The future of semiconductors depends on Taiwan

The elections in Taiwan were a significant moment not only for the island but also for the international geopolitical scenario with profound implications for the future of technology production and relations with China and the US. Lai Ching-te of the pro-independence Democratic Progressive Party (DPP) won the presidential election. However, he did not obtain an absolute majority in parliament. The pro-Chinese KMT party garnered a third of the vote, indicating a preference for a more cautious policy towards China by part of the electorate. This change in the political landscape could influence how the government will handle relations with China and the US.

Taiwan’s international relevance:

More than 60% of the world’s microchips are manufactured and assembled in Taiwan. The island is home to some of the world’s most advanced semiconductor factories, including the Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest manufacturer. The country holds not only quantitative, but also qualitative dominance. TSMC is the only company together with South Korea’s Samsung to be able to manufacture 3-nanometer microchips, the most advanced on the market today. Taiwan is at the forefront of the development of highly sophisticated semiconductor manufacturing processes, capable of producing ever smaller and more efficient chips. These technologies are fundamental to the development of new applications, from artificial intelligence to mobile devices, from computers to cars. The island is the nerve centre for the global supply chain. Disruptions in semiconductor production in Taiwan could have significant repercussions on multiple industries around the world. The new Taiwanese government’s policy choices will have a decisive impact on the global semiconductor industry, affecting the availability and cost of electronic devices.

China’s interests in Taiwan:

China considers Taiwan part of its territory and has not ruled out the use of force to achieve reunification. Beijing’s interest in the island goes beyond mere questions of national identity. Although China is a major semiconductor producer, it has not yet reached Taiwan’s level in the manufacture of state-of-the-art semiconductors. It is dependent on foreign imports for these state-of-the-art chips. Taking control of Taiwan would accelerate the development of the Chinese industry and give it a significant competitive advantage in the global semiconductor market, enhancing its strategic international position. Moreover, the ability to produce advanced semiconductors is essential for national security. Controlling Taiwan’s semiconductor industry could provide China with secure access to critical chips for military and security applications.

US support for Taiwan independence:

Supporting Taiwan independence is part of the broader US strategy to balance China’s rise and limit its geopolitical influence. The aim is to prevent Beijing from gaining a strategic technological advantage through control of the semiconductor industry produced on the island. Any Chinese control over Taiwan could limit US access to innovations and strengthen the Chinese monopoly on critical technologies. Semiconductors are also vital for defence capabilities, including advanced weapons systems and critical infrastructure. Ensuring that Taiwan remains a reliable supplier of semiconductors protects US national security interests.
To prevent the consequences of Chinese expansion into Taiwan, the US is also entering into agreements with TMSC to build new factories to make advanced semiconductors in Arizona. This is part of a broader strategy to diversify production and address supply chain security concerns.

The plant in Arizona is a significant step to increase the production capacity of advanced semiconductors outside Taiwan and to strengthen technology collaboration between Taiwan and the US. The first US plant will start production of 5 nanometre semiconductors next year. While TMSC will keep the high end of the smaller semiconductors in Taiwan for the time being.