the fate of the world economy depends on this company. In the background, the clash between China and the USA
On a tiny island off the coast of China, a company produces products that are used around the world for countless household items as varied as computers and washing machines.
And with this island – Taiwan – worried about the threat of an impasse between the US and China, the global economy is holding its breath. That’s because this one company: Taiwan Semiconductor Manufacturing Company, the world’s largest chip maker, can have trillions of dollars worth of economic activity.
Industry watchers say the escalating U.S.-China dispute over Taiwan could plunge the global economy, given the fact that no other company produces such advanced chips on such a large scale. They say if TSMC goes offline, production of everything from cars to iPhones could stop.
“If China were to invade Taiwan, it would be the greatest impact we have seen on the global economy – perhaps ever,” Glenn O’Donnell, Forrester vice president and research director, told Insider. “It could be worse than the crisis of 1929,” he added.
What is TSMC?
While TSMC may not be a commonly known name, you almost certainly own something that is powered by its chips.
TSMC is active in the foundry industry, which means it does not design its own chips, but produces them in factories for other companies. The company is responsible for more than half of the global semiconductor market, and when it comes to advanced processors, according to some estimates, this figure is as high as 90 percent. Even the best chip from China’s leading semiconductor manufacturer, SMIC, is said to be about five years behind TSMC.
TSMC sees Apple as its biggest customer, providing the Californian tech giant with the chips that power iPhones. In fact, most of the approximately 1.4 billion smartphone processors in the world are manufactured by TSMC, as are about 60 percent of the chips used by car makers, according to The Wall Street Journal.
TSMC semiconductors are also used in high-performance computing: they can quickly process data risks and direct missiles, making the company very valuable in the eyes of government institutions.
According to William Alan Reinsch, a senior advisor at the Center for Strategic and International Studies, a national security think tank, TSMC has dominated the industry, it has automatically become an oligopoly.
“When you have a very complex, very sophisticated and very expensive technology where entry barriers are very high – I mean, building a factory is billions – you can’t just decide tomorrow,” Well, I’m getting into this business, “he said. “It’s not making tea,” he added.
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How did we get so addicted to Taiwan-made chips?
The semiconductor industry has its origins in the United States, as most of the research and development work is done there. Companies in other countries license technology made in the USA.
Dylan Patel, Principal Analyst at Semiconductor Research and Consulting Company SemiAnalysis, cited the Dutch company ASML as an example. This one makes high-end equipment for the production of chips, but one of the technologies for which it is best known was invented in the US National Laboratories.
Over the past 30 years, according to Reinsch, manufacturers in the developed world have come to the conclusion that it is in their best interests to outsource chip manufacturing.
“You build a huge factory and do these things by the thousands, and you do it in a low-wage country that probably has no environmental requirements,” he said. “You keep all the design and intellectual property in your home, you do all the sales, marketing and services at home, and you make money on it,” he explained.
It was this approach that directly led to the development of foundries like TSMC and a reduction in production on US soil, Reinsch said.
According to a report by the Semiconductor Industry Association in 2021, in 1990 the United States produced 37 percent of world chip supply. Currently, the United States is responsible for only 12 percent. world chip production.
Why is this a problem now?
As the coronavirus pandemic and the war in Ukraine have shown, too much reliance on certain countries can overturn supply chains when disruptions occur. For this reason, many US corporations are researching “onshoring” – moving some production to the United States – to make their supply chains more resilient.
US access to TSMC chips, however, is particularly sensitive as while Taiwan is self-governing, China claims the island is their property and is threatening to invade. Controlling Taiwan is key to Chinese President Xi Jinping’s goal of achieving “a great rejuvenation of the Chinese people” by 2049, the 100th anniversary of the People’s Republic of China.
While the consequences of the invasion could be significant, many experts say it is only a matter of time before it happens by 2030, 2025 or even the end of next year.
US Secretary of State Antony Blinken recently predicted that China would take steps to annex Taiwan “much sooner” than previously thought. The US government is already playing wargame scenarios to prepare for this, and in the event of a full invasion, it would reportedly consider evacuating the skilled engineers it is so dependent on.
