs a huge punch
Last week, Ford Motor Co. became the latest in a bevy of carmakers to announce production halts due to a global shortage of microchips. The Chinese military tested a sophisticated new armed reconnaissance drone and conducted a massive exercise in the South China Sea simulating an amphibious assault on Taiwan. President Xi Jinping ordered the People’s Liberation Army to “substantially increase” the use of new technologies in such exercises.
The U.S., meanwhile, expanded its ban on doing business with Chinese companies linked to the People’s Liberation Army and dealt yet another blow to Chinese telecom giant Huawei. It also released new rules on securing information and communications technology supply chains. Intel Corp., the embattled inventor of the microprocessor, fired its CEO.
What these disparate events have in common is that each, in its own way, underscores the singular geopolitical importance of a single company, Taiwan Semiconductor Manufacturing Co. The company, which itself made news by announcing plans to boost spending by as much as $28 billion this year to expand capacity, has developed a stranglehold on production of the world’s most advanced chips.
This makes TSMC indispensable to just about any global power aiming to, say, develop an elite arsenal of autonomous weapons systems, gobble up 5G market share or compete in just about any other emerging technologies space imaginable.
TSMC’s operations also happen to be heavily concentrated less than 100 miles from China, a country intent on one day retaking control of Taiwan – and one whose vital supply of semiconductors is under assault by the U.S.
As the U.S.-China rivalry heats up, can the company give Taiwan some much-needed room to maneuver?
Flipping the Industry
Chip manufacturing is wildly complicated and just as expensive. For a long time, this allowed a handful of vertically integrated giants like Intel and Texas Instruments, which designed, manufactured and sold their own chips, to shield themselves from competition.
If anyone else wanted to try their hand at designing chips, they could, but they’d be stuck contracting out to a moreentrenched competitor to get them made. The amount of investment and expertise required to build and operate an advanced chip fabrication facility was simply too high for most would-be startups to strike out on their own.
But with substantial backing from the Taiwanese government, TSMC was able to flip the industry on its head. Beginning in 1987, the company pioneered what’s known as the “pure-play foundry” model that focuses solely on manufacturing other companies’ designs. This gave rise to all sorts of “fabless” heavyweights such as Nvidia and Broadcom, and more recently allowed companies like Apple, Tesla and Alibaba to enter the chip design space.
Even some established integrated device manufacturers like Intel rivals AMD and Qualcomm eventually sold off their own foundries, finding it more profitable to contract production out to TSMC and its only comparable competitor, South Korea’s Samsung.
Intel, which has fallen far behind TSMC and Samsung in the endless race to develop smaller, denser chips, is under some pressure from investors to at least partially follow suit.
This sparked a boom in innovation and specialisation as fabless chip designers could channel all their resources into pushing the boundaries in niches ignored by the likes of Intel, which focused mostly on general purpose processors.
But it also replaced one chokepoint – the dominance by a small number of vertically integrated giants – with another. This is because building cutting edge factories has become only more expensive; a next-generation chip fab is estimated to cost more than $20 billion.
It’s also become increasingly
technologically sophisticated, requiring expensive, highly specialised materials and tools that themselves are made by a very small number of companies.
As a result, TSMC controls more than 50% of the global semiconductor foundry market and makes the vast majority of the world’s most advanced chips. Its only competitor with comparable technological capabilities in the contract chipmaking space is Samsung.
But since the sprawling South Korean conglomerate, which has its own chip design arm and makes everything from smartphones to laptops to 5G infrastructure, is a direct competitor to so many companies in the market for a contract fab, most opt for TSMC.
TSMC In the Crossfire
Taiwan has reaped enormous benefits from TSMC’s success. In 2019, the company said it accounted directly for nearly 4.5% of the Taiwanese economy. The benefits of proximity to TSMC also gave upstart domestic firms in other tech sectors an edge, while attracting untold amounts of investment from foreign tech giants, turning the self-ruled island into an indispensable part of the regional high-tech ecosystem on which so much of the world – makers of everything from Fords to phones to F-35s – relies.
But it has also complicated Taiwan’s role in the geopolitical competition between the U.S. and China. Nextgeneration chips are essential to nearly all of China’s core economic, diplomatic and military objectives. In 2018, Xi identified semiconductors as a strategically preeminent core technology.
