Chinese warships off the coast, American delegations at the airport: Taiwan, an island slightly smaller than the Netherlands, is at the center of a global power struggle.
Not only is Taiwan’s political status at stake right now, but the global economy is also at risk. Especially when it comes to chips: more than 90 percent of the most advanced processors come from Taiwan.
Last week, the US and Taiwan began negotiations for a new trade deal. This should, among other things, prevent another hitch in the production of chips. The recent chip shortage – eased somewhat by the faltering global economy – showed how vulnerable Asian supply lines are.
The Taiwanese manufacturing industry plays a crucial role in the tech world. American chip designers such as AMD, Nvidia, Qualcomm and Apple (together around USD 3,500 billion in market value) have their processors manufactured by TSMC, the specialized chip manufacturer from Taiwan. The iPhone 14, which Apple will announce next month, will also run on computing power from the TSMC factory.
Tensions surrounding Taiwan increased this month as Nancy Pelosi, Speaker of the US House of Representatives, visited Taiwan and spoke with the TSMC leadership. China responded with unprecedented large-scale military exercises around the island and in the Taiwan Strait.
The US sees China as an aggressor and as the greatest threat to world peace. China sees the US as an aggressor and the biggest obstacle to China’s further growth. This week, a second delegation of US Congressmen paid an unannounced visit to Taiwan, where China announced new military exercises.
miracle of growth
Taiwan is in a difficult position. The island is claimed by China, but has had its own independent government for over seventy years and functions as an independent country. For its economic growth, Taiwan benefited from its good ties with the US, Japan and Europe, as well as from its proximity to China.
It was also mainly Taiwanese (and Hong Kong) business people who gave wings to the Chinese growth miracle and benefited from it themselves. They were the first to dare to invest in factories in mainland China. They also provided the knowledge transfer needed to turn an abundance of cheap Chinese labor into China’s growth engine as an export giant.
It is precisely the unclear status that the island now has that makes it a perfect link that connects international production chains with China. Taiwan exports 65 percent of its chips to the US and 10 percent to China.
The US fears that an increasingly assertive China will invade and take control of the island – just as Russia is now trying to do in Ukraine. In Chinese eyes, the US is pushing Taiwan to secede from China. Although the US formally adheres to its one-China policy (Taiwan and mainland China belong together), China does not see that reflected in US actions.
The fear of a formal secession is not imaginary: according to the latest opinion poll, the population of Taiwan is in majority in favor of such a secession. President Tsai Ing-wen does not opt for that, but who knows, maybe a more radical successor will. Then the island would be lost to China – completely unacceptable to Beijing.
US wants to make its own chips
The US does not want to be dependent on Taiwan for the most complex semiconductors: they want to be able to make them themselves. Last week, US President Biden signed the ‘Chips ACT’, a USD 52 billion (EUR 51.5 billion) stimulus program for its own chip industry.
“It’s crystal clear that we need those semiconductors, including for weapons systems that will depend on advanced chips,” Biden said. “Unfortunately, we currently make 0 percent of such chips.”
The stimulus program seems to be working. The largest chip makers TSMC, Samsung and Intel are going to build new factories in the US. The investment of one such chip factory can amount to 20 billion dollars. It is not efficient for chipmakers to spread production worldwide and have to look for qualified personnel in multiple locations.
The Chips ACT came partly at the insistence of Intel, the American chip manufacturer that is a few years behind the technology from Taiwan. The European Commission already decided in February on a EUR 43 billion stimulus package for the semiconductor industry. Europe also wants more chip production within its own region, prompted by the chip shortages during the corona crisis and rising geopolitical tensions.
Also read: China is not going to attack Taiwan head-on. Well sideways
With this large-scale state aid, the western world is following China’s approach. Over the past decade, that country has earmarked $150 billion for the development of its own chip industry.
