For months, if not years, governments and industries that rely on semiconductors have worried about the possibility of China invading Taiwan. The island, after all, makes about 92 percent of the most advanced computer chips that now run practically every aspect of our lives, and any disruption to its chipmaking ability would quickly have cascading effects.
Last week, the world served up a grim reminder that China is not the only threat when a 7.4-magnitude earthquake hit Taiwan’s eastern coast—the biggest quake that the island had experienced in a quarter century. As it stands, the damage was relatively contained, and the island’s major semiconductor factories—including those of industry giant Taiwan Semiconductor Manufacturing Corporation (TSMC)—were back up and running around 24 hours later.
“Apart from certain production lines in areas that experienced greater seismic impact, equipment in Taiwan fabs have largely been fully recovered as of April 5,” the company said in a statement emailed to Foreign Policy, adding that more than 70 percent of the recovery took place within 10 hours of the earthquake.
TSMC has spent years preparing for exactly this scenario. “TSMC has a long-established enterprise risk management system in place to minimize the potential disruption,” the company said, adding that its factories are designed with earthquake prevention in mind and that it conducts regular “disaster drills” among its workforce to ensure that they can get their facilities back up and running quickly.
For Taiwan, the quake may have been more of a blip than a blow. But for government and chip industry bigwigs—particularly in the United States—it was yet another warning about the need to dial back dependence on the island.
“It just reinforces the point [that] we need resilience in the supply chains,” said Intel’s chief executive officer, Pat Gelsinger, during an event at the Council on Foreign Relations last week. Gelsinger pointed out that the earthquake happened to strike Taiwan’s eastern coast, minimizing the devastation, rather than the far more urbanized and populous west, where most of TSMC’s factories are. But add to that the threat posed by China, just 160 kilometers (100 miles) away, and “boy, this is not a sustainable situation for the world,” he said.
Intel has been one of the biggest proponents and beneficiaries of the global push to change that situation, receiving a commitment of $8.5 billion in direct funding and $11 billion in loans under the U.S. government’s CHIPS and Science Act in an agreement announced last month. That legislation, which earmarks more than $52 billion in subsidies to bring more chip factories back to the country where they were invented, is being replicated in various forms by several governments around the world, including in Europe, India, Japan, and South Korea.
U.S. President Joe Biden’s administration is helping accelerate that push beyond its own shores, funneling CHIPS Act funds through the State Department to the likes of Costa Rica, Panama, Vietnam, and the Philippines. The stated goal is to give the global semiconductor supply chain more fail-safes (with the added benefit of further cutting out China from the industry).
That shift predates the Taiwan earthquake by several years, and the quake itself is unlikely to significantly alter its trajectory, according to experts, industry executives, and government officials. “If the earthquake was a surprising wake-up call to anybody, especially in the global semiconductor industry, then they’ve been sleepwalking,” said Michelle Giuda, the CEO of the Krach Institute for Tech Diplomacy at Purdue University and a former State Department official during the Trump administration. As far as nongeopolitical wake-up calls go, the COVID-19 pandemic and the resulting global chip shortage formed a far bigger impetus, Giuda and others said.
If anything, the earthquake and TSMC’s quick recovery showed how resilient and well-prepared Taiwan’s industry is for all eventualities. “It’s like confirmation that they know what they’re doing—they plan for this; they prepare for it. They executed the plan in an emergency, and lo and behold, it validated what a lot of people say,” said a U.S.-based executive at a Taiwanese semiconductor firm, who spoke on condition of anonymity because they are not authorized to speak to the media. “The reason Taiwan is really good at this is because this is not a wing and a prayer—this is a careful, very deliberate, resilient supply chain.”
Still, the earthquake likely served as yet another reminder to many in the West in particular of how concentrated cutting-edge chipmaking is on a volatile island, both geographically and geopolitically.
“It highlights the fact that we’ve got a lot of eggs globally in one basket,” said Shawn Muma, the director of supply chain innovation and emerging technologies at the Digital Supply Chain Institute. “You can’t continue to have 90 percent of your advanced manufacturing capability sitting in one country, no matter how safe that country is.”
