authors: Claire Lin, Vincent Hsiao
Controversy has erupted in Taiwan over the construction of TSMC (Taiwan Semiconductor Manufacturing Company) fab in the US. The whole world is facing US-China tech-economic war, the Covid-19 pandemic and the Russia-Ukraine war that make the world be turning to regionalization. Both US and China are trying to establish their own independent semiconductor supply chains. Determine whether states choose to balance or bandwagon is interests not security and threats. TSMC’s upcoming Arizona fab can reduce America’s reliance on overseas chips to balance between treating Beijing as an economic partner and a geopolitical rival and the fab can help provide good manufacturing jobs for the Biden administration to talk up, while they also help the Taiwanese chipmaker create a long-term hedge on its own future. US and Taiwan share similar values and interests. If China wants to reduce the possibility of a US-Taiwan alliance, it should alleviate Taiwanese people’s distrust of its peace commitment toward Taiwan. Intensifying military threats against Taiwan is counterproductive, because it would invite US intervention, which in turn would increase Taiwanese support for a US-Taiwan alliance.
Geographic Specialization and Regionalized Semiconductor Supply Chains Structure
Semiconductor device fabrication (fab) is the process used to manufacture semiconductor devices, typically integrated circuit (IC) “chips” such as computer processors, microcontrollers, and memory chips such as NAND flash and DRAM that are present in everyday electrical and electronic devices. Chips and other semiconductor devices are critical components in artificial intelligence(AI), quantum computing and other advanced technologies and are a mainstay of the consumer products we use every day. There are different layers of the semiconductor supply chains, including IC design, materials, equipment and tools, and manufacturing, the latter includes wafer fabrication, assembly, packaging and testing (APT). The United States, Europe and Japan dominate IC design, materials, equipment and tools, while East Asia, mainly Taiwan, South Korea and China, take the lion’s share of manufacturing. In the interdependence relations, IC design houses and Integrated Device Manufacturers (IDMs) in the United States and Europe contract manufacturing to specialized manufacturers, including fabs, Outsourced Assembly and Test (OSAT), in East Asia for mass production. On the other hand, East Asia depends on R&D, IP, equipment and tools provided by the United States and Europe for their manufacturing activities.
US chip ban to hit China to hrottle Beijing’s plan to obtain breakthrough technologies in chip manufacturing
Semiconductors are not only critical for industries but also play a key role in defining economic competitiveness and national security. The worldwide shortages of semiconductor chips in the past years resulting from supply chains disruption and the Covid-19 pandemic demonstrate the challenge to accessing semiconductors in global markets. As a result, countries have made securing semiconductor supplies as part of their national security strategy.
Chip is the key to re-establish the meaning of Silicon Valley and to cement the US’ leading global role in the manufacture of semiconductors. With China so integral to the global electronics supply chain and to the profits of Western technology companies.
Washington has been trying to find a balance between treating Beijing as an economic partner and a geopolitical rival. In order to maintain as large of a lead as possible, a growing raft of US measures now aim at slowing China’s development as a high-technology economy.
US President Joe Biden in August 2022 signed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, which authorizes US$52.7 billion of subsidies for US chipmakers while banning the export of chips more advanced than 28 nanometer to China for 10 years.
The Act is also seen as highly significant for national security and future warfare including autonomous weapon systems, drone technology as well as cybersecurity. CHIPS are now indispensable as part of defence capability and the foundation for modern systems of warfare and management on the battlefield. Advanced semiconductors now define a new system of military strategy based on the increasing sophistication of long-range, smart and autonomous weapons assisted by military surveillance in cyberspace and from outer space with a broad shift to informatization of military systems.
The bill allocates $39 billion for semiconductor manufacturing, including $11 billion to advance semiconductor manufacturing research and workforce training, and a $2 billion fund to more quickly translate laboratory advances into the military and other applications. Companies that could tap the funding for US expansions include Intel Corp (INTC), Taiwan Semiconductor Manufacturing Co Ltd (TSMC), Global Foundries Inc (GFS), Micron Technology Inc (MU), Applied Materials Inc (AMAT) and more.
TSMC is in the in the middle of a tug-of-war between two global superpowers, the US and China
The geopolitics of the semiconductor manufacturing of revolves around the fact that China is the largest producer of semiconductors. It accounts for 24% of the world’s semiconductor production, followed by Taiwan at 21% and South Korea at 19%. But TSMC is the largest manufacturer of semiconductor chips. While US Intel earns more revenue, TSMC makes around 90% of advanced chips produced globally. TSMC also controls more than half of the global semiconductor foundry market. This has made TSMC one of the most valuable companies in the world. It has also left the entire world’s digital infrastructure dependent on a small island that China considers a rogue province and that America has pledged to defend by force.
The global economy and technology are currently heavily reliant on Taiwan for semiconductor manufacturing. It is thought that this increases the incentives for Western countries such as the US to defend Taiwan from Chinese military threats, given their reliance on Taiwanese semiconductors. China is also reliant on Taiwanese semiconductors to the extent that it was reported by the Washington Post in April 2021 that Taiwanese chips are used in the missiles that China has pointed at Taiwan, though the Taiwanese government has denied this. That China’s supply chains are also dependent on Taiwanese semiconductors is thought to be a deterrent for a Chinese invasion of Taiwan.
