Taiwanese Semiconductor Manufacturing

semiconductor

Taiwanese Semiconductor Manufacturing

Semiconductors are strategic technological assets of critical importance to the global economy. Their use is ubiquitous in laptops, smartphones, cars, and defense equipment. COVID-19 semiconductor supply issues have also highlighted the lack of companies that produce semiconductors and their geographical proximity. As we can see from this graph, the small island democracy of Taiwan dominates the market, with its firms accounting for over 60% of Chip production. This clustering of production highlights a critical vulnerability in the Semiconductor market, with the Taiwan Strait exhibiting the potential to be a chokepoint of a vital commodity to global economic growth. 

TSMC (Taiwan Semiconductor Manufacturing Company) is the Semiconductor market leader, accounting for over 54% of global chip production and is the 6th most valuable company globally. TSMC is a considerable economic asset to Taiwan, and they are beginning to leverage it more in international relations. The US has also pushed Taiwan to build production plants, with TSMC investing 10’s of billions US$ in Texas and Arizona. Most notably, the plant in Phoenix, Arizona, will manufacture next-generation 2 NM chips. The reasoning behind pushing TSMC to set up shop in the US is fear of Chinese influence over Taiwan and the trade of such a critical commodity. Semiconductors are a crucial technology for US national security, with the US military being a big customer of advanced chips. The importance of Semiconductors is reflected in US industrial policy, with foreign firms like TSMC being eligible for generous US government subsidies. 

As the graph shows, Europe lags considerably behind the US and Asia in semiconductor manufacturing. Therefore Europe suffered more chip shortages during COVID-19 than the US and Asia. Europe only accounts for 6% of TSMC’s revenue, with the continent primarily consuming older generation chips used mainly by automakers. A shortage of these chips during the COVID-19 forced German automakers to slow down production.

TSMC talks had previously gone poorly with the EU, but a diplomatic spat between Lithuanian and China may change the Semiconductor picture on the continent. China has launched a complete trade embargo against Lithuania due to warming diplomatic ties between Taiwan and the Baltic state. The ban even covers goods made in the EU that contain Lithuanian components. Taiwan initially launched a 200 million $ investment plan to assist Lithuania but since upgraded it to a 1 billion US$ credit fund. The credit fund will cover six areas, most notably semiconductor talent and semiconductor development. 

Whilst this investment is significant, it is still a long way off a complete manufacturing plant. For example, the proposed TSMC plant in Arizona will cost 12 Billion US$. There are also concerns about Lithuanians capacity to manufacture Chips due to logistical problems and resources. Chip manufacturing is water and electricity-intensive, which could pose a problem as Lithuanian has some of the highest electricity prices in Europe and imports over 70% of it from Sweden. A fully-fledged semiconductor manufacturing plant in Lithuania, let alone in Europe, is unlikely in the near future. This case highlights the potential of Taiwan’s economic statecraft. Taiwan’s diplomatic allies are few and far between. This semiconductor-related support signals to other countries that friendly relations with Taiwan could lead to investment and the benefits of technology sharing of critical technology. 

How does this affect the UK? Taiwan and the UK have submitted applications to join the CPTPP (The Comprehensive Progressive Agreement on Trans-Pacific Partnership). If successful, this could deepen trade ties between the UK and Taiwan. Taiwanese investment in the UK’s semiconductor industry would be a welcome strategic diversification, with the UK’s largest Chip manufacturer (Newport Water Fab) being acquired by a Chinese company in 2021. 

By: Luc Wilson

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