What another Taiwan Straits crisis means for the global semiconductor industry

Nancy Pelosi, the Speaker of the US House of Representatives, and her visit to Taiwan have raised questions about a potential geopolitical turmoil in the region. The implications of her sudden visit will be felt in the coming months, with China already suspending the import of consumer goods from Taiwan and cancelling high-level talks with US representatives. However, one of the very interesting aspects of Pelosi’s visit was her video meeting with Taiwan Semiconductor Manufacturing Company’s (TSMC) chairman Mark Liu. As per a news report by Taiwan News, they also met over a dinner banquet to discuss important issues related to US-Taiwan collaboration on semiconductors.

With the Chinese state showcasing aggressive responses to the recent visit, one begins to wonder whether another Taiwan Straits crisis is on the horizon. A question that needs to be addressed in case of another crisis is the effect it might have on the global semiconductor and electronics supply chain. With the world slowly recovering from the global chip shortage and the electronic industry ramping up supply to pre-pandemic levels, can we afford another supply chain shock to the industry? Considering Taiwan’s dominance in the semiconductor manufacturing domain, will recurring cross-strait tensions affect the supply of chips and electronic products?

Understanding how any sort of escalation can eventually change the nature of the existing supply chain is imperative. A realignment in the industry’s functioning is possible, with China and Taiwan being integral aspects of the global semiconductor ecosystem.

A zero-sum game?

Increased tensions between China and Taiwan always raise the possibility of the PRC using its military might to complete its goal of reunification with the island nation. Now, if there is eventually an offensive launched, what will the end result look like? Will it eventually end up with China gaining influence in the overall ecosystem along with Taiwan’s existing semiconductor industry falling into the hands of the Chinese state?

Recently, the chairman of TSMC, Mark Liu, decided to sit with CNN’s Fareed Zakariya for a two-part interview. Being candid and upfront, Mark 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 openly talked about the China challenge and gave a public statement about a possible takeover of TSMC facilities by the Chinese state.

It is, however, true that China does not stand to benefit immensely from a hostile takeover of Taiwanese semiconductor manufacturing facilities. While fabs are just a component of the complex supply chain, China will continue to be dependent on importing high-end manufacturing equipment (from ASML, a Dutch company), photoresists and etching gas to actually ensure the completion of the fabrication process. If the Chinese state indulges in a takeover, there will be major pushback from the global semiconductor ecosystem, alienating China from the supply chain. There are already significant restrictions, such as export controls that exist on exporting critical semiconductor equipment to China. Completely taking over Taiwan’s industry will silo its own domestic industry leading to reduced revenue and market share.

But Taiwan will face a huge loss in terms of its economic and strategic advantage. Currently manufacturing over 60 percent 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 its domestic facilities housing critical IP and expensive equipment, the destruction or the takeover of these facilities will hurt Taiwan immensely.

Hence, China’s possible invasion of Taiwan by either the takeover or destruction of its semiconductor facilities will not be a zero-sum game. In the long run, both will be adversely impacted, and neither will benefit from such actions.

Assessing international impact

While it is clear that a potential crisis will only worsen the situation for both China and Taiwan in the semiconductor domain, there is an external caveat regarding how even an escalation in tensions can impact the global supply of chips.

A large-scale intervention or blockade of the Taiwan straits by the Chinese state can prevent the export of finished, 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 their own 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 on the trade routes, it is possible that Taiwan will be unable to export or supply the finished chips to its clients. This may trigger another chip shortage considering Taiwan’s global share of manufactured chip exports.

The Russian invasion of Ukraine had also raised concerns about whether a geopolitical event of such proportions could affect the chip supply chain. But the same thing cannot be expected in this case, considering Taiwan’s monopoly over the chip manufacturing domain. Even the possibility of an impending crisis can incentivise many firms to pull back on their business in Taiwan. Except for this time, there isn’t an alternative to fall back on. It will take considerable time and capital investment to reach where Taiwan is currently. The consumer will bear the immediate impact in this case. As end-consumers, we should expect to see a rise in the prices of consumer electronics goods in case of extended tensions.

It will not be just Taiwan, whose chip exports will decline. Even China, now one of the world’s biggest chip exporters, will focus on using its semiconductor technology to build chips for defence purposes. Most of their 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.

The global semiconductor ecosystem must be prepared in the coming months. Resiliency has not yet been built in, especially for Taiwan and its firms’ replacement in the supply chain. Another chip supply shortage might be on the cards if this issue can escalate into something big.

The author is a research analyst, The Takshashila Institution. Views are personal.

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