Beijing needs to move up the manufacturing value chain. It needs to become a major player in space and in global telecoms networks. And it needs to develop sophisticated anti-ship missiles capable of making it cost-prohibitive for the U.S. Navy to operate with impunity off Chinese shores. Its solutions for most of these challenges place a heavy emphasis on technological breakthroughs, which places a heavy emphasis on ensuring a stable supply of cutting-edge chips.
China has made enormous strides in several emerging technologies, including chip design. But it’s still overwhelmingly dependent on U.S. firms for the semiconductors that go into leading chips. It’s similarly reliant on TSMC for the fabrication of the chips themselves. Beijing is trying desperately to replicate the Taiwanese and South Korean industrial development models by shovelling money into homegrown chip manufacturers. But even its best are still considered multiple generations behind in chip design and, especially, chip manufacturing.
Naturally, the U.S. has zeroed in on these vulnerabilities over the past couple of years. It began trying to choke off China’s supplies of U.S.-designed semiconductors and software in 2018.
Last year, it started requiring foreign fabs – that is, TSMC – to obtain a license before selling anything using U.S. intellectual property in the manufacturing process to companies like Huawei. TSMC announced in May that it would comply with the order, at least for the time being.
Like most of its neighbours, Taiwan doesn’t want to have to choose between the U.S. and China. Despite its existential fears of a Chinese attack, commercial ties with the mainland, Taiwan’s top trade partner, have done wonders for the Taiwanese economy.
And in any case, Taipei sees mutual dependence as at least something of a deterrent against Chinese aggression. Just as how U.S. firms like Qualcomm and Intel have lobbied against the U.S. offensive against the Chinese tech sector, estimating staggering losses of revenue and fearing that cutting China off will ultimately accelerate the rise of Chinese competitors, TSMC is similarly vulnerable. Last year, China used more than 60% of the world’s microchips. The loss of Huawei alone as a customer would cut TSMC’s annual revenues by more than 14%.
More than a fifth of the company’s revenues last year came from Apple.
Yet, China and (to a lesser extent) the U.S. are demanding that Taiwan pick a side. Just how much leverage TSMC gives Taipei in this situation is a tricky question. On the one hand, the company’s indispensability may prove just as fleeting as that of the vertically integrated giants that monopolised chipmaking before it.
The U.S., where semiconductor production has fallen to just 12% of global capacity, has come to understand the problems that come with being dependent on foreign supplies of something as vital as advanced microchips; a concerted effort to reshore advanced foundries will only become more urgent.
China’s import substitution efforts, ineffectual though they may be now, may well improve in time if they can find a way to procure or produce cutting-edge extreme ultraviolet lithography machines.
Counterintuitively, some argue that Chinese dependence on Taiwanese chips puts Taiwan at even greater risk of Chinese attack. If microchips are the new oil, and if China is at risk of getting cut off, it could be driven to do whatever is necessary to get its chip fix, or so the thinking goes. Japan certainly did leading up to World War II.
In truth, it’s hard to see this being a decisive factor if and when China tries to retake Taiwan. For one thing, while China’s ambitions will be blunted by the de facto U.S. chip blockade, it’s not about to push the Chinese economy – and the Chinese Communist Party’s hold on power – to the brink of collapse, as was the case with Japan in the early 20th century.
For another thing, there’s the simple matter that physically taking control of Taiwan’s fabs (if they even survived the war unscathed) probably wouldn’t give China the same chipmaking capabilities. Too much expertise, experience and access to irreplaceable foreign equipment would be lost. If China ever tries to retake Taiwan by force, it will be the result of a combination of factors, foremost among them the belief in Beijing that it would be successful. Beijing does not believe this today.
Taipei may have only marginal influence over the longterm trajectory of U.S.-China rivalry, but TSMC’s dominance will likely last at least another couple of decades. And Taipei hopes that this will incentivise both sides to see the value of sustaining the status quo regarding the self-ruled island sitting in the crossfire.
It’s betting on the power of the path of least resistance in both capitals, in other words.
To ease U.S. fears about its own dependence on foreignfabbed chips, TSMC announced it would build a modest $12 billion fab in Arizona presumably to serve the needs of Apple and the U.S. military. Its goal here is to persuade Washington to allow a resumption of sales of at least lower-quality chips to the mainland at some point in the interest of sustaining Taipei’s leverage over Beijing.
If Taipei and Washington can get on the same page – and if continued U.S. dependence on TSMC makes the U.S. see Taiwan as all the more important to defend – then the company might just allow Taiwan to have the best of both worlds.