The visit to Taiwan on August 2 of Speaker of the US House of Representatives Nancy Pelosi’s did stir up the proverbial hornet’s nest. It was the first visit by a top US Administration official to Taipei in two-and-a-half decades. This led to a series of military manoeuvres by China as well as issuance of a White Paper on Taiwan on August 10.
This White Paper, which articulates the view of the establishment, is different from the white papers issued on Taiwan, previously in 1993 and 2000, in its lexicon as well as narrative. The text envisages ‘Use of Force’ by PRC in a bid for unification as also ‘No Foreign Interference’ in Taiwan. These two facets hinge on the stated policy of the CPC with respect to ‘One China Principle’ and, seemingly, outline a clear elaboration of the de novo course of action, if required.
The transformation of Taiwan’s ‘Paddy Field Economy’ to a leading ‘Chip Economy’ was facilitated by the government in the 1980s by clearly gauging a huge demand for semiconductors, making chips the focal point of development, investing heavily in R&D as also providing tax incentives.
This may seem unreal, but China-Taiwan trade, which was $46 million in the late 1970s, had risen to $328 billion by the end of last year. The Chinese mainland, short of 100 miles at its shortest distance, is Taiwan’s largest export market for the last two decades.
Correspondingly, it is also the largest destination for Taiwan’s offshore investments due to the geographical proximity, technology market dynamics and logistics. Per open-source statistics, a total of $71 billion is likely to have been invested by Taiwan in thousands of projects in the mainland.
The current GDP of China, per IMF statistics, is nearly 22 times that of Taiwan’s and, interestingly, Taiwan is China’s third largest source of foreign direct investment (FDI).
This is an imbroglio for an island nation controlling a chunk of the world chip market with significant investments on the mainland which is displaying belligerence. The market cap of Taiwan Semiconductor Manufacturing Company (TSMC) and United Micro Electrics Corp (UMC) are pivotal for understanding the situation better.
According to the European Institute for Asian Studies, TSMC alone drives 50 per cent of all foundry revenues with an 84 per cent market share in the production of cutting-edge technology chips smaller than 10 nanometres.
This technological prowess is the very core of every high-end computing system and sophisticated weapon system in the world. This dynamic makes the entire digital chessboard more complex.
Control on volumes
Despite the recent subsidies announced in this domain in the US and Europe and ratification of the ‘Chips Act’, Taiwan will maintain its presence in the world market as it has the wherewithal to control the volumes of chip production.
To augment economies of scale, these companies are establishing plants in other countries, while it will surely take some time for the outliers to set up and operationalise foundries/fab facilities as it is a complicated and time-intensive process. While the world is likely to be dependent on Taiwan for chips at least till the end of this decade, the role of semiconductors will remain central to the country’s political discourse. It may not be a very well-known statistic that semiconductors are the fourth most traded commodity worldwide (by value) after crude oil and petroleum products, refined oil and automobiles. This concentration of chip design, manufacturing, packaging, testing and distribution in this geographical region does create ample vulnerabilities in supply chains.
With the US and Europe leading in R&D, Taiwan and Korea leading in manufacturing/OSAT (Outsourced Semiconductor Assembly and Test) and China with its capital-intensive expertise in packaging and testing, the global value chains in this sphere are disjointed and disintegrated.
The current relationships between all these nations do need a hard look to understand the contours of tomorrow. The EU ratified the European Chips Act on February 8, 2022, which provides an industry investment of €43 billion followed by the US readying huge funds for science and technology, defence as well as technological security and innovations.
While this is a joint thought process on both sides of the Atlantic, the rest of the world will need to brace up to this reality and undertake relevant measures. This asymmetry could also spin off into the realm of a growing competition for high-tech talent which will be the driver of the world of tomorrow. This space has the ingredients to escalate issues of technology thefts as well as accentuate a global war on technology.
Geography is a strange subject — it may look benign, but its overarching effect on everything is profound. Eight-five per cent of global foundry market is concentrated in China, Taiwan and South Korea.
With increased demand worldwide, growth metrics of nearly 10 per cent in this sector every year, ongoing US-China trade sanctions and an oligopolistic chip ecosystem, disruptions and price rise in multiple segments are bound to happen in case of a conflict.
Building of capacities is a function of time, focus and capabilities. This involves humongous investments, infusion and adoption of cutting-edge technologies, large-scale skill development, and infrastructure. It would, therefore, take years for any county to shed reliance on Taiwanese foundries.
For the rest of the world, one is reminded of an old African saying: “Till the lion learns to write, every story will glorify the hunter”.
The writer is Vice-President (Public Policy, Government and Corporate Relations) of India Electronics and Semiconductor Association (IESA). Views are personal