Living on an island long coveted by a large and increasingly powerful neighbor, the residents of Taiwan have given some thought to where might be the best place to go should the worst happen. Some think it might be the hills, others historic buildings that China would want to preserve.
By the same reasoning, some believe it is the factory run by the world’s biggest microchip maker, Taiwan Semiconductor Manufacturing Co (TSMC).
Taiwan is one of the world’s economic powerhouses, while at the same time a global strategic flashpoint.
Illustration: Lance Liu
In an industrial park in Hsinchu, those twin identities merge almost perfectly in the form of a factory that is run by TSMC — a facility so vital that some Taiwanese think it could be the safest place to flee to should China one day invade.
It is hard to overstate the importance of the Taiwanese semiconductor maker to the world’s economy. TSMC dominates production of the world’s most sophisticated semiconductors, and counts Apple and Qualcomm among its most significant customers. It is a global hegemony that China envies.
A worldwide shortage of chips that began early in the COVID-19 pandemic is reaching crisis proportions, making TSMC’s role even more pivotal.
Financial markets are increasingly alarmed about how the shortages are fueling inflation in Western economies and — with executives predicting the chip scarcity could last for years rather than months — are casting a spotlight on how a company that few people have heard of can have such a grip on the world’s economy.
TOUGH ROAD AHEAD
The chip shortage has sent the costs of new and used vehicles soaring, which in turn fed a 4.2 percent jump in US consumer prices last month. Stock markets saw an instant correction as investors calculated that inflation would cause the US Federal Reserve to raise interest rates to take the heat out the economy sooner than expected.
Ever since they emerged from the shock of the recession last year, automakers have been unable to get their hands on enough semiconductors to meet demand in the auto market. Chips are not used just in computers — they are the brains behind an entire range of everyday devices and are integral in automobile production as vehicles do more and more of the thinking for drivers.
Ford said last month that it would make only half its normal number of vehicles through next month because of the chip shortage.
Other manufacturers such as General Motors, Volkswagen and Jaguar Land Rover have also been affected.
The end result was that vehicles in the US were 10 percent more expensive last month than they had been in March, the biggest monthly gain since records began.
Secondhand vehicles were up 21 percent in price from April last year as the shortage of vehicles coincides with the savings of consumers, many of them cashed-up because of pandemic restrictions on holidays and eating out, or going out in search of other ways to spend their money.
The pattern is repeated in many countries. Vehicle sales and prices are rising quickly in the UK in the wake of a third lockdown, while they are also booming in Australia.
A simple solution would be make more chips, but the market for these components is finely tuned, and adding manufacturing capacity is extremely complex, expensive and time-consuming.
When automakers shut factories in the first wave of the pandemic last year, manufacturers such as TSMC and Samsung in South Korea shifted production to chips for consumer electronics, where demand continued to build as people spent more time at home during lockdowns.
Automakers compounded the problem by failing to place enough future orders, believing that the economic shutdown would be longer lasting.
However, the world economy, helped by massive government intervention, has roared back more quickly than many thought, leaving a shortage of components.
Analysts this week calculated that the vehicle industry would lose US$110 billion this year because of production lost due to the dearth of chips.
DEPENDENCY THREAT
Mark Williams, chief Asia economist at consultancy Capital Economics, said that the vehicle industry’s problems showed how semiconductors have become an essential aspect of products that are not traditionally considered electronics and also how dependent the world is on Taiwan to produce them.
“This dependency poses a threat to the global economy that can be mitigated, but won’t be fully addressed in the foreseeable future,” he said.
What appears to be a strength also places Taiwan in a tight spot. The concentration of chip production in Taiwan, which could be disrupted by earthquakes and water shortages, as well as any possible military threat from across the Taiwan Strait, is a risk to the global economy.
The US and China are striving desperately to catch up with Taiwan’s high-tech champion amid growing diplomatic and geopolitical tension between Washington and Beijing.
TSMC is believed to be considering expanding its plans to pump billions of dollars into cutting-edge factories in Arizona, Reuters reported this month.
China is also desperate to increase its ability to make the most sophisticated chips, but has failed to reduce its dependence on overseas producers such as TSMC, Capital Economics reported.
TSMC is considering ventures in China worth billions of US dollars, including a new facility in Nanjing, the Nikkei Asia reported.
In 2018, Chinese companies such as Huawei Technologies Co stockpiled chips in response to threats of US export controls, exacerbating the shortage.
Sanctions on China’s leading chipmaker, Semiconductor Manufacturing International Corp, have not helped.
Ultimately, the best way out of the situation is to spread the load, said John Lee, who is running a joint project by research organizations SNV Netherlands Development Organisation and Germany-based Mercator Institute for China Studies analyzing the semiconductor value chain.
“The smart way to build resilience across the global supply chain is greater coordination across different countries, rather than chasing self-sufficiency with the huge risk and expense that would involve,” Lee said.
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