Implications of US-China Tech War for Taiwan’s Semiconductors Industry

Against the backdrop of worsening US-China relations, Taiwan’s semiconductor industry—including Taiwan Semiconductor Manufacturing Corp. (TSMC, 臺灣積體電路製造股份有限公司), which is the world’s largest contract chip manufacturer—has garnered unprecedented attention over the past year. Some have noted how TSMC’s halt of new Huawei orders after US restrictions in 2020 diminished the Chinese national champion’s ability to provide high-end smartphones. Others focused on how TSMC surpassed competitors such as Samsung and Intel to become the world’s most advanced semiconductor manufacturing firm, making it also a key chokepoint in producing cutting-edge devices such as the latest iPhones and PCs, but also US military-use chips critical to American security. With the manufacturing of chips now recognized as a critical “geopolitical imperative,” TSMC’s value in the eyes of both the security community and the market has heightened significantly—raising both its value as well as highlighting the risks of over dependence.

Recent automotive chip shortages have highlighted how important TSMC is to global industrial activity, for about 70 percent of the microcontroller units used in the world’s automobiles are manufactured by the firm. Amidst the need for a strong COVID-19 economic recovery, foreign governments have lobbied the Taiwanese government to prevent automobile factories from halting production due to chip shortages, which in turn played a role in persuading TSMC, UMC, and other Taiwanese semiconductor manufacturers to ramp up production of automobile chips. This has indeed been a rare diplomacy gain for Taiwan, with top officials calling these recent developments “definitely beneficial to Taiwan’s trade agenda.”

These recent events have provided a long-overdue recognition of Taiwan’s industrial might, so often eclipsed by news concerning tensions with neighboring China. The production value of Taiwan’s semiconductor industry stood at USD $115 billion in 2020, ranking second in the world and accounting for 19.7 percent of the global total. Taiwan today is home to not only TSMC, but also other semiconductor industry leaders such as: MediaTek (聯發科技股份有限公司), the world’s largest smartphone chipset vendor, which surpassed US firm Qualcomm to become the world’s biggest smartphone chips supplier in the third quarter of 2020; ASE Group (日月光集團), the world’s largest provider of outsourced semiconductor manufacturing services in assembly and testing; and GlobalWafers (環球晶圓股份有限公司), which will become the world’s second largest supplier of silicon wafers if it successfully acquires German firm Siltronic. Taiwan’s successful ecosystem in this sector stems not only from decades of successful government support and investment, but also its interconnectedness with other parts of Taiwan’s wider tech industry—including PC vendors such as ASUS and Acer, and electronics contract manufacturers such as Foxconn, Pegatron, and Wistron.

American and Chinese Self-Sufficiency Challenges Taiwan’s Business Model

With talks of “selective decoupling” and “self-sufficiency” emerging on both sides of the Pacific, however, the spotlight on Taiwan’s tech industry should be seen as both a blessing and a curse. While some Chinese semiconductor firms have been crippled by US sanctions, and other initiatives have experienced failures due to poor planning, China’s large market is still a fertile breeding ground for TSMC’s competitors, accounting for 36 percent of the global semiconductor market. SMIC today is already the world’s 5^th largest semiconductor contract manufacturer, while Hua Hong ranks at a distant 9^th place. Paired with the inability of many Taiwanese semiconductor firms to deal with Chinese clients as the result of US restrictions, it seems only a matter of time before SMIC and other Chinese competitors capture more domestic market share. Over $20 billion worth of Taiwanese electronics (including semiconductors) were shipped to China in 2020, and more were directly manufactured by Taiwanese firms based in China.

Besides issues of market accessibility, China is also pushing for less technological reliance on the outside world. Pressured by US restrictions on the import of semiconductor parts and equipment, China has created a USD $29 billion national semiconductor fund to invest in related firms and sectors, with government documents explicitly calling for more self-sufficiency in semiconductor production and technologies. Private investments in Chinese semiconductor firms also reached an all-time high in 2020, increasing almost four times as compared with 2019. While these trends alone may not be enough to help Chinese firms break technological bottlenecks, it does provide an unprecedented opportunity to do so. The most important implication, however, is that even if TSMC remains a neutral service provider, the experience of Chinese manufacturers in recent years has eroded their willingness to rely on outside partners for critical technologies. This will be a long-term negative for Taiwan’s tech industry.

