On the front line of the superpower struggle between the US and China, Taiwan has fashioned a defensive masterstroke: It has become indispensable to both sides.
In dominating the fabrication of the world’s most advanced semiconductors, Taiwan Semiconductor Manufacturing Co (TSMC) has captured a technology that is crucial to the cutting-edge digital devices and weapons of today and tomorrow. TSMC accounts for more than 90 percent of global output of these chips, according to industry estimates.
Both superpowers find themselves deeply dependent on the island country at the center of their increasingly tense rivalry.
Illustration: Kevin Sheu
For Washington, allowing an increasingly powerful China to overrun TSMC’s foundries in a conflict would threaten US military and technological leadership. However, if Beijing invades, there is no guarantee it could seize the prized foundries intact. They could easily become a casualty of the fighting, severing the supply of chips to China’s vast electronics industry. Even if the foundries survived a Chinese takeover, they would almost certainly be cut off from a global supply chain essential to their output.
The US and China want to break their dependency. Washington has persuaded TSMC to open a US foundry to make advanced semiconductors, and is preparing to spend billions rebuilding its domestic chip-making industry. Beijing, too, is spending big, but its chip industry lags a decade or so behind Taiwan’s in many key areas. Analysts have said that gap is expected to widen in the years ahead.
So valuable are these foundries to the global economy that some here refer to Taiwan’s chip sector as a “silicon shield” deterring a Chinese attack and ensures US support.
Minister of Economic Affairs Wang Mei-hua (王美花) said in September that the industry is deeply intertwined with Taiwan’s future.
“This isn’t just about our economic safety,” she said. “It appears to be connected to our national security, too.”
In a later statement, her ministry played down the silicon-shield theory.
“Rather than saying that the chip industry is Taiwan’s ‘Silicon Shield,’” the statement said, “it is more appropriate to say that Taiwan has an important position in the global supply chain.”
The danger for Taiwan is that TSMC’s fabs, as the chip fabrication plants are known, are in the line of fire.
The foundries are located on the narrow plain along Taiwan’s west coast facing China, about 130km away at the nearest point. Most are close to so-called red beaches, considered by military strategists as likely landing sites for a Chinese invasion. TSMC’s headquarters and surrounding cluster of fabs in Hsinchu are just 12km from the coast.
The industry’s vulnerability was on display in July 2020, when Taiwan mobilized thousands of troops to fight off a simulated Chinese attack on Taichung, home to TSMC’s Gigafab 15, one of the foundries that make cutting-edge chips.
In the counter-invasion exercise, “enemy” paratroopers dropped on Ching Chuan Kang Air Base and captured the control tower, just a nine-minute drive from Gigafab 15. Off the coast, a virtual Chinese invasion flotilla steamed toward the city’s beaches. Fighting enveloped Taichung as Taiwanese troops and tanks counterattacked to regain control of the air base; commanders called in airstrikes, missiles and artillery, using live ammunition to pound the “invasion fleet.” The invasion was repulsed.
In mocking the exercise scenario, reports in China’s state-controlled media reinforced the potential for destruction: Waves of missile strikes would destroy Taiwanese forces before a Chinese landing, they said.
Asked about the threat to Taiwan’s fabrication plants, the Ministry of Economic Affairs said that in “the past 50 years, China has never given up trying to use force to control Taiwan, but its aim is not the semiconductor industry.”
Taiwan had the ability to “face and manage this risk,” it added.
TSMC did not answer specific questions about the exposure of its foundries. In a statement, it emphasized that the chip industry is global and relies on design, raw materials, equipment and other services from several regions and many specialized companies.
“Therefore, rather than one company or one region, global collaboration is vital for semiconductor industry success,” the company said.
US ANXIETY
As China ratchets up its military intimidation of Taiwan, Washington is signaling anxiety over US chip dependency.
“The big concern in Washington is the possibility of Beijing gaining control of Taiwan’s semiconductor capacity,” said Martijn Rasser, a former senior intelligence officer and analyst at the US Central Intelligence Agency, and now a senior fellow at the Center for a New American Security.
“It would be a devastating blow for the US economy and the ability of the US military to field its [weapon] platforms,” Rasser said.
In one of the clearest US statements on the need to resist a Chinese attack on Taiwan, a top Pentagon official told the US Senate Foreign Relations Committee on Dec. 8 that Taiwan’s semiconductors were a key reason why its security was “so important to the US.”
A spokesperson for the White House National Security Council had no comment on the chip vulnerability, but said Washington “would regard any effort to determine the future of Taiwan by other than peaceful means a threat to the peace and security of the Western Pacific.”
