What the world’s largest company should do

With the outlook for Sino-US relations remaining bleak, the globally indispensable Taiwanese Semiconductor Manufacturing Company (TSMC) is quietly exploring its options. Caught in the middle of the competition of the great powers of the 21st century, its future will depend on playing a long and intelligent game.

CAMBRIDGE – Taiwan, often referred to as the “silicon shield,” produces a staggering 65% of the world’s semiconductors and more than 90% of the highest-end chips. As such, no company is more uniquely important to the global economy than TSMC (Taiwan Semiconductor Manufacturing Company). TSMC’s advanced microchips are indispensable for iPhones, medical devices, missile launch platforms and many other technologies, and are virtually unrivaled. Countries and companies that cannot afford TSMC’s most advanced semiconductors simply cannot develop certain critical technologies. Company decisions, therefore, can bear directly on global security issues.

Against a backdrop of bleak Sino-US relations, TSMC announced plans to invest $40 billion to build a second manufacturing plant in Arizona, where it will make 3-nanometer chips (the first plant, for 4-nanometer chips, is scheduled to be operational in 2024). The company’s decision to bring more production online in the United States is understandable now that tensions over Taiwan have come to the fore. Following the US House Speaker Nanci Pelosi’s visit to the island in August, China carried out unprecedentedly aggressive military exercises, launching missiles near the island and simulating a blockade of the Straits. from Taiwan.

Then, in October, the administration of US President Joe Biden announced sweeping new export controls, aimed at undermining China’s ability to produce advanced chips and implement other high-tech manufacturing. While China has invested heavily in domestic chip production, the results have been disappointing. Now that President Xi Jinping has guaranteed himself a third term as China’s leader, his regime could retaliate by ending contracts with US technology companies to build data centers for provincial governments.

While TSMC has received a one-year waiver from new US export controls, there could come a time when the Biden administration pressures it to cut much of its business in China. The US administration fears that China is using TSMC chips in a new class of hypersonic missiles, and is seeking to impose global dominance in the field of artificial intelligence.

China’s reliance on Taiwanese chips has served as a form of deterrence and protection for Taiwan, because the Chinese government simply cannot take over the island’s highly sensitive chip-making facilities by force. While some observers fear that China may view TSMC as a reason in itself for occupying Taiwan, TSMC Chairman Mark Liu has pointed out that a war would inevitably destroy TSMC’s factories or render them inoperable.

Still, TSMC finds itself caught in the middle of great-power competition, because it makes chips that both sides want and has operations on both sides. While the Chinese market accounts for 10-12% of the company’s total revenue, the United States is its largest customer base, and Taiwan remains its main production base and research and development center.

TSMC is diversifying its chipmaking capabilities precisely to avoid getting entangled in geopolitical complexities. Beyond Arizona, it plans to open factories in Japan, and is in the process of evaluating sites in Europe. But there is a limit to how far TSMC can diversify without stripping Taiwan of its silicon shield.

China will no doubt be left behind in the semiconductor race, because it lacks access to the lithography machines needed to make the most advanced chips. However, it is likely to dominate the market for legacy chips (those ranging from 28 to 44 nanometers), and it is working hard to develop its own technology standards.

While the United States has tried to reduce its own reliance on Taiwanese chips by implementing the CHIPS and Science Act of 2022, more federal support for domestic semiconductor producers won’t completely solve the problem. TSMC will continue to make the most advanced chips for the foreseeable future, and much of the supply chain will remain in Taiwan. Policy makers in the United States, therefore, need to be prudent when it comes to export controls. Policies that succeed in isolating China completely from advanced chips could flip the deterrence calculus and leave China with nothing to lose if it goes ahead with an invasion. As Taiwanese President Tsai Ing-wen observed in a recent speech, the superpowers’ shared reliance on Taiwanese chips must continue to be viewed “not as a risk, but…as the key to the reorganization of the global semiconductor industry.” ”.

As geopolitical tensions rise, maintaining deterrence in the Taiwan Strait is more important than ever. Xi’s speech at the recent 20th National Congress of the Chinese Communist Party showed that he is serious about unifying Taiwan and mainland China – by force, if necessary – even if the timing of doing so is still uncertain. As the United States and Taiwan head into their own presidential election cycles, politicians may feel increased domestic pressure to be proactive.

That said, TSMC’s goal remains the same: to maintain its status as the unrivaled industry leader. To do so, you will have to play a long and clever game. That means making the necessary sacrifices in its Chinese business, moderating its new investment and diversification abroad, and ultimately keeping its most advanced chips in Taiwan.

China and the United States will see each other as strategic rivals for many years to come, with technology and national security remaining at the center of their competition. Ensuring Taiwan’s economy, trade, and technology supply chains are resilient and less dependent on China is in America’s vital interest. Caught in the middle of a 21st century great power competition, TSMC can only hope that American leaders continue to see it that way.

The author

A former member of the Legislative Yuan (parliament) of Taiwan, he is a senior research fellow at the Ash Center for Governance and Democratic Innovation at the Harvard Kennedy School.

Copyright: Project Syndicate, 1995 – 2022

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