TAIPEI, Taiwan — An overwhelming percentage of the world’s semiconductor microchip supply will remain concentrated in Taiwan, according to officials and industry leaders, despite the looming threat of aggression from China.
“As to [the] question, whether or not we would insist on keeping this type of technological know-how here in Taiwan, I think, in the short term, the answer is probably ‘yes,’” said Taiwan’s National Development Council minister, Kung Ming-hsin.
That intention runs contrary to President Joe Biden’s emphasis on “friend-shoring,” the realignment of supply chains beyond the reach of Beijing. Chinese forces underscored Taiwan’s fragility last month by rehearsing a blockade of the island, which the communist regime claims as sovereign territory despite never having ruled there, but that threat motivates some policymakers to keep the semiconductor sector close at hand — to raise the odds that the United States would intervene on their behalf in a crisis.
“We play a very important niche role in this global supply chain,” Dr. Lo Chih-cheng, the Taiwanese legislature’s foreign affairs and national defense committee chairman, told the Washington Examiner during an interview in his office. “That kind of value to Taiwan in terms of technology, in terms of our importance in this global supply chain, is very important, not just for political [reasons], economic reasons, but also security reasons because [neither] you nor anybody [can] afford to lose Taiwan.”
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American officials and leaders across the U.S. alliance network have moved in recent years to insulate semiconductor supply chains against such a shock. And Biden backed a new federal law that offers subsidies for companies to produce the microchips in the United States on the condition that “recipients do not build certain facilities in China and other countries of concern.” That bill is designed to reduce “U.S. reliance on vulnerable or overly concentrated foreign production,” an impulse hardly shared in Taipei.
“If you want to reduce the risk in economic terms of some sort of military incident or a war and the Taiwan Strait … that doesn’t match with Taiwan’s development goals,” Tufts University’s Chris Miller, author of the forthcoming Chip War: The Fight for the World’s Most Critical Technology, told the Washington Examiner. “They’d rather have it at home.”
Kung, other Taiwanese officials, and business representatives spoke to a group of reporters invited to Taipei as the Taiwanese government makes the case for Taiwan’s application to join the Comprehensive and Progressive Trans-Pacific Partnership, a trade pact linking 11 Pacific Rim economies. They also touted the beginning of the U.S.-Taiwan Initiative on 21st Century Trade, a dialogue that Taiwanese officials hope will set the stage for a free trade agreement with the U.S.
“Taiwan is a member of the global semiconductor supply chain ecosystem and we believe by forging stronger partnerships across the supply chain, we can optimize the supply chain for the benefit of the world,” said Kung, emphasizing that even Taiwanese semiconductor companies depend on American equipment to manufacture their products. “So for Taiwan, our priority is to forge strong partnerships with important trading partners and also trading partners who are transparent so that we can ensure our economic security.”
Even so, Taiwanese authorities want to proceed with caution in the talks, according to a Taipei-based observer.
“Taiwan is also quite concerned about the flow of technology that will accompany a free trade agreement because, essentially, having this cutting-edge technology in chips is what gives the country strategic advantage,” European Values Center for Security Policy’s Marcin Jerzewski said. “Of course, a free trade agreement will be a huge political boost for Taiwan … but when it comes to just pure economics, there are a lot of disagreements between both sides.”
As it stands, industry power players and independent observers agree that it would take years to establish new production facilities — known as “fabs,” short for “fabrication plants” — and those replacement factories may struggle to match the quality of the Taiwan Semiconductor Manufacturing Company and other leading producers.
“If the whole world already can consume [the chips produced at] 100 fabs, if we lost 20 fabs, where are we going to find that additional 20?” Macronix International founder Miin Wu, a pioneer of Taiwan’s semiconductor industry, told reporters last week. “In reality, the damage will not be easy to recover.”
Wu estimated that if a crisis were to break the current supply chain, it would take “at least one year” to transfer operations to an overseas facility. “And then, the product has to be qualified by my customer’s customer,” he said.
Even that timeline may be optimistic. “When those fabs turn on, you have no guarantee that you’re going to hit yields,” the Semiconductor Industry Association’s director of technology policy, Eric Breckenfeld, told ChinaTalk host Jordan Schneider last month. “In the worst-case scenario, you also don’t have access to their engineering talent. Who’s going to run these fabs? You have to relearn a lot of the knowledge in the fabs’ proprietary — and that’s the Coca-Cola recipe, right? They keep that safely guarded. So you’re a decade behind, at least.”
TSMC agreed in 2020 to open a factory for advanced 5-nanometer chips “at the urging of the U.S. government” during the Trump presidency, as TSMC founder Morris Chang said in April. Chang asserted that “manufacturing chips in the U.S. is 50% more expensive than in Taiwan,” and Wu cited TSMC’s experience while questioning whether American employees have the “discipline and dedication” to perform at the level of Taiwan-based fabs.
“Nobody wants to move out,” Wu said. “A Taiwanese company in Taiwan, they have the best people to work in the factories. They are dedicated, they are willing to work overtime, anytime, if [the] company needs them. So the cost to produce parts in Taiwan is the lowest. So you go ask their opinion — nobody wants to go to other countries because they already demonstrate it’s not going to work.”
If Taiwanese authorities believe that their centrality in the semiconductor supply chain serves to deepen U.S. interest in their fate, it also remains possible that such consolidation could backfire on the island democracy. Miller, the Tufts University professor, warned that U.S. officials may feel an incentive to press Taiwan to make concessions in a crisis rather than risk a conflict that disrupts the supply chain.
“The cost of even just a small military incident, to say nothing of a war, would potentially be so large,” Miller explained. “[It’s plausible that] this president or a future president would look at the cost-benefit of fighting and say, ‘You know, in addition to [being] not sure what is going to happen on the military side, we’re also guaranteed this huge economic cost because we lose access to all this technology we can’t otherwise replicate.’”
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If that’s a risk, then it’s one that some in Taiwan believe they must take. “We have to make Taiwan valuable,” said Lo, the Taiwanese lawmaker. “What’s the alternative? To make Taiwan less valuable? No. That’s our only approach.”
