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Taiwan’s strategic semiconductor sector
Strategic Vision vol. 10, no. 51 (December, 2021) Sweetening the Pot
Taiwan leverages its semiconductor chip sector to boost relations with US, Japan
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Tobias Burgers
Semiconductor chips are currently among the hottest commodities in demand, save only for COVID-19 vaccines. It quickly becomes apparent why these tiny chips—their sizes measured in nanometers—are essential for producing a wide range of products: from phone screens and computers, cars, civil and military aircraft, hypersonic missiles, to next-generation autonomous cars. Chips are the digital heart of these devices, enabling them to function as needed.
Their importance and scarcity have fueled a global race to research, develop and produce current and next-generation chips. This race, an economic incentive as well as a geopolitical one, is nowhere more visible than in the Asian-Pacific region: Through its Made in China 2025 initiative, the People’s Republic of China (PRC) seeks to become the global leader in developing and producing chips. The Chinese government has made billions of dollars available to fund this development, and something of the wild, at times ineffective, race has pushed the Chinese tech sector to develop next-generation chips. The importance of chips for the PRC is illustrated in the recent decision by Chinese president Xi Jinping to appoint his top economic advisor Liu He as the lead person to develop an effective governance platform to stimulate
photo: ROC Ministry of Foreign Affairs
Compared to chipakers in Taiwan, the American and Japanese semiconductor industries are a shadow of their former selves.
Dr. Tobias Burgers is an assistant professor at the Cyber Civilization Research Center at Keio University in Japan. He can be reached at tobias.burgers@pm.me
photo: ROC Ministry of Foreign Affairs
Morris Chang, left, the founder of Taiwan Semiconductor Manufacturing Company, poses with ROC President Tsai Ing-wen, center.
development of third-generation chips.
Not to be outdone, and fearing the Chinese efforts to advance its semiconductor chip industry and capabilities, the United States is currently seeking to maintain or regain a leading position in this race by investing significant sums of money in the R&D and production facilities that produce next-generation semiconductor chips. Through initiatives such as the CHIPs act and a separate funding bill of over US$50 billion, the US aims to revive its semiconductors chips research and production capabilities.
Government subsidies
Likewise, in Japan, the government is making available funding for the R&D of next-generation chips. It made available close to US$400 million to foster the development of next-generation chips in cooperation with industrial giants such as Canon. However, in both cases, it remains unclear whether these efforts are even close to sufficient to revive either nation’s once-leading chip industry. Tetsuro Higashi, chairman of the government expert commission on technology, estimates that Japan needs about US$9 billion to make its industry competitive again. The funding made available by the government is, in that regard, a drop in the bucket. While funding efforts are much more significant in the United States, it also remains to be seen how practical these effects will be in America. One of the major hurdles the United States faces in this effort is that its domestic chip industry has gradually declined. Where it once was a global leader, with companies such as IBM producing state-of-the-art chips, these days, the American semiconductor industry is a shadow of its former self. Years of underinvestment, outsourcing, and a shifting economic focus towards the production of other technological products, have left its industry trailing. While efforts by the Trump and Biden administrations indicate a strong support for reviving this industry, it remains to be seen if this can be achieved. Rebuilding the underfunded and under-researched semiconductor chip industry is not simply a matter of making large sums available: It requires research and development, training a workforce, academic research, and constructing facilities that produce
chips. Building semiconductor fabrication plants, also known as fabs or foundries, are multiyear efforts that could easily take half a decade, with construction costs going into the billions of dollars.
What complicates these efforts further is the desire by respective governments (including the American, Japanese, and Chinese governments, and even the European Union) to develop a domestic production process. With governmental actors viewing the semiconductor industry through geopolitical and economic security lenses, they aim to increase national control over the production process. However, the current, highly optimized supply chain of the chip production process is a multi-continent, multinational process, that involves an extensive range of producers, and is tightly interwoven and streamlined. In addition, along several points in this supply chain process, there are highly specialized actors that each have decades of experience in the production or services in a certain part of the production process. For example, while Taiwanese foundries excel at the production of chips, they are reliant on Japan’s semiconductor industry which holds a near bottleneck position further downstream in the processing of chips made in Taiwan. At the same time, several Dutch companies build the state-of-the-art machines that Taiwanese foundries use to produce these chips. These examples illustrate how interwoven the supply chain is, but equally how certain actors have highly specialized capabilities that are difficult to reproduce.
