The Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners, and strategic thinkers across the globe for their diverse insights into U.S. Asia policy. This conversation with Lotta Danielsson – vice president of the U.S.-Taiwan Business Council and editor of the report “U.S., Taiwan and Semiconductors: A Critical Supply Chain Partnership” – is the 377th in “The Trans-Pacific View Insight Series.”
Explain Taiwan’s crucial role in the semiconductor supply chain.
Taiwan spent the last 40 years bolstering its semiconductor industry. The Taiwan government, domestic companies, and foreign companies have all invested in the sector. A clustering effect has led to Taiwan building substantial capacity across a wide spectrum of technologies, where thousands of suppliers and manufacturers have coalesced into a powerful semiconductor ecosystem.
Taiwan is a crucial supplier and partner not only for leading U.S. technology firms like Apple, Nvidia, Texas Instruments, and Qualcomm but also for prominent technology companies across the globe. Four Taiwan companies – TSMC, UMC, Vanguard, and Powerchip – together held a foundry market share of 69 percent in the first quarter of 2023. Spearheaded by TSMC, Taiwan foundry companies account for a majority of overall global capacity, especially for leading-edge technology at the smallest process nodes and on 300-mm wafers.
At the <10 nm process node, the island holds by far the largest manufacturing capacity at 63 percent, with South Korea at 37 percent. Taiwan produces 92 percent of chips at 7 nm and 5 nm, and only two companies – Taiwan’s TSMC and South Korea’s Samsung – are mass-producing chips at 5 nm or less. TSMC continues to invest, pushing towards higher utilization of its leading 3 nm process while also developing future technologies. Meanwhile, competing semiconductor foundries are scrambling to catch up technology-wise.
While Taiwan’s dominance at the cutting edge makes headlines, Taiwan also has a substantial presence in trailing-edge chips that go into cars, appliances, etc. Taiwan’s ASE is the leading global outsourced assembly and testing (OSAT) firm, and Taiwan’s MediaTek is the fourth largest fabless company in the world. In addition, Taiwan was the second-largest destination for semiconductor equipment spending in 2022.
Taiwan holds a concentration of both capacity and know-how. It is a key market for U.S. semiconductor equipment manufacturers and a critical partner for U.S. tech companies. The complexity of the semiconductor industry, and the extraordinary cost of building new production capacity, means that it would be impossible to replace Taiwan-made chips overnight – or even over a few years.
A loss of access to Taiwan-made chips could mean a 5-10 percent hit to U.S. GDP, potentially larger than the estimated negative impact of 7.5 percent from the COVID pandemic. U.S. intelligence estimates show that losing Taiwan’s chip production could mean erasing up to $1 trillion per year from the global economy for the first few years. It could also have severe repercussions for U.S. national security, as access to semiconductors is a key driver for advanced weapons capabilities.
Identify key risks to Taiwan’s function in the semiconductor industry.
Talent shortages, intellectual property and trade secrets theft, natural disasters, raw material and equipment shortages, industrial accidents, supply/demand gaps, and infrastructure problems all represent risks affecting the semiconductor supply chain. Some key risks for Taiwan include ongoing talent shortages and potential disruptions to facilities and infrastructure from severe weather or earthquakes. Such partial disruptions are the most likely to occur but would also be shorter term and have less severe consequences.
For Taiwan, two additional but less likely scenarios stem from aggressive actions by China. One scenario is an economic blockade whereby Beijing could attempt to restrict the flow of goods and services to/from Taiwan, potentially causing a significant, medium-term disruption to the Taiwan semiconductor industry.
Finally, a China-Taiwan war could mean a total disruption in Taiwan for a year or more. However, there is no consensus on what damages an attempted invasion would cause or how a protracted war would affect Taiwan semiconductors. It is also debatable whether Beijing intends to invade Taiwan anytime soon, and what the global response to that might entail, particularly as China’s economy also depends heavily on semiconductor output from Taiwan.
How are companies in the global semiconductor supply chain preparing for potential disruptions?
Chip manufacturing, particularly foundries, is becoming more geographically diverse, and new capacity is coming online, as exemplified by the Arizona investment by TSMC. Semiconductor companies in Taiwan have already made significant investments to withstand natural disasters and are increasing water recycling and securing power access. The government and companies are funding university programs to ensure access to talent. They are setting up risk management teams to prepare for potential disruptions and are diversifying and building redundancy into their supply chains. Companies are working closer with suppliers to build larger inventories, even at increased costs, and are improving tracking and preparing alternative routes for deliveries. Many chip companies are making resiliency a top priority.
Evaluate the effectiveness of Taipei’s measures to safeguard the global semiconductor industry ecosystem from geopolitical risks.
Taipei has to balance the potential for “hollowing out” the crucial Taiwan chip industry with being a team player in the global ecosystem. Taiwan has supported various U.S.-led initiatives in the semiconductor sector, including observing U.S. restrictions on sales to Huawei, complying with export controls, and joining the Chip 4 alliance as a key member. There is only so much that Taiwan can do on its own, but they have consistently partnered with the U.S. and its allies in their attempts to counteract China. Taiwan wants to be part of the solution, despite anxiety at home over a potential erosion of Taiwan’s star industry.
Assess Washington’s strategy for engaging allies in protecting the future of Taiwan’s critical contributions to the semiconductor supply chain in the international arena.
It is encouraging that Washington is focusing on this important sector and Taiwan’s crucial role. Allowing Taiwan companies to take advantage of CHIPS and Science Act incentives and including Taiwan in the Chip 4 alliance are both positive steps forward. Taiwan should have a seat at the table, and the U.S. leadership bringing Taiwan into the fold is heartening.
It is concerning, however, that the discussion on friend-shoring in the semiconductor supply chain appears to exclude Taiwan. The U.S. needs to include Taiwan in this discussion, allowing others to take advantage of their skills and experience. Taiwan will remain a critical semiconductor partner for the foreseeable future, and the U.S. must do everything it can to help ensure that Taiwan remains close – not just to the United States but to our allies as well.