The Microchip Industry Would Implode if China Invaded Taiwan, and It Would Affect Everyone

Semiconductors are produced by a remarkably global supply chain, with design often stemming from US, Japanese or European firms, and manufacturing taking place in Taiwan and South Korea. However, Taiwan alone manufactures more than 60% of the world’s semiconductors -— and crucially, 90% of the most advanced ones.

There are fears the silicon shield might not hold forever, and an invasion by China would threaten the global economy with implosion. However, if TSMC were to build new manufacturing facilities elsewhere it would reduce the world’s reliance on Taiwan for chip production. A practice called “friendshoring” could concentrate manufacturing and the sourcing of materials outside Taiwan in countries friendly to the US. This would reduce risks to the US and its partners from an invasion.

However, such a shift would take years to complete and would be challenging to implement. In 2021, TSMC announced its plan to build a multi-billion-dollar facility in Arizona. But the plant will only be ready from 2025 at the earliest, and will probably not be capable of producing chips at what will by then be the technological frontier in terms of scale.

Generally speaking, the smaller the chip, the more transistors can fit on it. This enables the development of faster, more powerful electronic devices.

The Arizona facility is expected to produce chips at the 5 nanometer (nm) scale, and, at some stage, 3nm. This wouldn’t undermine Taiwan’s leadership, however, because TSMC is already working at 3nm in Taiwan and is likely to be further advanced by 2025.

TSMC may also face a challenge in attracting enough skilled employees to run its US operation.

The Chip Shortage
There is already a shortage of microchips, which began with the onset of COVID-19 in 2020 and has affected many industries and products. In 2021, global car production slumped 26% and consumer electronic product launches have been delayed largely as a result.

In a bid to boost chip supplies, the Biden administration and the EU have tried to improve supply chain resilience by incentivizing production closer to home. The 2022 CHIPS and Science Act, for instance, offers more than US$50 billion (£40 billion) for semiconductor research and development, manufacturing and workforce development in the US.

Yet, these policies run counter to trade war tactics. Export controls and other downward pressures on global “friends” working with Chinese firms have meant that even when TSMC is at capacity, additional supply cannot come from Chinese manufacturers. Under current chip war conditions, low supply is likely to continue, which means price increases and product delays.

The military response to an invasion of Taiwan could see manufacturing of semiconductors on the island halted overnight. This would place marked pressure on the price of the chips manufactured outside Taiwan. The increase in chip prices would unleash massive inflation on a range of products and services, including cars, phones and healthcare equipment such as ultrasounds and vital sign monitors.

The reduction in semiconductor supply would also affect the very national security context that is shaping the contours of its production. A Taiwanese invasion would mean a halt to the availability of the advanced chips used in satellites, stealth jets, and supercomputers. China’s ambition of having a “fully modern” military by 2027, and its Made in China 2025 plan, to boost manufacturing, both hold semiconductor capabilities at the core.

Having access to TSMC know-how and supplies would be pivotal for delivering on these goals. But the US commitment to defending Taiwan – if it holds – would mean the destruction of TSMC facilities on the island. The world’s cutting-edge facilities for advanced chips would be decimated.

We should all care about a Chinese invasion of Taiwan. The global semiconductor industry would freeze. Inflation would spiral further upwards and the post-COVID recovery would be reversed. So many of the tools we rely on would disappear from our shops for years. It would wreak enormous damage on us all —- with the Taiwanese people bearing the greatest cost.

Robyn Klingler-Vidra is Associate Dean, Global Engagement | Associate Professor in Entrepreneurship and Sustainability, King’s College London. This article is published courtesy of The Conversation.