What a Taiwan crisis means for the global chip race

With Taiwan and China being key parts of the global semiconductor ecosystem, how will increased cross-Strait tensions affect the industry?

Speaker of the United States (US) House of Representatives, Nancy Pelosi’s visit to Taiwan has raised questions about a potential geopolitical turmoil in the region. One interesting aspect of Pelosi’s visit was her video meeting with Taiwan Semiconductor Manufacturing Company (TSMC)’s chairman Mark Liu, showcasing the primacy of semiconductors in international relations.

With the world recovering from a chip shortage and industry ramping up supply to pre-pandemic levels, can we afford another supply chain shock to the industry? (Shutterstock)

With the Chinese State showcasing aggressive responses to the visit, one begins to wonder whether another Taiwan Strait crisis is on the horizon. A question to address in case of another crisis is the effect it might have on the global semiconductor and electronics supply chain.

With the world recovering from a chip shortage and industry ramping up supply to pre-pandemic levels, can we afford another supply chain shock to the industry? With Taiwan and China being key parts of the global semiconductor ecosystem, how will increased cross-Strait tensions affect the industry?

If a military offensive is launched, what will it look like for the industry?

Recently, Mark Liu was interviewed by CNN’s Fareed Zakaria. Being candid and upfront, Liu stated that if China were to take over Taiwan, it would find TSMC’s facilities unusable, because human capital remains their strength and their progress rests on international collaboration with companies for materials, equipment, software and hardware. It was the first time an industry leader talked about the China challenge and gave a public statement about a possible takeover by China.

Indeed, China does not stand to benefit from a hostile takeover of Taiwanese semiconductor manufacturing facilities. While fabs are an important component of the complex supply chain, China will continue to be dependent on importing high-end manufacturing equipment, photoresists and etching gas to complete the fabrication process. If the Chinese State executes a takeover, there will be a major pushback from the global semiconductor ecosystem, alienating China from the supply chain. There are already significant restrictions, such as export controls, on supplying semiconductor equipment to China. Taking over Taiwan’s industry will silo its domestic industry.

Taiwan, however, will face huge losses in terms of its economic and market advantage. Currently manufacturing over 60% of the world’s chips, the industry’s collapse will see Taiwan’s economy tumble and eventually lose its strategic sway over the ecosystem. With their domestic facilities housing critical IP and expensive equipment, the destruction or the takeover of these facilities will hurt Taiwan immensely. Therefore, China’s takeover or destruction of Taiwan’s semiconductor facilities will not be a zero-sum game. In the long-run, both will be impacted, and neither will benefit from such actions.

A large-scale intervention or blockade of the Taiwan Straits by the Chinese State can prevent the export of manufactured semiconductor chips from the island nation. The fabs in Taiwan function on the pure-play foundry model, meaning that they act only as contract manufacturers for all semiconductor design firms that don’t have fabrication facilities. Hence, a majority of US and European firms enlist the services of Taiwanese foundries to get their designs manufactured. If there’s a blockade of trade routes, Taiwan may be unable to export or supply finished chips to its clients. Signs of an impending crisis can make firms pull back on their business in Taiwan. This may trigger another chip shortage.

It will not be just Taiwan, whose chip exports might decline. Even China, now one of the world’s biggest exporters, will focus on using its semiconductor technology to develop chips for defence purposes. Most of its capital and resources in the semiconductor domain will be directed towards utilising them for improvement in military systems. Hence, consumer goods will take a hit. With Chinese exports being a low-cost alternative for many, this would ensure that there is a paucity of goods from China in case of a conflict.

Supply chain resilience or replacement has not yet been built, especially for Taiwan and its firms. It will take time and capital investment to reach where Taiwan currently is. Another chip supply shortage might be on the cards if this issue escalates into something bigger.

Arjun Gargeyas is a researcher with the High Tech Geopolitics programme, Takshashila Institution

The views expressed are personal