In recent weeks, attention has shifted increasingly to Taiwan and the semiconductor industry as a whole, following the introduction of export laws that the US government imposed on China. These regulations limit the sale of US-made semiconductors and are intended to limit China’s ability to develop advanced technologies.
The US and China are now trapped in what Patel has described as a “full-scale two-sided cold economic war” that is likely to have serious financial repercussions, especially given how intertwined the semiconductor supply chain is.
What would happen if China invaded Taiwan?
Taiwan hopes its semiconductor industry will save it from Chinese aggression – government leaders have dubbed the industry a “silicon shield” from invasion.
But if China invades by disrupting world chip access, “the entire world economy will come to a halt with a screeching tire,” said O’Donnell of Forrester. – Semiconductors have become almost like the oxygen of the world economy – he emphasized. “You can’t breathe without the chips,” he added.
The effects of such a hold would be “economically devastating,” says Martijn Rasser, a former senior intelligence officer at the CIA who is now a security and technology expert at the left-wing think tank Center for a New American Security.
“You’ll be looking at trillions of dollars in economic losses,” he told Insider.
The US National Security Council agrees, and in July the US Trade Secretary said the US would face a “deep and immediate recession” if US companies no longer had access to these chips.
Some experts speculate that in the event of an invasion, the chip manufacturing facilities will be intentionally destroyed to prevent China from having access to them. In a December article in the US Army journal, scientist Jared McKinney described this strategy as a “broken nest” – another way of describing it is guaranteed mutual destruction.
The destruction of these facilities or lack of access to their chips could have serious national security implications, Rasser said.
“Every military system we rely on has a plethora of semiconductors,” he said. “It would start to affect our ability to maintain existing weapons systems, improve them, build new ones,” he explained.
Given that the US has pledged to defend Taiwan in the event of a Chinese invasion, these attacks on US defense capabilities could be particularly significant.
But while a Chinese invasion of Taiwan would cause the most serious disruptions, Rasser says blocking global access to chips does not necessarily require an invasion. In addition to investing in Taiwanese companies and poaching their workers, China could introduce a blockade on the island that could cut the world off its semiconductor supply.
What is the answer?
The United States is taking some steps to become independent from Taiwan. For example, in July, Congress passed the CHIPS Act, which covers nearly $ 53 billion. subsidies and tax breaks to boost US chip manufacturing.
Some companies have already started investing in facilities in the US: Intel builds two factories worth $ 20 billion. in Ohio, Micron pledged up to $ 100 billion. For a huge chip factory in upstate New York, Samsung is building a factory worth $ 17 billion. in Texas, and TSMC builds a $ 12 billion factory. in Arizona.
TSMC is also building a new plant in Japan that will produce less advanced chips needed by the auto industry. “The Wall Street Journal “reported that Japanese officials have signaled they would like TSMC to expand its presence there and build more advanced chips, another sign that world powers are increasingly concerned about geopolitical risks to Taiwan.
However, O’Donnell warned that it would be premature to celebrate an end to the chip shortage or US addiction to Taiwanese products. The factories themselves need equipment that is lacking due to – ironically – a lack of chips. Besides, they need years to build the infrastructure and enter the economic chain.
“Once you dig a shovel into the ground, you won’t get the chips for at least three years,” he said.
In addition, there are still obstacles to significantly reducing the country’s dependence on TSMC. While subsidies and tax breaks will help, Taiwan may still remain a cheaper option for businesses. At least for now, TSMC chips are likely to be of higher quality as well. Given that TSMC is “really at the forefront,” said Rasser, chips produced in the US, for example, by Intel “would not be as sophisticated” as those made in Taiwan.
While producing even these lower-quality chips could reduce the US dependence on Taiwan to some extent, the US has a shortage of skilled labor needed to increase production, an issue faced by companies in this industry around the world. Rasser says better training and education will be needed to fill this gap.
For these reasons, it may take “years, potentially decades”, before the United States can declare independence on the chip manufacturing front.
“The CHIPS law is a good step in the right direction, but it’s only a first step,” said Rasser.
Authors: Avery Hartmans and Jacob Zinkula
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