As tensions mount between the US and China, Taiwan, the tiny island nation, has become the focal point of global attention. While Taiwan’s strategic and military importance in a Sino-US conflict is apparent, what is not so obvious is the crucial role played by this small country in the global economy by being the predominant manufacturer of semiconductor chips. These thin fingernail-sized silicon pieces have majorly transformed the electronic world in the last three decades and are continuing to drive the e-future of the world (Cronin, 2022). It is crucial to operating everything from a smartphone to an advanced military weapons system. In short, without it, there is no new-age technology (Capri, 2020).
Taiwan Semiconductor Manufacturing Company (TSMC) is the largest producer of semiconductors.-it accounts for 55 percent of the overall production in the world. Considering how these semiconductors have become the backbone of the modern economy and the fact that TSMC is the only one at present with the capability to produce the most advanced chips, the tech companies are becoming wary of the rising tensions between the two global powers. With the semiconductors industry assuming high stakes in the current geopolitical issue, the post will briefly examine the effect of the potential Sino-US conflict on the global semiconductor supply chain and the resulting implications on the global economy.
A look at the semiconductors market
Although a few countries- Taiwan, Japan, South Korea, US, and China- have bagged places in the global semiconductor supply chain, the industry’s center of gravity has been chiefly focused around Asia (Feng, 2022). TSMC has captured a significant share in the overall production of cutting-edge logic chips, accounting for 92 percent of the overall production of advanced chips (Cronin, 2022). The US share, on the other hand, has fallen from 37 percent in 1990 to 12 percent in 2020. Despite having a multi-billion dollar semiconductor industry, China imported chips worth more than $400 billion in 2021, larger than its oil imports budget, while its exports were only worth $120 billion (Mishra, 2022). It might be surprising how a small nation surpassed the US, the most technologically advanced nation, and China, the largest market economy, on this front. However, TSMC’s stranglehold in the industry is unassailable in the near future for a variety of reasons.
The excessive costs associated with the manufacturing of the chips are identified as one of the major reasons for many companies dropping out of the More Moore Race (Hattori, 2021). Along with this, the requirement for extensive process knowledge, close collaborations with specialized suppliers, and deep pockets for recurring investments in new equipment explain the consolidation of the global market. This gradually paved the way for a fabless business model wherein companies such as Apple, and Tesla, design their chips but rely on TSMC as their chipmaker (Capri, 2020). The companies decide their designs based on the manufacturing process of the foundry they choose, creating a lock-in (Lee & Kleinhans, 2020). This poses a bottleneck for others to take over TMCS’s market share. The latter has attained a dominant position in the market to the extent that it is almost impossible for its counterparts to compete with its vast capital spending, technological expertise, network of suppliers, and strong support from the Taiwanese government. Even if they come up with new fabs, it will be trailing much behind TSMC (Hille & Sevastpulo, 2022). Despite being the fifth largest foundry in terms of revenue, Semiconductor Manufacturing Int’l Corp (SMIC), strongly backed by the Chinese government, has been struggling to catch up with TSMC. The former is about four generations behind the latter, and it generally takes 2-3 years to move up a generation. So even in the case of a linear progression, it would take SMIC at least a decade to reach where TSMC is right now, but keep in mind the latter is not going to be stagnant in the meantime. The situation is worsened by the US’s crackdown on China via various export controls (Cronin, 2022), which might make it impossible for China to make any advancements in domestic manufacturing in the near future.
The cost of the Sino-US tug of war
The pandemic has already given us glimpses of what would entail if the global semiconductor supply chain were disrupted. It has underscored Taiwan’s strategic economic and technological importance in the chain. It has rattled the global economy to the extent that now the talks are all about chip war.
The current chip shortage is triggered by the confluence of various events-surge in demand for electronics during the pandemic, semiconductor decoupling measures imposed by the US on China (Hur, 2018), and faster than expected recovery of the automobile industry (Cronin, 2022). With the demand surging, suppliers struggled to keep pace with it, thereby affecting various sectors in the process. It exposed the hard fact that the semiconductor industry is extremely susceptible to crisis while also being slow when it comes to adapting to unexpected market changes.