Taiwan’s chip supremacy, while clearly a strategic advantage, might not be enough to deter China from trying to take it by force, some have said.
The deep economic interdependence among the nations of Europe failed to prevent war in 1914, said retired US Marine Corps lieutenant general Wallace Gregson, an assistant secretary of defense in former US president Barack Obama’s administration.
While the semiconductor industry is “thoroughly beneficial” to Taiwan’s security, it is questionable whether this would prevent conflict once the “dogs of war get loose,” Gregson said.
What is more, Chinese President Xi Jinping (習近平) has staked his legacy on bringing Taiwan under Beijing’s control, he added.
“He can’t be seen to compromise, much less back down,” Gregson said. “He is tied to this achievement.”
At risk for China and the US is access to chips that power almost all advanced military and civilian technologies, including mobile phones and the medical diagnostic and research tools that have been invaluable in fighting the COVID-19 pandemic.
The most advanced chips, which are critical in the US-China arms race, are those described as 10 nanometers or below — the sector dominated by Taiwan. These tiny devices pack billions of electronic components in an area as small as a few square millimeters.
A major US worry is losing ground in the race to use artificial intelligence in weaponry, as such technology enables machines to outperform humans at solving problems and making decisions. It is expected to revolutionize warfare, and it hinges on semiconductors.
In a March report to Congress, the bipartisan US National Security Commission on Artificial Intelligence warned that the threat to TSMC exposed a glaring vulnerability. Taiwan produces the “vast majority of cutting-edge chips” a short distance from the US’ “principal strategic competitor,” the report said.
“If a potential adversary bests the US in semiconductors over the long term or suddenly cuts off US access to cutting-edge chips entirely, it could gain the upper hand in every domain of warfare,” it said.
Much is at stake for Beijing, too. The loss of chips from Taiwan would crush Chinese industry. China accounts for 60 percent of world semiconductor demand, a report from the US Congressional Research Service said in October 2020. More than 90 percent of semiconductors used in China are imported or manufactured locally by foreign suppliers, the report said.
Taiwan is a critical supplier. In the first quarter of last year, nearly half of Taiwan’s exports to China, Taiwan’s largest trading partner, were semiconductors — a 33 percent increase from the same period in 2020, data from Taiwan’s Ministry of Economic Affairs said.
The global chip shortage caused by supply disruptions amid the COVID-19 pandemic is giving a foretaste of the havoc a Taiwan conflict would wreak. The loss of a single year’s output from Taiwan would bring the international electronic supply chain to a halt, said an April report from Boston Consulting Group and the Semiconductor Industry Association, the lobby for the US industry.
The contours of this silicon standoff, with China and the US dependent on Taiwan, began taking shape decades ago as a consequence of US and Taiwanese policy choices. The US semiconductor sector remains dominant in many ways, through its leadership in research, development and design. It accounts for almost half of revenues in a global industry worth an estimated US$452 billion last year, but the US has largely outsourced manufacturing of advanced chips, mostly to Taiwan.
BREAKTHROUGH
Taiwan’s rise as chip power dates back to a breakfast in early 1974 at a downtown Taipei eatery known for its soy milk and steam buns, according to an account by the Industrial Technology Research Institute.
A Chinese-born executive from a leading US tech company, Radio Corporation of America, discussed a bold idea with Taiwanese officials: Build a semiconductor industry from scratch in Taiwan. Taipei struck a tech-transfer agreement with RCA and sent engineers to work there.
“Back then, no one knew these technologies would become so important,” former minister of science and technology Chen Liang-gee (陳良基) said.
In 1985, Chinese-born engineer Morris Chang (張忠謀), a 25-year veteran of another US semiconductor power, Texas Instruments Inc, was recruited to head technology development in Taiwan. In 1987, Chang founded TSMC with the government as the major shareholder.
Chang made a decision that reshaped the global industry. He decided that TSMC would be a pure foundry, making chips for other companies. Orders poured in from Western makers who wanted to focus on design and cut costs.
Today, TSMC has the 11th-highest market capitalization of any listed business. This year, it plans to outlay about US$30 billion in capital investment, dwarfing Taiwan’s US$16 billion defense budget.
In a speech in Taipei in April, Chang likened Taiwan’s chip industry to a “holy mountain range protecting the country (護國神山),” a phrase popular in Taiwan that is used to describe TSMC’s pivotal role in the domestic economy.