The Push for Semiconductor Manufacturing in the United States

On the US side, things are also not as good as they might seem. While the Biden administration has called for “techno-democracies” to cooperate together, and held economic dialogues with Taiwan’s tech industry, the US market for Taiwanese semiconductors and other products also looks a bit tricky in the long-term. US firms are lobbying for “substantial funding for incentives for semiconductor manufacturing” domestically, which will help lagging American competitors such as Intel and Global Foundries. After the National Security Commission on Artificial Intelligence concluded that the US needed to build a “resilient domestic base” for designing and making semiconductors, Eric Schmidt, the former Google chief executive who chairs the commission, added that “we are very close to losing the cutting edge of microelectronics which power our companies and our military because of our reliance on Taiwan.” While US-Taiwan relations remain strong, the US’s keenness to remain a technology leader and some suggestions to completely re-shore its technology base may eventually create frictions with Taiwan and its firms if dialogue and cooperation are not carefully managed.

This wave of US anxiety has played a role in TSMC’s recent investment in a USD $12 billion factory in Arizona. While governments have heralded this as an example of US-Taiwan tech cooperation, it will still require many subsidies and tax breaks to cut down US production prices. Some costs (human resources, water, electricity, and others) are hard to fully calculate at this point. Without the comprehensive Taiwan-based semiconductor ecosystem in place, it will be much harder for TSMC to succeed in the United States. TSMC’s only current US-based fab in Camas, Washington has been said to be “much less efficient” than Taiwan fabs by a former US-based TSMC executive. As TSMC continues to draw American clients with or without a US-based fab, and the economics of manufacturing in America do not seem advantageous enough yet, the only positives for TSMC seem to be preempting competitors from benefiting too much from US incentives, or else providing itself a larger voice in shaping the industry’s future development. This reality has inevitably left some to wonder about the possible non-business factors behind this investment decision, and others to wonder about other potential future negatives from US policies towards TSMC’s business interests.

Taiwan’s Campaign to Be Seen as Partner and Not a Risk

Unfortunately, pressure on TSMC and other Taiwanese semiconductor firms is coming not only from the United States and China, but also many other places. With the EU also pouring USD $145 billion to push for more semiconductor self-sufficiency, it now seems possible that TSMC may feel pressured to build a fab in Europe, too. The EU has already reportedly made plans to build an advanced semiconductor factory—and it may involve TSMC or Samsung in the project.

As countries seek to secure their own tech supply chains, it remains to be seen whether the ongoing tech “decoupling” between China and parts of the West will result in more opportunities for democratic Taiwan, or else prompt some countries to throw resources into boosting their own champions at the expense of Taiwanese firms. Either way, the flexible production practices that Taiwanese tech firms have relied upon to profit in a globalized world have now bumped into a much less flexible world. While this may not hurt leading firms such as TSMC, other Taiwanese tech firms operating in less favorable positions and profit margins might face a negative impact.

All in all, a top priority for the Taiwanese government right now is looking for strategies that would persuade foreign governments that Taiwan’s tech dominance makes it more a partner than a risk; and to leverage this international interest to support Taiwan’s industrial strategy. Taiwan is planning to increase its semiconductor production to USD $169.5 billion by 2030, and to also localize more semiconductor material supplies and equipment production—factors that happen to be the weaker parts of Taiwan’s current chip manufacturing ecosystem. The success of these campaigns to assure partners and boost its own capabilities will heavily influence the future of Taiwan’s technological might—a key asset for ensuring its continued viability in an increasingly unstable world.

The main point: Taiwan’s semiconductor industry may face long-term downsides from Chinese and American semiconductor self-sufficiency policies. The Taiwanese government needs to persuade foreign governments that Taiwan’s tech dominance makes it more a partner than a risk.

(Feature photo by Briáxis F. Mendes (孟必思), CC BY-SA 4.0)