Semiconductor nationalism is a direct result of the collapse of global supply chains during COVID but concerns about supply chains were already fueled by concerns about erratic policy moves by Xi Jinping towards foreign investment and assertive military posturing. Currently the focus is on “reshoring” leading-edge chip foundries that are critical to AI, autonomous vehicles, quantum computing, and other breakthrough technologies.
Because its foundries fabricate 92 percent of the world’s leading-edge chips, the Taiwan Semiconductor Manufacturing Company (TSMC) has become the focal point of reshoring in the U.S., Japan, and Europe. Taiwan’s close partnership with the Netherland’s ASML company, the single source of the ultraviolet photolithography machines needed to fabricate advanced and leading-edge chips plays a key role.
Taiwan’s dominance of chip fabrication, which constitutes a global strategic industry, gives it geopolitical influence far beyond its size, economy and population. China’s dependence on Taiwan to cover its chip deficit has been called its “Silicon shield.”
In the case of the United States, a key objective of the $52 billion “Chips and Science Act” of 2022 is to create a more secure domestic source for its most advanced civilian and military needs. The Act does little to address the everyday “mature” chips supply chain breakdown that shuttered vehicle and appliance assembly lines around the world. American companies have emphasized advanced and leading-edge technologies because they could never compete with low-cost producers in East Asia. The contract foundry relationship of U.S. companies such as Apple, Nvidia, and Qualcomm with the Taiwan Semiconductor Manufacturing Company (TSMC) has allowed the U.S. companies to focus on research and development (R&D) core intellectual property (IP), chip design, and specialized tools, and other related technology.
China is both the largest producer and largest importer of semiconductors and related integrated circuits. After more than 50 years of authoritarian rule under the Chinese Communist Party, inadequate investment in science and technology, and extreme over investment in the property sector, China still cannot fabricate a leading-edge chip. Consequently, it depends on Taiwan for about 70 percent of the chips needed to feed its world-leading consumer electronics and motor vehicle industries. Chips and other Integrated circuits constituted 62 per cent of Taiwan’s exports to the mainland in 2021, valued at US$155 billion (China Customs).
The crux of the issue for Taipei is to make sure that TSMC’s role in chip nationalism positively affects Taiwan’s economy and security. Building foundries in the U.S., Japan, and Europe has both benefits and risks for TSMC. Going offshore significantly increases Taiwan’s global influence and helps solidify both its economic and security relationship with the United States, but also has potential financial risks for TSMC and the economy in Taiwan.
A problem could arise if TSMC should reserve the fabrication of its most advanced chips exclusively in Taiwan. For the United States, not having a domestic source of the most cutting-edge chips weakens the whole rationale for onshoring. Indications are that TSMC understands U.S. concerns. The first Arizona foundry scheduled to be completed in late 2024, has already been upgraded from 5 to 4nm The company has now committed to a second foundry scheduled for completion in 2026 that will have the company’s latest version of its Extreme Ultraviolet Lithography. For now, the plan is to produce 3nm chips, but the foundry should be able to fabricate whatever becomes the most advanced standard in Taiwan.
For United States, having access to domestic leading-edge chips will have economic and security benefits, but these will be limited if the high costs of subsidizing construction create diminishing federal, state, and locality political support. It remains to be seen what will happen once when the Congress and public at large realize that domestic production of leading-edge chips will do nothing to address the supply chain vulnerability revealed by the COVID pandemic. It can be argued that offshoring need not affect TSMC’s dominant position and bottom line because the output of foundries in Arizona, Kumamoto, and Europe will provide new income for TSMC, but it is likely be more complicated than that. Whether the increased costs to produce offshore will provide profits that are equivalent to those experienced by foundries in Taiwan remains to be seen. There seems little doubt that over long term that the demand for leading-edge chips will continue to grow rapidly, but less so, at least temporarily, in the case of a global recession.