“I used it to make my point that it would be very difficult for Taiwan to create another company with TSMC’s influence,” Chang said.
Taiwan accounts for 92 percent of the world’s most advanced semiconductor manufacturing capacity, a report from Boston Consulting and the Semiconductor Industry Association said in April. South Korea holds the remaining 8 percent.
CHINA’S CHALLENGE
Early on, Taiwan protected this crown jewel. In the late 1990s, then-president Lee Teng-hui (李登輝) imposed curbs on Taiwanese high-tech companies doing business in China to ensure they did not offshore their best technology. The restrictions have been relaxed, but TSMC and its peers remain barred from building their most advanced foundries in China.
“Looking back now, the industry supply chain could have been entirely moved there,” Chen said.
Under Xi, China has set a goal of self-sufficiency in manufacturing advanced chips — what some have dubbed the “great semiconductor leap forward.”
The Taiwanese curbs are not the only obstacle to Xi’s vision. Also at play are a US-led effort to limit tech transfers to China, and the sheer complexity of fabricating advanced semiconductors.
The US and its allies have for decades imposed chip technology barriers on China, mostly aimed at curbing Beijing’s development of advanced weaponry. The US maintains a list of specific chip technology that requires a license for export, and restricts tech exports to China’s leading chipmaker, Semiconductor Manufacturing International Corp.
The controls on that company are tailored to block items needed to produce advanced chips of 10 nanometers or smaller. So far, China mostly produces lower-end chips for consumer electronics.
A key tool in this containment strategy is the Wassenaar Arrangement, a voluntary pact among 42 nations to curb the spread of “dual-use” technology, used in commercial and military applications. Under Wassenaar, Washington and its allies have harmonized controls over the flow of chip technology to China.
The most significant restriction is on equipment that uses extreme ultraviolet (EUV) light beams. This light is generated by lasers and focused by mirrors to lay out ultra-thin circuits on silicon wafers. EUV is at the bleeding edge of semiconductor manufacturing. It allows chipmakers to build faster and more powerful microprocessors and memory chips.
Former US assistant secretary of commerce Kevin Wolf said that the EUV curbs are aimed at blocking China’s effort to produce 5 nanometer chips — today’s state of the art — or even more advanced semiconductors under development.
For China’s economic planners, semiconductor independence is a top priority. The aim is what is known as a “closed loop” — domestic companies being responsible for the entire sector, including raw materials, research, chip design, manufacturing and packaging.
This is a huge challenge for any economy because the existing global supply chain for chips is so complex — involving hundreds of materials and chemicals, more than 50 types of high-tech equipment, and thousands of suppliers across Europe, North America and Asia.
A US review of its supply-chain vulnerability said in June that Beijing was directing US$100 billion in subsidies to its chip industry, including the development of 60 new plants. Some of this spending has led to huge losses, with a spate of bankruptcies, loan defaults and abandoned projects.
Even if China were able to acquire foreign technology and direct money into better-run projects, there is no guarantee it would succeed in advanced chips, semiconductor industry veterans from Taiwan, the US, Japan and the Netherlands have said.
Advanced chip making is among the most complex manufacturing processes yet devised, they said. Fabricating chips takes three to four months and more than one thousand manufacturing processes. It must be done in a pristine environment and requires precision equipment that manipulates particles on sub-atomic levels.
China also faces a talent gap. It has recruited engineers and technicians from Taiwan, South Korea and the US, but these efforts have yet to deliver major breakthroughs. Companies such as TSMC have huge teams of specialists for a vast array of processes. Poaching individual experts can only deliver gains in niches of the craft, according to industry executives.
These elite professionals are the most important assets of Taiwan’s chip industry, said retired navy captain Chang Ching (張競), a research fellow at the Taipei-based Society for Strategic Studies.
“If it invades Taiwan, the communist army will do its best to protect the personnel working in the tech sector,” he said.
Having relinquished chip fabrication to Taiwan, the US is trying to reverse that move. The US artificial intelligence commission called for the government to spend US$35 billion in incentives to rebuild a chip manufacturing industry.
However, Taipei has said that it has no intention of surrendering primacy.
TSMC has begun trial production of what is to be its most advanced chip, using so-called 3-nanometer technology, and it has launched an R&D drive to make 2-nanometer chips.
Between now and 2025, local and foreign companies plan to invest more than US$108 billion in Taiwan’s chip industry, National Development Council Minister Kung Ming-hsin (龔明鑫) said.
After this splurge on factories and equipment, “Taiwan’s semiconductor industry will have very few competitors,” Kung said.
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