Clashing considerations
Forcing geopolitical considerations (such as the decoupling of industries, as is currently being done and will likely increase, given the ever-intensifying geopolitical Sino-American competition) is likely to significantly interrupt and possibly even disrupt the semiconductor industry. In this, the future of the semiconductor industry is one where economic incentives and political considerations are likely to clash. In light of this, it will be interesting to see if the chip competition will be something of a forebearer of the attempts by China, and also the United States, to
photo: Michael B Zingaro
seek to decouple their economies. Given how interwoven the chip supply chain is (and the global economy for that matter), it remains to be seen whether this geopolitical drive to decouple and increase selfsufficiency will have any success. Observing how the supply chain of the chip industry functions, and how it has developed over the course of the last three decades, it is unlikely that decoupling efforts could achieve their desired outcome. Rather, it is more likely that geopolitical pressures by nations such as the United States and China (as well as other actors such as Dutch, South Korean and Taiwanese companies) will force them to walk a tightrope between their economic interests and geopolitical pressure, which often clash.
Amid all this stands Taiwan and its world-class semiconductor industry. Globally known for its chipmaking, and home to industry giants such as Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) and United Microelectronics Corp. (UMC), Taiwan holds more than 60 percent of the current market share. Furthermore, and equally important, Taiwan’s companies have the most advanced R&D, knowledge, and production capabilities. Given this expertise, there is now noticeable pressure on Taiwan’s industry actors to collaborate further with the American and Japanese efforts to revive their industries. Nevertheless, it raises the question of how Taiwan and its industry should react to these outreach efforts by the American and Japanese governments and industries.
Geopolitically, the government of Taiwan could utilize its semiconductor industry as a geopolitical tool to further advance its interests with the United States and Japan. Given the recent increasing tensions with China and its ever-increasing aggressive behavior towards the island, it seems logical that Taiwan would seek to align itself closer to these nations and gain more support. In this, the chipmakers could be utilized as a tool for Taiwan to use to its advantage in its geopolitical situation: Its semiconductor expertise could then be used as a trading tool for further political and military support.
While the United States and Japan seem willing to increase their support for Taiwan, we can expect both nations to seek benefits in return. Given Taiwan’s position and the enduring military threat from China, both nations will pressure Taiwan to harden its chip
production supply chain. This translates into ensuring that the production of chips will not remain primarily on the island itself, and hence subject to direct Chinese military threats. This raises the possibility of Taiwan firms outsourcing production facilities and supply chains outside of Taiwan. Plans for the construction of a fab foundry by TSMC in Arizona, and also a TSMC-Sony joint fab venture outside Tokyo, should be considered through this lens. While there is a clear economic incentive for TSMC fabs in Arizona and Tokyo, there is certainly a geopolitical element to these decisions as well.
Nevertheless, these efforts to establish non-Taiwan located fabs could come at an economic and geopolitical price for Taiwan. First, establishing offshore production lines—even if not of the same quality as in Taiwan—runs the risk that Taiwan’s industry will lose something of its forefront position. While it would not necessarily reduce its leading position in the short term, in the long term, it could provide the basis for the US and Japan to build and extend their respective semiconductor businesses at the cost of Taiwan’s industry, and as such, it could decrease the geopolitical power of its chip industry and potentially impact the leverage it holds. While much of the global focus on Taiwan’s semiconductor industry is on TSMC and UMC, and its leading position
photo: Peellden
The headquarters of Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest independent semiconductor foundry.
and ability to make the thinnest—and as such, the most advanced—chips, there are numerous smaller producers in Taiwan with less-advanced capabilities that still make up a significant proportion of Taiwan’s semiconductor output. Outsourcing less-advanced capabilities to the United States and Japan would put these companies at economic risk of losing the competition, and as such, profits and foremost employment opportunities for Taiwan’s people. Second, despite China seeking to build its semiconductor industry, it is still heavily reliant on Taiwanese companies to meet its demand for chips. As such, with China consisting of a significant market (and according to recent data, a growing one), Taiwan needs to find a balance between the geopolitical potential it can gain from its industry and the economic considerations. With China representing such a large market, it is not unlikely that Taiwan’s chip companies would go to considerable lengths to keep access to this market. Given recent Chinese behavior towards Taiwan, we can expect that Beijing will react strongly against Taipei seeking closer geopolitical cooperation with Washington and Tokyo. As a result, China could seek to increase the pressure on Taiwan. Given its dependency on chips, such pressure tactics would not necessarily be in the chip domain but are likely to be found in other domains—from other economic sectors, and in the form of military and diplomatic pressure.
The sum of this illustrates the difficulties for the Taiwanese government and its chip industry in the ongoing tech competition between China and the United States. While the competition could bring geopolitical benefits in the short and possibly long term, it equally creates risks and uncertainties for Taiwan and its chip sector in the geopolitical domain, especially when it comes to the nation’s economic security. Navigating this competition and ensuring that the interests of Taiwan and its industry are maintained and represented will be one of the core tasks of its government in the next few years. Bad policies could lead to navigational errors and could create a situation in which Taiwan and its chip industry could gradually lose importance over the long term, diminishing its economic security and geopolitical value. n