The timing of the disaster will further help Washington’s chip diversification drumbeat. On Monday, less than a week after the earthquake, the Biden administration announced an award to TSMC of up to $6.6 billion under the CHIPS Act, similar to the one granted to Intel in March. TSMC company reciprocated by announcing that it will build a third semiconductor fabrication plant, or “fab,” on its site in Arizona. The facility will make the kinds of advanced chips that it currently only makes in Taiwan, and it takes the company’s total U.S. investment over the past four years to $65 billion.
“As the Biden administration is looking to make these two awards, you’ve got a natural event that occurred that you can point to and say, ‘This is a reason why, no matter what’s going on in the South China Sea, we need to diversify the manufacturing and de-risk it,’” Muma said.
TSMC is engaged in a global diversification push of its own, announcing major expansions in Germany and Japan in the past year. Industry watchers say that’s driven in part by geopolitics and other risks, but also simply by business imperatives.
“There’s some political pressure on companies like TSMC from the U.S. and other governments, but there’s also pressure from customers as well,” said Lotta Danielsson, the vice president of the U.S.-Taiwan Business Council. Diversification and increased global demand means that chipmakers are also “gaining proximity to their customers,” she added. “A lot of their customers are in Europe and the U.S., and so putting plants there makes a lot of sense.”
One entity that may not be too thrilled about the global chip spillover effect, though, is the Taiwanese government. Not only does the semiconductor industry power much of Taiwan’s economy, but the island’s importance to the world’s technological capabilities is also seen as protecting it from a possible invasion by China by ensuring that allies such as the United States will defend the island to keep their chips flowing—a phenomenon referred to as the “silicon shield.”
“I think probably for their first 25 years, TSMC was responding to the demands of their constituency, which was the Taiwan government, so they built exclusively in Taiwan because they were seen as a national champion and indeed a national security enterprise,” said the anonymous chip industry executive, whose company is one of TSMC’s many customers. “The real challenge for TSMC is to thread that needle between [global customers and] satisfying their home constituency, which might see any effort to move capacity outside as a betrayal.”
It’s a fear that TSMC’s now-retired founder, Morris Chang, has previously expressed, warning last year that Taiwan’s semiconductor industry was being “hollowed out” and diluting its national security. But he’s no longer in charge, and the company’s current leadership may have different priorities and be driven more by global market forces, according to Danielsson.
“The government in Taiwan is very concerned about this issue of hollowing out their star industry,” she said, adding that TSMC’s overseas investments—extensive as they are—will only form a small fraction of the company’s overall capacity. “They’re keeping their cutting edge at home, and I think most importantly they’re keeping their R&D [research and development] at home … they’re trying to diversify away from Taiwan, but they’re still maintaining Taiwan as the core of what they are and who they are.”
When asked whether it faced any pressure from the Taiwanese government to keep advanced manufacturing on the island’s soil, the answer was a flat-out no. “TSMC is and remains committed to our Taiwan operations to manufacture and deliver the world’s most-advanced chip technology, while continuing our global manufacturing footprint expansion which is based on customer demand and necessary level of government support,” the company told Foreign Policy. “We have worked and continue to work very closely with the Taiwan government, as we do with all governments where we have facilities.”
And despite the flurry of expansion announcements, the global chip supply chain won’t dramatically change overnight. “TSMC is probably at least a year, maybe two years behind where they would like to be,” said Muma, the supply chain expert. “And it takes five to seven years to build a fab.”
At the same time, the ongoing transformation will be hard to reverse. “For TSMC in the last decade, they have gone from being a Taiwanese company that was operating globally to truly becoming a global company,” the semiconductor executive said.
From a U.S. perspective, it’s not about cutting out or supplanting Taiwan, Giuda said, noting, “I think it’s less about diversifying away from Taiwan and more about, ‘what is the ‘Taiwan-plus’ strategy?’”
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