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‘Eye of the storm’: Taiwan is caught in a big game over microchips

TAIPEI, Taiwan — As Chinese warships rehearsed a blockade of Taiwan this month, they simulated a scenario that world leaders and policymakers have been concerned about: not a war, but a total disruption of supply chains. electronics that make the modern world work.

Taiwan’s biggest trading partners, including China, the United States, Europe and Japan, have different ideas about the self-governing island’s political future, but all share a common desire: to expand their share of its cutting-edge semiconductor industry.

Beginning with House Speaker Nancy Pelosi’s visit in early August, a succession of US delegations have kissed the ring of Taiwan’s top chip executives. There is much to gain. In recent years, Taiwan’s largest chipmaker, Taiwan Semiconductor Manufacturing Company, or TSMC, has pledged to open new factories in the United States and Japan. Taiwanese chip design company MediaTek recently partnered with Purdue University to open a chip design center.

The calculation starts from a basic and disturbing reality of the global economy. Taiwan is the largest producer of the most advanced chips in the world. It is also fast becoming one of the most dangerous geopolitical hotspots in the world. The fear is that, in the event of a conflict, companies won’t get the microchips they need to make phones and drones, set up supercomputers and cellular networks, and even build new weapons.

Tech companies on both sides of the Pacific now rely heavily on TSMC to create the high-performance chips that render graphics in video games and bring intelligence to smartphones, but also guide missiles and analyze oceans of military data. That has made TSMC, whose name is unknown to most consumers, a vital strategic asset for both Washington and Beijing.

During the geopolitical drama of the past month, the power of TSMC and the rest of the island’s chip supply chain has been clear. On Ms. Pelosi’s trip to Taiwan, she met TSMC CEO Mark Liu and its famous founder, 91-year-old Morris Chang. A separate delegation led by Sen. Edward J. Markey, D-Massachusetts, met with the company to discuss investments and improving semiconductor supply chains.

Taiwanese President Tsai Ing-wen told a group that she saw the island’s technological prowess as a means of shoring up support for its democracy. Calling economic security a “pillar” of national security, she said Taiwan was willing to work with partners to build sustainable supply chains for what she called “democracy chips.”

Chinese state media criticized the efforts, calling Ms. Pelosi’s meeting a “photo op”. Still, in an indicator of how important Taiwanese chips are, she did little to strike back at the company.

For all her cheering from the US delegations, Ms Tsai and the semiconductor industry she seeks to protect face a precarious balancing act. Many Taiwanese companies, including TSMC, depend on China for their livelihoods, even if they support Ms. Tsai to confront Beijing’s pugilistic behavior.

Although many in the semiconductor industry would look to the United States for support in the event of a conflict with China, they balk at the impracticality of building new factories in the United States, which is more expensive and lacks supporting industries. Mr. Chang, the founder of TSMC, has repeatedly and publicly pointed this out.

TSMC has maneuvered in the narrow space between American and Chinese interests. It is building new production facilities in Japan and Arizona, even as it expanded capacity at its factory in the eastern Chinese city of Nanjing. But critically, the vast majority of its most advanced production occurs in Taiwan, where TSMC continues to build its state-of-the-art production facilities, called factories.

Seen in one way, this network of dependencies helps keep the peace. China’s dependence on TSMC and other Taiwanese chip companies deters the Communist Party from invading the island. America’s reliance on the same knowledge lends additional credibility to its military support for Taiwan.

In the event of a military conflagration, Taiwan’s importance to global chip supply also means that the damage to all sides, and to the world’s digital infrastructure in general, is greatly amplified. It is not for nothing that people in Taiwan call TSMC their “holy mountain, protector of the nation”.

China’s new bellicosity, which came to a head earlier this month with a week of missile tests and fighter raids, has steadily turned the island’s sympathies away from China.

“Right now, they’re moving a lot toward the US,” Dieter Ernst, a senior fellow at the Center for International Governance Innovation who studies the semiconductor industry, said of Taiwan’s leaders. “But from the perspective of the Taiwanese economy and most Taiwanese companies, they need to maintain a link, and hopefully as close a link as possible, with China.”

Some of the top semiconductor leaders have spoken out against China after the military exercises. Robert Tsao, the founder of Taiwan’s second-largest chipmaker, United Microelectronics, said he would donate $100 million to the Taiwanese military after the exercises. Long seen as a friend of China, Tsao said in an interview that things had changed.

“They will not bring progress, only destruction,” he said of the Chinese Communist Party. He also spoke out against the trend in recent years for Taiwanese semiconductor engineers to work for Chinese companies for high salaries, saying they were “serving the Chinese Communist Party.”

However, few in Taiwan’s microchip industry believe that Taiwan can move away from China. Most of the electronics supply chain continues to pass through China. For years, the value of Chinese semiconductor imports has exceeded that of oil. In 2021, it bought more than $430 billion worth of semiconductors, 36 percent of which came from Taiwan, according to Chinese state media. Much of it goes into devices made for foreign companies that are then exported to the world.

Despite China’s efforts to make more chips domestically, which have met with some success but have also recently been hit by a wave of executive arrests for corruption, Taiwan’s chipmakers have taken pains not to become China’s “enemy,” said Ray Yang, director of consulting. at the Taiwan government-funded Industrial Technology Research Institute.

“No one would look at TSMC and say ‘you are my enemy.’ I think for the Taiwan industry, in fact, everyone knows that we are their friends, even China,” he said.

However, TSMC and Taiwan have increasingly aligned themselves with US policy. The company’s cooperation was indispensable to the Trump administration’s efforts to stymie Huawei, the Chinese tech giant. TSMC was a major supplier to Huawei until new US rules put an end to that.

TSMC will also receive US chip subsidies tied to pledges not to expand further into China under the recently passed CHIPS and Science Act of 2022. Taiwanese officials have been receptive to a proposed new US Chip 4 alliance, which seeks to unite US chip supply chains with those of Taiwan, South Korea and Japan, excluding China.

Analysts debate how much protection China’s dependence on Taiwan gives it. Some argue that supply chain calculations are insignificant in a decision on war, which could bring untold devastation and reshape geopolitics.

“You have to worry that those interdependencies seem very significant, in peacetime, to the people who are embedded in those relationships,” said Richard J. Danzig, who served as Secretary of the Navy under President Bill Clinton. “But when the momentum of war starts to build, it tends to swamp those things.”

Yet few deny that Taiwan’s centrality in the supply chain makes such considerations a factor, a concept generally known as the “silicone shield.” An invasion of Taiwan would mean a form of mutually assured destruction, not necessarily of the world, but of the many modern devices we use every day.

That confers a dose of security, said Jason Hsu, a former Taiwan lawmaker and current fellow at the technology-focused Harvard Kennedy School.

“TSMC is in the eye of the storm,” he said. “Sometimes what appears to be the most dangerous place can be the safest.”

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