Semiconductor Industry Strategies in Taiwan

Written by Guo-Huei Chen, Ming-En Hsiao and Li-Ke Chang.

Image credit: Binario by Marta Diago Marco/Flickr, license CC BY-NC 2.0

The semiconductor industry is strategic to national security and critical to international connections in the high tech and techno-geopolitics era. In regard to tech, along with strategic competitions between America and China, Taiwan is at the frontline for its supply chains and geopolitics.

TSMC – the leading semiconductor manufacturer in Taiwan – is equipped with innovative technologies and advanced processes. It is pivotal in the competition between America and China. Thus, to sustain its advantage and minimize risks, TSMC has built a new plant in America. It is a strategy to increase bargaining power with America and keep its market share in China. TSMC also needs to continue in various technological innovations to maintain its pivotal role.

As China catches up in comprehensive national power by exercising a different system, suspicions between America and China escalate geopolitical competitions. In other words, tech frictions between the two countries are based on strategic distrust. With the “United States Strategic Approach to the People’s Republic of China,” the U.S. Department of State points out that “the CCP’s expanding use of economic, political, and military power to compel acquiescence from nation-states harms vital American interests.”

Oxford Economics describes semiconductor sector as a core industry that enables an interconnected world and tech innovations. Without an autonomous semiconductor industry, technical innovations in China will be controlled by other countries. Hence, when tech upgrades are delayed, the path to “Chinese Dreams” will be hindered.

If China overtakes in semiconductor technology, American hegemony will be jeopardized. Therefore, semiconductor becomes a core area in  US-China competition.

According to IC Insights, America is far ahead of China in integrated device manufacturer (IDM) and fabless fields. Up to 65% of fabless companies and 51% of IDM companies are headquartered in America. In comparison, fabless and IDM companies with headquarters in China, only account for less than 1% and 15%, respectively.

To gain autonomy in high-end technology, China is catching up fast. It proposes a China Integrated Circuit Industry Investment Fund to support local semiconductor industries. It aspires to increase domestic chip production rates to 70% by 2025 and to minimize the tech capability gap with America.

Reasonably, America is alarmed by this development. It places various restrictions and sanctions to suffocate semiconductor innovations in China and ensure its tech leadership in the world.

America elevates high-end tech export controls in Wassenaar Arrangement. Therefore, Internet software and semiconductor production technologies with military potential are enlisted. Export Administration Regulations and Entity Lists also aim to limit competitors from acquiring advanced technologies.

With outstanding human resources and technical advantages, Taiwan’s semiconductor industry plays a vital role in the US-China competition. Therefore, every strategic choice in Taiwan influences the geopolitical landscape. For example, the TSMC financial report in 2019, indicates that America accounts for 59.3% of its annual revenues (NT$634.7 billion), while China accounts for 19.4% (NT$208.1 billion). Its top two clients account for 23% and 14% of the annual revenue. Foreign institutional investors assume that Apple is the largest TSMC client, whereas Huawei is the second largest. Thus, if TSMC chooses to side with America, it may lose up to 20% of revenue in China. It is undoubtedly an unbearable loss to TSMC.

In its Letter to Shareholders, TSMC wants to become “everyone’s foundry.” It shows that TSMC does not intend to take sides. The company also actively lobbies in Washington, D.C. With investments and lobbying in the United States, it hopes to protect interests in the Chinese market. According to former TSMC General Counsel Dick Thurston in the EE Times, “It could be ‘you could quid pro quo with us’ not to go hard after Huawei.” Also, TSMC has established export control mechanisms to ensure their exports abide by international and American trade regulations. It also hopes to continue its shipments to customers. These measures not only build legal firewalls but also significantly reduce political risks.

In conclusion, TSMC’s strategic choices offer three critical lessons to the semiconductor industry in Taiwan. First, TSMC accounts for 53% of wafer foundry services around the world. With this critical role in supply chains, TSMC has more bargaining power not to take sides. Second, clarifying international and American export regulations to ensure corporate interests. Third, taking sides in the short term and engaging in a hedging strategy for the long term. Thus, companies should initially minimize the risk of losing American support and adapt to risk-averse strategies based on evolving situations.

Guo-Huei Chen is a PhD student at Tamkang University, Taiwan. He is also Secretary at the Hsinchu City Government.

Ming-En Hsiao completed his MSc at the London School of Economics and currently works as a Chief of International and Mainland China’s Affairs Section at the Hsinchu City Government.

Li-Ke Chang, PhD, is Director of the Economic Development Department, Hsinchu City Government.

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