That semiconductors incentivize Western powers to defend Taiwan and dissuade China from an invasion has been termed Taiwan’s “silicon shield.”
Match point : duplicate entire semiconductor ecosystem
The US retains enormous momentum in electronic design automation tools, the design of chips, and the development of fabrication and metrology tools. Taiwan has accumulated enormous momentum for the fabrication and packaging sides of the ecosystem, especially for cutting-edge digital chips, and is moving into design. China has very little momentum in most of these areas, but has made huge progress and constructed considerable momentum in trailing-edge and more-than-Moore chip fabrication technologies, as well as in integrating packaged chips on to boards and into finished products.
The Communist Party of China (CPC) is spending money at an enormous pace to try to jumpstart ecosystems in all of these other areas. Rare-earth elements are critical components in the development of many products relying on advanced technology. China is the main supply country. Upon establishing a monopoly on their supply through legal environmental externalities and government subsidies, the Chinese immediately made use of that leverage for political ends.
To persuade TSMC or Samsung to build a modern fab in the US would only ensure access to a specific process node (for example 5nanometer or 7 nanometers) that happens to be leading-edge today. Building the world’s best chips is not a matter of a single factory or a single company. It’s a product of maintaining an entire semiconductor ecosystem, at home and within the borders of allied and partner regimes. Maintaining semiconductor supremacy is about maintaining US and allied dominance across the entire ecosystem.
The liberal-democratic/Western semiconductor ecosystem still has enormous geographic stickiness. Moving factories is enormously disruptive and expensive; engineers and executives don’t want to move their households and families to distant and culturally incompatible places. A critical question is how to leverage what remains of this social momentum in the US to enhance US dominance despite the fact that cutting-edge changes occur rapidly, across all areas of the semiconductor ecosystem.
Taiwan matters to the United States
The US needs to defend Taiwan for multiple reasons: Taiwan is an ally that shares liberal democratic values, it is the most important source of advanced semiconductor chips, and it is the linchpin of the First Island Chain, helping to bottle up the PLA (People’s Liberation Army) Navy in home waters. But Taiwan is not simply an entry onto the balance of power ledger.
Beijing increasingly sees itself safer in a world fundamentally different from orders built by the West. Even within a softening of trade and travel policies, however, Beijing has long “sought to isolate Taipei internationally,” using diplomatic and economic means, including large-scale investment/infrastructure packages, to entice small states to abandon Taipei for Beijing as it has done in recent years with El Salvador, the Dominican Republic, and Panama. Beijing even coerced global airlines to display Taiwan as part of the mainland.
Fabless semiconductor companies that use TSMC’s fabrication services get to tap into a very rich ecosystem of pre-designed IP blocks, from an entire network of different vendors. As a result, TSMC users can often license 90% or more of the design of their chip, while their engineers design only the pieces that generate significant technical differentiation.
Creating redundancy for TSMC would not be just a matter of standing up processes and factories; it’s a matter of replicating this entire design ecosystem on top of those processes, plus the downstream offerings from TSMC’s partners in the packaging and test ecosystem. Network effects make building an onshore alternative to TSMC far more difficult and expensive than it might initially appear.
Having a parallel ecosystem in the US is both a national-security imperative, and a great way to reduce the likelihood of an attack on Taiwan.
The loss of Taiwan through overt PRC action would have a detrimental effect on American credibility and global values-based policies, thus striking at the core of the U.S.-PRC ideological competition. Therefore, the manner of any potential Taiwanese transition is of vital interest to Washington.
Geopolitics have drastically changed the semiconductor ecosystem and make it from globalization to regionalization and the tensions between the US and China over chips will split the global tech supply chain into two camps. It is difficult to see any early spring in relations between US and China at such short notice. China is engaged in a long-term effort to subsume the independence of the liberal-democratic states of the world by acting outside the strictures of the rules and free-trade based international order. US would move expeditiously to reinforce its relationships with liberal-democratic allies to reduce authoritarian access to this entire ecosystem.
Beijing said that China will never renounce the right to use force over Taiwan. Namely, Taiwan seeks stronger economic and tech ties with the US–its major security guarantor in the event of a Chinese invasion–so as to increase the incentive for the US to defend Taiwan in the event of a Chinese invasion. US and Taiwan have shared similar values and interests. Taiwan should maintain and strengthen its semiconductor technology leadership, and continue investing heavily in R&D. and keep the orders in Taiwanese manufacturers, even if they are manufactured in the United States or Europe. This will create the competitiveness of Taiwanese companies, master the core technologies needed by great power, and increase Taiwan’s national security.
Vincent Hsiao received his Ph.D. in the Department of Mechatronics Engineering, from National Changhua University of Education. He is currently a Research Fellow in Taiwan Instrument Research Institute(TIRI), National Applied Research Laboratories(NARLabs), Taiwan.