Taiwan’s dominance of the chip industry makes it more important

The semiconductor industry has been called Taiwan’s “Silicon Shield”, giving the world a great reason to protect the island. Yet chips are the industry most affected by the split between the US and China. Shield parts are now going overseas. In December TSMC held a ceremony to mark the opening of a chip plant (or “fab”) in Arizona. Joe Biden was there, as was Tim Cook from Apple and Morris Chang, the founder of TSMC. Mr Chang said TSMC would triple its investment in Arizona to $40bn, open a second fab in 2026 and make three-nanometer chips, now the most advanced in the US. Mr. Biden declared that “American manufacturing is back, folks.” Mr Chang called globalization and free trade “almost dead”.

The chip industry was built on globalization, with every part of the supply chain supporting it. Based on efficiency and highly skilled, long-hour labor, TSMC’s fabs can make chips faster and more accurately than any competitor. Experts agree that replicating this supply chain elsewhere would be inefficient. Mr. Chang told reporters in November that the cost of making the chips in the US would be 55% higher. He reportedly told Nancy Pelosi that US efforts to bring trade home were “doomed to fail”. Yet local supply chains are changing, boosted by Covid-19 and the war in Ukraine. Governments want to build critical technology in safer places, closer to home and the US and China are competing to control the most sophisticated chips that could prove key to the next generation of advanced weapons.

Taiwan is pulled between the two. China has invested $50 billion in chip manufacturing, hoping to meet 70% of domestic demand for chips by 2025. It has also taken possession of Taiwanese chip engineers, executives and trade secrets. That brain drain has alerted Taiwan’s government, which has raided Chinese chip makers and passed new laws against economic espionage. The US is also trying to prevent China from getting advanced chips. It passed the CHIPS and SCIENCE Act in August 2022, offering $39 billion in subsidies and 25% tax credits to boost manufacturing at home, as well as $13 billion in chip research . In October 2022, it banned the export of advanced chips and chipmaking gear to China.

America’s success in bringing TSMC to Arizona set off alarm bells in Taiwan. The KMT accused the government of “gifting” TSMC to the US. KMT legislator Tseng Ming-chung said, “TSMC will definitely become USMC in the future.” Officials say that such apprehension is high. TSMC aims to produce 600,000 wafers a year at its American fabs. But its manufacturing capacity is more than 13m wafers a year. It’s also building a new fab in Japan and considering one in Europe. “It is not that Taiwan’s cake is being cut in half. The cake is getting bigger, and we are giving some extra slices to the US and Japan,” says Emil Chang from the Ministry of Economy.

Economic Affairs Minister Wang Mei-hua says TSMC’s new fab doesn’t mean the loss of Taiwan’s advantage. The most advanced nodes will still be built in Taiwan, and research will continue. Taiwan passed its own CHiPS Act in January, offering tax subsidies worth 25% of research costs. Foreign chip makers are investing in Taiwan. ASML, a Dutch company that makes advanced lithography machines for cutting-edge chips, is opening its sixth factory in Taipei in 2023. Micron and Applied Materials, two US semiconductor firms, are expanding in Taiwan.

None of this changes the fact that making a “friend-shoring” semiconductor will involve inefficiencies. But this is the reality of a world reshaping itself around geopolitical risk.

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