Taiwan’s dominance in the chip industry makes it all the more important

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They yes the chips that power everything from mobile phones to electric cars – and they make up 15% of Taiwan GDP. Taiwan produces more than 60% of the world’s semiconductors and more than 90% of the most advanced ones. Most of them are manufactured by one company, Taiwan Semiconductor Manufacturing Corporation (TSMC). So far, the most advanced ones have only been made in Taiwan.

The semiconductor industry is known as Taiwan’s “silicon shield”, giving the world a great reason to protect the island. But chips are the industry most affected by the split between America and China. Parts of the wing are now moving abroad. In December TSMC held a concert to celebrate the opening of a chip (or “fab”) plant in Arizona. Joe Biden was there, as was Tim Cook from Apple and TSMCfounder, Morris Chang. Mr. Chang said TSMC triple investment in Arizona to $40bn, will open a second fab in 2026 and make three-nanometer chips, now the most advanced, in America. Mr. Biden said that “American manufacturing is back, folks.” Mr Chang said globalization and free trade were “almost dead”.

The chip industry was built on globalisation, with every part of the supply chain supporting it. TSMC‘s fabs, based on efficiency and high-skilled, long-term labor, could make chips faster and more accurately than any competitor. Experts agree that replicating this supply chain elsewhere would be ineffective. Mr. Chang told reporters in November that the cost of making chips in America would be 55% higher. He reportedly told Nancy Pelosi that American efforts to bring the industry home were “inevitable to fail.” But the shift to local supply chains is happening, spurred by covid-19 and the war in Ukraine. Governments want to make critical technology in safer places, closer to home. And America and China are competing to control the most sophisticated chips that could be vital to the next generation of advanced weapons.

Taiwan is pulled between the two. China has poured $50bn into chip-making, hoping to meet 70% of domestic demand for chips by 2025. It has also poached Taiwan’s chip engineers, executives and trade secrets. That brain drain has alarmed Taiwan’s government, which has cracked down on Chinese chip makers and introduced new laws against economic espionage. America is also trying to stop China from getting advanced chips. He passed it CHIPS and the August 2022 Science Act, offering $39bn in subsidies and a 25% tax credit to encourage domestic production, as well as $13bn of investment in chip research. In October 2022 it banned the export of advanced chips and chip-making gear to China.

Inside the TSMC Innovation Museum in Hsinchu, Taiwan, February 16, 2023

America’s success in giving TSMC to Arizona has caused fear in Taiwan. The KMT government allegation of “gift” TSMC to America. “TSMC definitely come USMC in the future,” said Tseng Ming-chung, a KMT rector Officials say those fears are overblown. TSMC aims to produce 600,000 wafers per year at its American fabs. But its manufacturing capacity is over 13m wafers per year. It is also building a new fab in Japan and considering one in Europe. “Taiwan’s cake is not cut in half. The cake is getting bigger, and we are taking some of the extra slices to America and Japan,” said Emile Chang from the economy ministry.

The minister of economic affairs, Wang Mei-hua, says TSMCthe new fabs do not mean the loss of Taiwan’s advantage. The most advanced nodes will still be made in Taiwan, and research will remain. In January Taiwan passed its own chip act, offering tax subsidies worth 25% of research costs. Foreign chip makers are investing in Taiwan. ASMLa Dutch company that makes advanced lithography tools for modern chips, is opening its sixth factory in Taipei in 2023. Micron and Applied Materials, two American semiconductor companies, are expanding in Taiwan.

None of this changes the fact that there will be inefficiencies in making “friend-shoring” semiconductors. But the reality is that the world is reshaping around geopolitical risk.

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