The “silicon shield”: how chips protect Taiwan from a Chinese invasion – World Order

The “silicon shield”: how chips protect Taiwan from a Chinese invasion – World Order
The “silicon shield”: how chips protect Taiwan from a Chinese invasion – World Order

An island is crucial to the global economy of this century. Taiwan companies produce 68% of semiconductors, 92% in the case of the most advanced, essential for everything from a garage door to a missile to work. Already during the pandemic, confinement on the island delayed the delivery of smartphones and cars, among other products. Many Taiwanese trust that this role protects them from a Chinese invasion that would be catastrophic for the entire global production chain. They often say that the chip industry, especially the TSMC company, is the “sacred mountain” that protects Taiwan.

Cold, the data proves them right. The production of microchips consists of several phases and, although some take place in the United States, Japan or South Korea, Taiwan is vital in almost all of them. According to data from the Taiwanese Government, in 2023 the country covered 21.3% globally in the design phase, 77.9% in wafer manufacturing and 52.6% in assembly and final testing. They are the pieces of the so-called “silicon shield”.

A key sector for the world

“Different types of chips are manufactured with different manufacturing technologies, based on different business models. And they are not interchangeable,” he explains to The World Order Jan-Peter Kleinhans, director of the Technology and Geopolitics program at the German foundation Stiftung Neue Verantwortung. That is, a semiconductor designed for a specific device cannot be used in another device with other functions. “You have to think about an extremely complex supply chain in which no region can bring together all the necessary elements. And Taiwan matters because it is in the middle of this whole chain.”

In part, this diversification is due to the fact that the American firms that dominated the market in the 1990s outsourced production. As a result, the United States reduced its global share from 37% in 1990 to 13% in 2010. China, even after enormous efforts, has barely reached 16%, and imports $400 billion worth of semiconductors a year. As a consequence, a conflict over Taiwan would be disastrous for the world economy. Estimates, according to a study by the Center for Strategic Studies in The Hague, vary from a 5% drop in global GDP in the event of a naval blockade to 10.2% with a large-scale invasion. Double the impact of the 2008 crisis or the pandemic.

“In ten years, China will depend much less on what is manufactured in Taiwan, which entails geopolitical risks,” says Kleinhans. “The world is not ready for a war over Taiwan. There is no company that can do anything to mitigate the impact of a naval blockade against the island. Each economic sector will suffer the impact at a certain point,” he adds.

Sources in the semiconductor sector in Taipei confirm this. As explained by executives of a major company in a meeting with journalists attended by The World Order, if there is a war and the island stops exporting chips, there will not only be a shortage of tablets, smartphones and latest generation vehicles. Elevators or automatic doors in buildings will also begin to stop working, and appliances that break down will not be able to be repaired, among other effects. Almost all companies in the world will be affected, they say, because they will have to stop their production.

From the Taiwanese defense…

In this context, TSMC has chosen to install new factories in Japan, Germany and the United States. An initiative criticized in Taiwan itself, both by the opposition and by some voices from civil society and industry, considering that it weakens the silicon shield. However, most experts reject this interpretation. “This is not based on the data because the percentage of TSMC manufacturing in Taiwan is still overwhelming,” says Kleinhans. “Even if you outsource everything announced, which remains to be seen, it will still be 60%. That is to say, diversification does not prevent it from continuing to be indispensable.”

Taiwanese businessmen express themselves in the same sense. They consider that TSMC’s decision is due to commercial reasons to maintain supply capacity to its customers since its business is expanding at high speed, but it hardly affects the importance of production on the island. TSMC, in any case, ensures that the most advanced chips will continue to be manufactured only in Taiwan.

…on the Chinese offensive

For its part, China is carrying out a double strategy: the massive acquisition of assets in the field of semiconductors throughout the planet and a huge effort to achieve self-sufficiency. To do this, it is investing in research and acquiring stakes in leading companies in order to ensure access to the entire chain, from the supply of minerals to the machines to make microchips. In fact, it already controls 64% of silicone, 60% of germanium and 80% of gallium.

However, Beijing has encountered an almost insurmountable obstacle: controlling exports of the machinery necessary for the manufacture of the most advanced microchips. It was imposed by the United States and supported by the Netherlands, whose company ASML is the only global supplier of extreme ultraviolet lithography machines, the process used to create these next-generation semiconductors.

According to the businessmen consulted, China can produce chips of about ten nanometers, but lacks the capacity to reduce them much further. Recently, Huawei launched a range of products with one of seven nanometers, but TSMC and South Korea’s Samsung have reached three, and Intel is expected to reach 1.8 in 2025. Given the role of these next-generation chips for technologies that will shape the future, such as artificial intelligence or quantum computing, it is an uncomfortable situation for China.

With or without a shield, a war would affect the world

The mystery, in any case, remains: does the silicon shield exist or is it a myth? Specialists such as Chris Miller, author of The chip war and interviewed in The World Order, question whether Chinese dependence on Taiwanese semiconductors serves as a real deterrent against a possible invasion that only the United States could prevent. Other specialists even consider this concept to be mere wishful thinking, claiming that semiconductors play no role in China’s strategy towards Taiwan.

In any case, expert Dmitri Alperovitch argues that one way to dissuade the Chinese regime is, precisely, to make clear to it not only the economic costs that a conflict would have, but also that not even by invading Taiwan would it be able to obtain the most advanced machinery to manufacture microchips. Along those lines, TSMC and ASML announced in May that they can dismantle it remotely. Thus, there is a debate about whether Chinese dependence on chips manufactured in Taiwan would provide an incentive for Beijing to invade the island, or the opposite. But surely a war in Taiwan would have profound consequences throughout the world.

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