Can the West wean itself off Taiwan’s semiconductors?
The island nation accounts for around two-thirds of semiconductor production, but flaring tensions with China have underlined the fragility of the global chip supply chain
Chips are the building blocks of all modern devices. They power our cars, smartphones and household appliances, and will drive progress in artificial intelligence, robotics and 5G wireless networks.
The problem is that the supply of chips is currently dominated by one company: Taiwan Semiconductor Manufacturing Company (TSMC).
The foundry is the biggest contract chipmaker in the world, supplying the likes of Apple and Nvidia. TrendForce has forecast TSMC will contribute 56% of global foundry revenue this year, up from 53% in 2021. Taiwan accounts for two-thirds of the global foundry market.
The US House Speaker Nancy Pelosi’s recent visit to the island, during which she dined with executives from TSMC, underlined the critical role it plays in the global chip supply chain. The meeting with the foundry angered China and there have since been suggestions that China could potentially seize the foundry if hit with sanctions by the US.
In a rare interview with CNN, TSMC chairman Mark Liu dismissed such claims – China’s dependence on the company has been referred to as a silicon shield.
Nevertheless, Liu warned that the foundry would be rendered inoperable if China were to invade Taiwan. The company’s headquarters and fabs – industry lingo for manufacturing plants – are situated on the west of the island, making them a potential target of any attack.
Securing chip supply
The US and EU are all too aware of the dangers of their chip supplies getting caught in the crossfire of flaring tensions between Taiwan and China. Both are taking steps to reduce their reliance on Asia and to onshore chip production.
The US is to implement the Chips Act, a $52bn (£45bn) package offering subsidies to foundries to build out their manufacturing capacity on its soil, as well as fund future semiconductor research. The legislation also comes with overseas investment restrictions.
Meanwhile, the European Commission has put forward the European Chips Act to enhance and strengthen the bloc’s role in the global semiconductor industry. More than €43bn (£37bn) in private and public funding is to be invested between now and 2030.
These government subsidies are designed to lower the cost of onshoring production and help attract manufacturers that are deciding where to ramp up investment.
Some major industry players are already leading the way. Back in January, Intel chose Ohio for its new $20bn factory, which would potentially become the biggest in the world. President Biden has described it as a “field of dreams” on which “America’s future will be built”.
GlobalFoundries and STMicroelectronics announced in July that they had chosen France as the location for a new $5.7bn chip factory, with the French government set to provide significant financial support.
As the West looks to ramp up domestic production, weaning themselves off Taiwan won’t be straightforward.
“Even though the legislations passed by the US and EU are good starting points to boost their capacity, they aren’t expected to be sufficient,” says Suryadeep Jain, industrial procurement specialist at analytics firm The Smart Cube.
For starters, the need for the US and EU to onshore is necessitated by the global semiconductor shortage, which is now not expected to end until late 2023 or early 2024, Jain points out.
What’s more, this urgency to boost domestic production is likely to decline once the shortage ends, Jain adds, at which point the challenge will be convincing chip manufacturers to invest in the US and EU over Asia.
The Chips Act’s impact
Procuring chips from Asia makes economic sense due to the much lower costs. Despite attempts to stymie China, it’s the biggest producer of silicon – the material semiconductors are comprised – and it’s expected to become the leading chip producer by 2030 as its own domestic capacity continues to expand.
The question is whether the US and EU will be able to continue pulling in the investment needed to strengthen capabilities in not just the supply chain but also talent, design, research and intellectual property.
This will be key if they are to compete with Asia’s dominance, says Thibault Pucken, managing director of procurement consultancy Inverto.
There’s also the thorny issue of how China might respond to the Chips Act. The China Semiconductor Industry Association has accused the US of violating fair trade rules and has warned that there could be chaos ahead for global supply chains.
“Disentangling the complex semiconductor global value chains will create severe supply chain disruptions,” says Oliver Sawbridge, policy and insights manager at Economist Impact.
“Any attempt to onshore production without the proper mechanisms in place will lead to more supply-side shocks, higher prices and, potentially, lower long-term growth.”
The nature of supply chains and the risks attached to upsetting the status quo mean it’s unlikely the US and EU will eventually be producing all the chips they need themselves. “To completely wean themselves off Taiwanese parts – if at all possible – would come at a high cost and take an extremely long time,” says Pucken.
To this end, chip autonomy might seem that it would solve a problem, but it would only create new ones. There are better ways to achieve resilience in the supply chain. “The solution has to create more flexibility within the entire chain,” argues Pucken. “This means diversifying manufacturing capabilities, geographies and the suppliers in the value chain, and not just relying on one.”
US chips flowing into Russian weapons
A perfect illustration of the tangled web the global semiconductor industry weaves is the fact that US-made chips are ending up in Russian weapons being used against Ukraine.
Since the start of the war at the end of February, global exports of semiconductors to Russia have plunged as countries slapped Moscow with sanctions. The resulting shortage has meant that Russia has been unable to get its hands on advanced chips that typically go inside its military equipment and machinery.
Given that repairs and upgrades have been difficult to carry out, troops have been scrambling for chips found in household appliances.
“We have reports from Ukrainians that when they find Russian military equipment on the ground, it’s filled with semiconductors that they took out of dishwashers and refrigerators,” Gina Raimondo, the US secretary of commerce, told a Senate hearing in May.
Despite the export restrictions, some US-made run-of-the-mill chips have still made their way into the country since the start of the invasion. This is according to a special investigation by Reuters and the think-tank Royal United Services Institute, the results of which were released in August.
The reason for this is that consumer products have generally not been subject to export rules. They can be shipped in, opened up and then the chips removed.
Perhaps even more worryingly, shipments of US-made military-grade parts are still being smuggled into Russia, mainly through third-party sellers.
The US manufacturers whose chips have been discovered in Russian military equipment and machinery told the investigation that they comply with export controls and trade sanctions. They’re currently conducting internal reviews.