The U.S And Taiwan’s Supply Chain Partnership For Semiconductors


Mercy Kuo, author of The Diplomat, consults international subject-matter experts, policy practitioners, and strategists on U.S. Asia policy. This particular discussion with Lotta Danielsson

Explain Taiwan’s crucial function in the supply chain for semiconductors

Taiwan has spent the past four decades strengthening its semiconductor industry. The Taiwanese government, Taiwanese businesses, and international businesses have all invested in the sector. Thousands of suppliers and manufacturers have coalesced to form a formidable semiconductor ecosystem in Taiwan as a result of the clustering effect.

Taiwan is a vital supplier and partner not only for leading U.S. technology companies such as Apple, Nvidia, Texas Instruments, and Qualcomm but also for prominent technology firms around the world. In the first quarter of 2023, four Taiwanese companies—TSMC, UMC, Vanguard, and Powerchip—held a combined 69 percent market share in the foundry industry. The majority of global capacity belongs to Taiwanese foundry companies, particularly for cutting-edge technology at the smallest process nodes and on 300-mm wafers.

At the 10 nm process node, the island’s 63 percent manufacturing capacity is significantly greater than South Korea’s 37 percent. Taiwan manufactures 92% of all semiconductors between 7 nm and 5 nm, and only two companies—TSMC and Samsung—mass-produce chips at 5 nm or less. TSMC invests to maximise its industry-leading 3 nm technology and develop new technologies. In the meantime, rival semiconductor foundries are racing to catch up technologically.

While Taiwan’s dominance at the leading edge makes headlines, it also has a significant presence in semiconductors that are used in automobiles, appliances, etc. Taiwan’s ASE is the world’s foremost outsourced assembly and testing (OSAT) company, and MediaTek is the world’s fourth-largest fabless company. Additionally, Taiwan was the second-largest destination for expenditure on semiconductor equipment in 2022.

Taiwan has an abundance of both capacity and expertise. It is a crucial market for U.S. semiconductor equipment manufacturers and a vital ally for U.S. technology companies. It would be impossible to replace Taiwan-made chips overnight—or even within a few years—due to the complexity of the semiconductor industry and the exorbitant cost of creating new production capacity.

A loss of access to Taiwan-made chips could result in a 5–10 percent decline in the U.S. gross domestic product, which is potentially greater than the anticipated negative impact of the COVID pandemic of 7.5%. According to U.S. intelligence estimates, losing Taiwan’s semiconductor production could cost the global economy up to $1 trillion per year for the first few years. It could also have severe consequences for U.S. national security, as access to semiconductors is a critical factor in the development of advanced weaponry.

Identify significant threats to Taiwan’s semiconductor industry

Risks influencing the semiconductor supply chain include talent shortages, theft of intellectual property and trade secrets, natural disasters, raw material and equipment shortages, industrial accidents, supply and demand gaps, and infrastructure issues. Permanent talent shortages and potential disruptions to facilities and infrastructure due to severe weather or earthquakes are among Taiwan’s most significant hazards. Partial disruptions are the most likely to occur, but their duration would be brief and their effects would be less severe.

China’s aggressive actions create two additional, though less probable, scenarios for Taiwan. Beijing could attempt to restrict the flow of products and services to and from Taiwan in the event of an economic blockade, which could cause a significant, medium-term disruption to Taiwan’s semiconductor industry.

Lastly, a China-Taiwan conflict could result in a year or more of total chaos in Taiwan. It is also debatable whether Beijing intends to invade Taiwan in the near future and what the global response would be, given that China’s economy depends heavily on Taiwanese semiconductor production.

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