World is overly reliant on Taiwan

Technology | BLOOMBERG 1 Mar 2021

Alan Crawford, Jarrell Dillard, Helene Fouquet and Isabel Reynolds

As china pushes the world to avoid official dealings with Taiwan, leaders across the globe are realizing just how dependent they've become on the island.

Taiwan is being courted for its capacity to make leading-edge computer chips.

That's mostly down to Taiwan Semiconductor Manufacturing, the world's largest foundry and go-to producer of chips for Apple smartphones, artificial intelligence and high-performance computing.

Its role in the world economy largely existed below the radar, until it came to recent prominence as the auto industry suffered shortfalls in chips used for everything from parking sensors to reducing emissions. With carmakers forced to halt production and idle plants, Taiwan's importance has suddenly become too big to ignore.

US, European and Japanese automakers are lobbying their governments for help, with Taiwan and TSMC being asked to step in.

Their pleas illustrate how TSMC's chip-making skills have handed Taiwan political and economic leverage in a world where technology is being enlisted in the great power rivalry between the United States and China - a standoff unlikely to ease under the administration of Joe Biden.

Taiwan's grip on the semiconductor business - despite being under constant threat of invasion by Beijing - also represents a choke point in the global supply chain that's giving new urgency to plans from other countries to increase self-reliance.

By dominating the US-developed model of outsourcing chip manufacture, Taiwan "is potentially the most critical single point of failure in the entire semiconductor value chain," said Jan-Peter Kleinhans, director of the technology and geopolitics project at German think tank Stiftung Neue Verantwortung.

The Trump administration exploited that pinch point to deny Beijing access to technology. By banning access to all US chip technology including design, it was able to cut off the supply of semiconductors from TSMC and other foundries to Huawei Technologies, hobbling the advance of China's biggest tech company.

It also negotiated with TSMC to establish a US$12 billion (HK$93.6 billion) chip fabrication plant in Arizona. South Korea's Samsung Electronics is set to follow, with a US $10 billion facility in Austin, Texas.

News that Intel, the onetime industry leader, was considering outsourcing production of some chips to TSMC under its former CEO underscored the need for a US player that can fabricate at the leading edge, said a Foreign Affairs Committee staff who is not authorized to speak publicly.

The European Union aims to bolster the bloc's "technological sovereignty" through an alliance armed initially with as much as 30 billion euros (HK$281.5 billion) of public-private investment to raise Europe's share of the global chip market to 20 percent from less than 10 percent now.

It's also encouraging Taiwan to increase investments in the 27-nation bloc, with some success. GlobalWafers - based in TSMC's hometown of Hsinchu - just boosted its offer for Germany's Siltronic to value the company at 4.4 billion euros, an acquisition that would create the world's largest silicon wafer maker by revenue.

That's not to say Taiwan is the only player in the semiconductor supply chain. The United States still holds dominant positions, notably in chip design and electronic software tools; ASML Holding of the Netherlands has a monopoly on the machines needed to fabricate the best chips; Japan is a key supplier of equipment, chemicals and wafers.

But as the emphasis shifts to ever smaller, more powerful chips that require less energy, TSMC is increasingly in a field of its own. And it's helped Taiwan form a comprehensive ecosystem around it: ASE Technology Holding is the world's top chip assembler, while MediaTek has become the largest smartphone chipset vendor.

Tokyo, too, is attempting to attract TSMC to set up in Japan. With 110 billion yen (HK$8.16 billion) earmarked last year for R&D investment and another 90 billion yen for this year, some of that may go to a TSMC facility, which reports have said the company is considering setting up in Japan.

"TSMC is becoming more and more dominant," said Kazumi Nishikawa, an official working on technology issues at Japan's Economy Ministry. "This is something everybody in the chip industry must find a way to deal with."

China is channeling help to the chip industry and other key technologies to the tune of US$1.4 trillion through 2025. But with Washington stymieing its progress, there is also speculation that Beijing could resort to stealing chip IP, with Taiwan at the heart of those endeavors.

Taiwanese cybersecurity firm TeamT5 has observed a steady increase in attacks on the island's chip industry corresponding to the tightening of US export controls on China. While it's not always possible to know if these are Chinese state actors, "they are all attacking the Taiwanese semiconductor industry," said Shui Lee, a T5 cyber threat analyst.

Fellow analyst Linda Kuo said the Taiwanese government was alarmed by a ransomware attack on TSMC in 2018 and had announced plans for some US$500 million to help the industry become more aware of cybersecurity issues.

The greater worry is that TSMC's chip factories could become collateral damage if China were to make good on threats to invade Taiwan if it moves toward independence.

"Taiwan is the center of gravity of Chinese security policy," said Mathieu Duchatel, director of the Asia program at the Institut Montaigne in Paris.

Yet while Taiwan's status in the global chip supply chain is a "huge strategic value," it's also a powerful reason for Beijing to stay away, he said.

In the meantime, geopolitics means chip shortages could become a more regular occurrence, according to Joerg Wuttke, president of the EU Chamber of Commerce in China.

"This is going to move on to the point where because of export controls, because of governmental intervention, there will be all of a sudden supply chain disruptions not just because of capacity problems," he told Bloomberg Television. "So better get prepared."

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