Since 2014, the domestic production of chips has been a national priority. In that year, China set up a fund to help the country become independent from abroad for the production of chips. This ‘National Chip Fund’ or the ‘Major Fund’ fits in with the ambitious Made in China 2025 plan. Although China processes many chips in electronics, there is no local chip industry that can compete with the international premier league in semiconductors; in Taiwan (TSMC) and in South Korea (Samsung).
Although the share of Chinese chip production is increasing, the country is lagging behind with advanced chips. This is partly due to export restrictions. For example, ASML’s EUV lithography machines – indispensable for the production of the most modern chips – may not be supplied to the Chinese chip manufacturer SMIC.
The US government wants to deny the Chinese more tools to manufacture chips, fearing that China will gain an edge in artificial intelligence and military strength.
Such a tightened export restriction could affect Japanese and Dutch chip machine makers, but also American suppliers such as Lam Research, KLA and Applied Materials. More than a quarter of their turnover comes from China. By comparison, ASML obtained almost 15 percent of its annual turnover (18.6 billion euros) from China in 2021. It was 10 percent in the past quarter.
Chinese corruption
The Chinese Grand Fund is not yet an undivided success. For example, a lot of money went to the Tsinghua Unigroup, which makes chips and parts for telephones. The company, which grew by buying up other companies in the sector, could no longer pay its debts and went bankrupt in July 2021.
Zhao Weiguo, the company’s former chief executive, disagreed with the way the company was being restructured by the government after the bankruptcy. He also accused officials involved of pushing money back. Zao was recently arrested and has not appeared in public since. It was not only he who fell: at least two high-ranking officials on the board of the Great Fund were also arrested.
Because Chinese leader Xi Jinping wanted to grow the sector quickly at all costs, a lot of money was poured into it with no control over spending. For example, the costs for some factories in the sector were much higher, for no apparent reason. That led to corruption.
In other industries, the Chinese innovation model – a government that flings money to develop key sectors – often proved successful, even though a lot of capital was wasted. In this way, the thriving Chinese wind energy and solar panels sector gained momentum, as well as the manufacture of electric cars. But this is more difficult with semiconductors. The reason: it is more difficult.
The complexity of chips is expressed in the number of nanometers (millionths of a millimeter) with which the lines are applied to a chip. The finer the mesh, the more circuits can fit on the same chip surface. The more circuits, the more powerful the chip. TSMC produces 5-nanometer chips with lithography machines from the Dutch ASML. Factories for the next generations, 3 and 2 nanometers (nm), are already in preparation.
The most advanced chip manufacturer on Chinese soil is SMIC. This company knows how to make 7 nm chips with ingenuity, but is three or four generations behind the international competition in the production process. But China is effectively stuck at 14 nanometers, as long as ASML does not get permission to supply its most advanced lithography machines to SMIC.
Money or violence
In 2020, the US cut off Chinese tech company Huawei access to TSMC’s advanced chips. China is trying to acquire the technical knowledge for chip production itself by luring TSMC talent with high salaries, much to the chagrin of the Taiwanese government.
Can China also acquire chip technology faster, through aggression? Military actions would destroy the delicate infrastructure surrounding the production of chips in Taiwan. Mark Liu, chief executive of TSMC, the world’s largest chip maker, told at the end of July CNN that TSMC would then no longer be able to function. „They are very complex production processes, they depend on a real time connection with the outside world, with Europe, with Japan, with the US, from raw materials to chemicals to spare parts and to diagnostics and design software.”
A blockade would also hit the Taiwanese high-tech sector in the heart. The semiconductor production chain has so many dependencies that you cannot keep a factory running with money or violence. Should China invade Taiwan, it would kill the goose that lays the golden eggs, and risk en passant that the nascent Chinese chip industry will be completely cut off from Western technology.
Neither China nor the US are ready for such a drastic disconnection. Xi Jinping and Joe Biden can tell each other in person during their meeting at the G20 summit in Bali in November.
A version of this article also appeared in the newspaper of August 20, 2022
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