US House Speaker Nancy Pelosi’s visit to Taiwan earlier this month caused Beijing to respond in a way that is the largest seen since the third Taiwan Strait crisis, 26 years ago in 1996.
Fiery rhetoric accusing the US of “playing with fire” was followed by consecutive days of exercises involving live ammunition. International carriers including Singapore Airlines cancelled flights to Taipei following reports of multiple missiles lobbed across Taiwan. China hit Taiwan’s pockets too, with sanctions that include an import ban on fish and fruits while sand can no longer be exported to Taiwan.
The world, still reeling from the economic fallout of Russia’s invasion of Ukraine, now has to contend with the possibility of another major disruption, should tensions escalate. The more imaginative may have a feeling of deja vu, given that optically, there are clear parallels between Russia’s invasion of Ukraine and a potential Chinese military campaign against Taiwan.
A Bloomberg article on Aug 7 says while Russia’s invasion of Ukraine has led to a potentially devastating energy crisis and a critical shortage of food in some of the world’s most vulnerable nations, a war over Taiwan may be even more disruptive to the global economy.
Should military action happen across the Taiwan Strait, it will threaten some of the world’s busiest shipping lanes. It will also affect the production of one of the world’s most precious commodities: computer chips.
Semiconductors now make up nearly 40% of exports from Taiwan, and about 15% of its gross domestic product.
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In the first quarter of 2022, Trendforce reported that Taiwan recorded 63% of global semiconductor foundry revenue, with Taiwan Semiconductor Manufacturing Co (TSMC) having 53% of the global revenue share alone, a yawning lead over the 16.3% revenue share of South Korea’s Samsung Electronics.
Speaking to CNN on Aug 1, TSMC president Mark Liu said that there would be an economic crisis on both sides of the strait if China and Taiwan come into conflict. TSMC factories, which produce 92% of the most advanced chips used in phones and ballistic missiles, would become “non-operational” in the event of a Chinese attack, triggering a supply chain crisis that Liu says would spread to the US.
Intel Corp CEO Pat Gelsinger, unsurprisingly, has tried to put the products of his company front and centre of his government’s agenda. “Oil has defined geopolitics in the last five decades, but fabs will shape the next five — they are the new geopolitics.”
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Fabs refer to the fabrication factories for chips, of which TSMC commands the lion’s share. Gelsinger had also noted that while the US created the semiconductor industry, 80% of production currently sits in Asia.
If these fabs are so important, why don’t countries simply build them in their own countries? Some countries, like the US, have passed its US$280 billion ($385 billion) CHIPS Act, which includes US$52 billion of funding to semiconductor companies to build fabs in the US.
The shortage has become an incentive for manufacturers like Intel to invest in new plants to meet the growing demand for tech products like laptops and smartphones worldwide.
But US officials fear that, without government intervention, chip manufacturers will continue to move new foundries to China, leaving little room for the US to profit off of an industry it pioneered decades ago.
Not all observers see the CHIPS Act as good news. “The logic behind CHIPS’ industrial policy flies in the face of deeply embedded liberal economic thought that has steered US trade policy for decades,” says Alex Capri, research fellow at the Hinrich Foundation.
From a liberal economist’s perspective, assuming there are no government-imposed trade barriers, global supply chains will organise themselves on the basis of efficiency. “For the past three decades, globalisation has borne this out, and no industry exemplifies this better than semiconductors,” says Capri.
China, on its part, is also making attempts at becoming a self-sufficient country in semiconductor supply, announcing plans to invest US$1.4 trillion between 2020 and 2025 in advanced technologies including semiconductors.
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However, as it stands, semiconductor supplies from China only account for 9% of the global revenue share, with the majority coming from state-owned Semiconductor Manufacturing International Corp (SMIC).
Political pressure
But not all chips are created equal. Trade tensions between the US and China have crimped Chinese abilities to produce advanced chips.
As part of the CHIPS Act, companies that receive the funding have to promise not to increase their production of advanced chips in China. Specifically, the CHIPS Act bars companies from getting federal funding for “materially expanding” production of chips more advanced than 28 nanometres (nm) in China — or a country of concern like Russia — for 10 years.
In contrast to the current leading edge 5nm chips, 28nm chips are several generations behind, but are still widely used in products ranging from cars to 4G transceivers.
Recipients of these government subsidies may have to return them if they violate the restrictions and do not remedy the breach.
Bloomberg says the curbs will hit companies like Intel and TSMC, leading chipmakers that have tried to build their businesses in China. This means that TSMC will not be able to substantially upgrade or expand its existing facilities in China, effectively losing some growth opportunities in the world’s biggest semiconductor market.
While China’s SMIC can make chips that are more advanced than 28nm, its technology is still at least six years behind TSMC.
SMIC and TSMC are the two companies with the most advanced logic chipmaking capabilities in China. SMIC’s most sophisticated technology is 14nm, while TSMC’s best is 16nm in the country. Those are three generations behind the most cutting-edge technology TSMC owns in Taiwan.
TSMC now makes 92% of the world’s most advanced chips — generally classified as those 10nm and below. For reference, Advanced Micro Devices’ (AMD) Ryzen series of chips, found in consumer desktops, use the 7nm process node, and chips in the newest iPhones and Samsung’s Galaxy S21 family use the 5nm process node.
ASML intertwined
Part of the challenges SMIC faces is related to the acquisition of equipment needed to produce these advanced chips. Key to the making of semiconductor chips is what is known as lithography machines, which make the silicon wafers that sit in the heart of semiconductor chips. While there are many makers of these lithography machines, only one company can make so-called extreme ultraviolet (EUV) lithography machines that produce the most advanced chips, namely, Dutch firm ASML.
The Trump administration had pressured the Dutch government to restrict ASML from selling its most advanced EUV machines to Chinese companies, and more recently, Bloomberg reported on July 22 that the US wants to expand the restrictions to also include older deep ultraviolet (DUV) tools from ASML. DUV tools are also manufactured by Japan’s Nikon Corp and are used to make more mature chips. Should this curb come into effect, ASML’s sales could drop by 5%–10%.
The Dutch government confirmed US officials are seeking to expand an existing moratorium on the sale of such systems to China, but it has yet to agree to any additional restrictions. ASML opposes the proposed ban because DUV lithography equipment is already a mature technology, CEO Peter Wennink said earlier this year.
Nina Turner, research manager for IDC’s enabling technologies and semiconductor team, says that because of the Covid-induced supply chain challenges, semiconductors have become more politically sensitive than they used to be.
It is recognised that there was a concentration risk in the semiconductor manufacturing chain. Japan and a few other European countries used to be huge players in the semiconductor manufacturing industry, but have outsourced a huge portion of these to places like China and Taiwan, she says.
Geopolitics and business are intertwined across the world; they are especially so for semiconductors, with international relations a key reason affecting where chipmakers invest to minimise the vulnerability of their supply chains. “Nobody wants to be dependent on one region if there’s a risk of disruption, [and] that’s driving that kind of diversification,” says Turner.