Semiconductor Nationalism and the Global Chip Supply Chain
By Richard Cronin
Emerging Technology
Semiconductor nationalism is a direct result of the collapse of global supply chains during COVID but concerns about supply chains were already fueled by concerns about erratic policy moves by Xi Jinping towards foreign investment and assertive military posturing. Currently the focus is on “reshoring” leading-edge chip foundries that are critical to AI, autonomous vehicles, quantum computing, and other breakthrough technologies.
Because its foundries fabricate 92 percent of the world’s leading-edge chips, the Taiwan Semiconductor Manufacturing Company (TSMC) has become the focal point of reshoring in the U.S., Japan, and Europe. Taiwan’s close partnership with the Netherland’s ASML company, the single source of the ultraviolet photolithography machines needed to fabricate advanced and leading-edge chips plays a key role.
Taiwan’s dominance of chip fabrication, which constitutes a global strategic industry, gives it geopolitical influence far beyond its size, economy and population. China’s dependence on Taiwan to cover its chip deficit has been called its “Silicon shield.”
In the case of the United States, a key objective of the $52 billion “Chips and Science Act” of 2022 is to create a more secure domestic source for its most advanced civilian and military needs. The Act does little to address the everyday “mature” chips supply chain breakdown that shuttered vehicle and appliance assembly lines around the world. American companies have emphasized advanced and leading-edge technologies because they could never compete with low-cost producers in East Asia. The contract foundry relationship of U.S. companies such as Apple, Nvidia, and Qualcomm with the Taiwan Semiconductor Manufacturing Company (TSMC) has allowed the U.S. companies to focus on research and development (R&D) core intellectual property (IP), chip design, and specialized tools, and other related technology.
China is both the largest producer and largest importer of semiconductors and related integrated circuits. After more than 50 years of authoritarian rule under the Chinese Communist Party, inadequate investment in science and technology, and extreme over investment in the property sector, China still cannot fabricate a leading-edge chip. Consequently, it depends on Taiwan for about 70 percent of the chips needed to feed its world-leading consumer electronics and motor vehicle industries. Chips and other Integrated circuits constituted 62 per cent of Taiwan’s exports to the mainland in 2021, valued at US$155 billion (China Customs).
The crux of the issue for Taipei is to make sure that TSMC’s role in chip nationalism positively affects Taiwan’s economy and security. Building foundries in the U.S., Japan, and Europe has both benefits and risks for TSMC. Going offshore significantly increases Taiwan’s global influence and helps solidify both its economic and security relationship with the United States, but also has potential financial risks for TSMC and the economy in Taiwan.
A problem could arise if TSMC should reserve the fabrication of its most advanced chips exclusively in Taiwan. For the United States, not having a domestic source of the most cutting-edge chips weakens the whole rationale for onshoring. Indications are that TSMC understands U.S. concerns. The first Arizona foundry scheduled to be completed in late 2024, has already been upgraded from 5 to 4nm The company has now committed to a second foundry scheduled for completion in 2026 that will have the company’s latest version of its Extreme Ultraviolet Lithography. For now, the plan is to produce 3nm chips, but the foundry should be able to fabricate whatever becomes the most advanced standard in Taiwan.
For United States, having access to domestic leading-edge chips will have economic and security benefits, but these will be limited if the high costs of subsidizing construction create diminishing federal, state, and locality political support. It remains to be seen what will happen once when the Congress and public at large realize that domestic production of leading-edge chips will do nothing to address the supply chain vulnerability revealed by the COVID pandemic. It can be argued that offshoring need not affect TSMC’s dominant position and bottom line because the output of foundries in Arizona, Kumamoto, and Europe will provide new income for TSMC, but it is likely be more complicated than that. Whether the increased costs to produce offshore will provide profits that are equivalent to those experienced by foundries in Taiwan remains to be seen. There seems little doubt that over long term that the demand for leading-edge chips will continue to grow rapidly, but less so, at least temporarily, in the case of a global recession.
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