Considering that semiconductors are the drivers of almost all new-age technologies, the US and China have great stakes in Taiwan. In a scenario where Taiwan is taken over by China, as an anticipatory move in response to the pushback against it by the US along with the latter’s increasing support for Taiwan’s democracy, the blow that it would have on the global semiconductor supply chain would not be the likes of the shortage that we have witnessed until now (Cronin, 2022). It would bring us to a situation where the global semiconductor supply chain would come to almost a standstill, immobilizing most of the high-tech industries along with it (McKinney & Harris, 2021). This is because, for one, the TSMC unit would not survive the attack. Manufacturing of the chips is a high-maintenance process requiring great precision and skills that would be sabotaged during a conflict. Alternatively, even if it is captured intact, its capacity would still be compromised-TSMC relies on intellectual property, machinery, and chemicals that are almost entirely supplied by its foreign allies, which would come to a halt post-invasion (Lee & Kleinhans, 2020). Second, TSMC’s technological leadership and massive capacity in fabricating cutting-edge chips cannot be significantly replaced by any other global players in the immediate future (Cronin, 2022).
Way forward
The risk of instability that comes with the monopoly power enjoyed by TSMC in semiconductor production warrants immediate action. As a result, many countries are bolstering their domestic chip manufacturing industries (Feng, 2022). Many are offering tax and financial incentives to lure foreign manufacturers. America’s newly enacted Chips and Science Act, 2022 (Fact sheet: CHIPS and Science Act will lower costs, create jobs, strengthen supply chains, and counter China, 2022) and China’s Made in China 2025 Plan ((Cronin, 2022) are evidence of it. Although attaining basic self-sufficiency might not be possible immediately, it is better to lay down steps for it right away so that we can be better prepared for what the future holds, especially in light of the escalating geopolitical tensions.
References
Capri, A. (2020, January). Semiconductors at the heart of the US-China tech war. http://www.industrialpolicy.us/resources/China%20tech%20war%20and%20semiconductors.pdf
Cronin, R. (2022, August 16). Semiconductors and Taiwan’s “Silicon Shield”. https://www.stimson.org/2022/semiconductors-and-taiwans-silicon-shield/
Feng, J. (2022, May 25). The costs of US-China semiconductor decoupling. https://www.csis.org/blogs/new-perspectives-asia/costs-us-china-semiconductor-decoupling
Hattori, T. (2021, June 2). Past, present and future of Moore’s law, which supports the advancement of the semiconductor industry. https://www.tel.com/museum/magazine/report/202106/
Hille, K., & Sevastopulo, D. (2022, October 24). TSMC:The Taiwanese chipmaker caught up in the tech cold war. Financial Times. https://www.ft.com/content/bae9756a-3bce-4595-b6c9-8082fd735aa0
Hur, N. (2018, November). Historical and Strategic Concern over the US-China Trade War: Will They Be within the WTO?. Journal of East Asia and International Law, 11(2), 393-411.
Lee, J. & Kleinhans, J. (2020, December 15). Would China invade Taiwan for TSMC?. The Diplomat. https://thediplomat.com/2020/12/would-china-invade-taiwan-for-tsmc/
Lee, J. & Kleinhans, J. (2020, December 10).Taiwan, chips and geopolitics: Part 1. The Diplomat. https://thediplomat.com/2020/12/taiwan-chips-and-geopolitics-part-1/
McKinney, J.M., & Harris, P. (2021). Broken Nest: Deterring China from invading Taiwan. Parameters, 51(4), 23-36.
Mishra, V. (2022, November 2). The great US-China tech decoupling. https://www.orfonline.org/expert-speak/the-great-us-china-tech-decoupling/
The White House. (2022, August 9). Fact sheet: CHIPS and Science Act will lower costs, create jobs, strengthen supply chains, and counter China, 2022. https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/