Semiconductor Competition: Opportunities for Taiwan

Written by Adhiraaj Anand

Image credit: Public Domain

The Covid-19 Pandemic has underscored the dominance of Taiwan and particularly TSMC in the global semiconductor industry. Amid a worldwide chip shortage, the company’s profits beat most analysts’ expectations in 2021, with its share price reaching a record high. In addition, it outlined plans for $40-$44 billion of capital investment, far more than the capital resources available to any of its rivals. Nevertheless, TSMC and Taiwan’s chip industry continue to face threats from a tense geopolitical environment and intensifying competition from China and the US. A 2021 article for Taiwan Insight discussed how industrial policy and government support from the 1960s onwards allowed Taiwan to become a global leader in semiconductors. Now, some governments are taking similar approaches to making their countries self-reliant in semiconductors. As a result, concerns have been raised that foreign competitors could snatch talent from Taiwan. Taiwan and its firms could, however, could also see rising competition from abroad as an opportunity to expand their capabilities and access to markets.

Intensifying Global Competition

We are now in an era of global ‘techno-nationalism’, as the US and some of its allies make efforts to ‘decouple’ from China by re-shoring technology ecosystems and supply chains in the name of economic security. And China, in turn, attempts to achieve self-sufficiency in key technology sectors, including semiconductors. The ongoing Russian invasion of Ukraine could accelerate trends towards ring-fencing and localisation in the production of semiconductors and other technology, with the US, Japan, Taiwan and other nations placing sanctions on Russia and the US threatening to place further sanctions on China.

Amid such trends, for how long could Taiwan and TSMC maintain their leading edge in semiconductor manufacturing?

Taiwan’s Edge

Currently, only TSMC and Samsung in South Korea can produce chips at the most advanced process node of 5 nanometers (nm). TSMC controls 84% of the market for chips at this node, which have the highest speed and lowest energy consumption and are used in products by Apple and Huawei, among others. Other Taiwanese firms also hold dominant positions in the semiconductor industry. ASE Technology Holding is the world’s top chip assembler, and MediaTek is the largest smartphone processor vendor.

China is unlikely to match Taiwan’s capabilities in semiconductor manufacturing anytime soon. Despite receiving billions of dollars in loans and tax breaks, Chinese firms, including Semiconductor Manufacturing International Corporation (SMIC), have struggled to upgrade their capabilities to encompass high-end chip manufacturing on par with TSMC and Samsung. According to one expert from investment group CLSA, SMIC’s most advanced technology in 2019, at the 14nm node, was six years behind that of TSMC and Samsung. This gap could widen as TSMC spends more heavily to upgrade its capabilities further. What is more, the US government is slow to approve licenses for American firms to sell chipmaking equipment to SMIC, having put the company on a blacklist in 2020.

American firms including Apple, Nvidia, Qualcomm, Google and AMD receive 90% of their chips from Taiwanese manufacturers and will not be able to diversify away from them in the short term. Taiwan possesses certain training institutions, technical prowess, work culture, and efficiency that cannot be easily replicated elsewhere. Efforts in other parts of the world to produce high processing chips are bound to run into energy, labour, and efficiency problems eventually. Moreover, TSMC enjoys customer trust and government support and has experienced battle-tested management. The presence of an industry cluster at Hsinchu Science Park also reduces operating costs in Taiwan. TSMC’s plans to spend $100 billion in capital expenditure from 2021 to 2023 should ensure that it maintains its lead in advanced technologies for the foreseeable future. Moreover, such investments may allow it to attain the capability to produce even more advanced chips at the 3 nm node and below, and other firms with less advanced capability are unlike to take the risk of investing in frontier areas.

Thus, for at least the next ten years, TSMC and Taiwanese firms more broadly should remain leaders in semiconductor manufacturing. However, this supremacy cannot be taken for granted in the longer term. Several governments have expressed concern about reliance on Taiwan and introducing initiatives to boost domestic semiconductor manufacturing capabilities.

New Opportunities for Taiwan

The Biden administration has put aside billions of dollars to improve semiconductor manufacturing capabilities in the US, whose global output fell from 37% in 1990 to 12% in 2020. Additionally, the EU Chips Act, proposed in 2022, seeks to make Europe a leader in semiconductor technology and maintain a secure supply of chips by increasing the continent’s market share in the semiconductor industry to 20% by 2030. Japan has similarly unveiled a strategy to promote indigenous semiconductor manufacturing to achieve a 40% global market share in next-generation power semiconductors, which are to be used in emerging technologies such as electric vehicles, by the end of the decade.

Such developments, however, should be viewed by Taiwan and TSMC as opportunities rather than threats to their dominance. They present opportunities for Taiwanese firms to expand to new markets and build their capabilities in R&D and innovation in the value chain of semiconductors and other industries. As a result, Taiwan could reduce its dependence on semiconductor manufacturing as a driver of its economy and a strategic asset that provides diplomatic leverage. The Biden administration has shown an intention to work with Taiwan and other Asian allies in its re-shoring efforts, involving these governments in partnerships with multinationals and industry associations. TSMC’s establishment of a 5nm wafer plant in Arizona, announced in 2020, could amount to a form of win-win cooperation. From the US’ point of view, the $12 billion investment would create jobs, support the local economy, and help fulfil the government’s strategic aims in an industry that is important to its military and economy. TSMC, for its part, would be able to tap into innovation ecosystems and a large talent pool in the US, giving it a boost in establishing advanced R&D centres.

Similarly, by establishing a foundry in Europe, TSMC could also benefit from the EU’s strong innovative research environment and supply of manufacturing equipment, on which Dutch company ASML has a monopoly. The EU could, in turn, move closer to achieving ‘semiconductor sovereignty.’ Furthermore, TSMC is also reportedly looking to build a semiconductor manufacturing capacity in India. It has an opportunity amid rising demand for smartphones, laptops and other consumer electronics and government efforts to build manufacturing capabilities. This includes creating an Electronics Development Fund and a $10 billion Production Linked Incentive scheme for semiconductors (Capri, 2021) (Srivastava, 2021). With such an alignment of interests, it is prudent for the Taiwanese government to seek supporting agreements with these governments.

The Taiwanese government should look to advance discussions with partners such as the US and EU on establishing specialized strategic partnerships to protect the supply of semiconductors as well as investment and free trade agreements. Such cooperation could spur efforts to overcome the challenges of establishing foundries (such as those related to costs) in other countries and regions. It may also allow TSMC and other Taiwanese firms to improve their capabilities in upstream activities such as design and innovation, reducing the island’s dependence on manufacturing.

Free trade and investment agreements and security arrangements could allow Taiwan to diversify its economy and possibly earn a guarantee of military support in the event of a Chinese invasion and its firms greater access to international markets. Such cooperation would be win-win, and with Taiwan and these partners having overlapping interests, the time is ripe for the Taiwanese government.

Adhiraaj Anand is a graduate student and researcher at the National University of Singapore. His interests include great power competition, perceptions in international relations and global value chains

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