U.S. Semiconductor Chip Anxieties Emerge Amidst China-Taiwan Conflict

Semiconductor stocks took a tumble globally on Tuesday as the expected visit to Taiwan by U.S. House of Representatives Speaker Nancy Pelosi threw fuel to the fire of current tensions between Washington and Beijing. This diplomatic move is viewed by China as a signal of pro-Taiwanese independence, something that has been repeatedly warned against. So what exactly is driving Nancy Pelosi’s visit to Taiwan and an overall push for U.S. interest and intervention?

Two key elements remain at the heart of U.S. interest in this conflict: Semiconductors and the Taiwan Semiconductor Manufacturing Company Ltd.

Using the AlphaSense platform, we unearthed how a potential Chinese invasion of Taiwan could drastically affect the world we live in. Read below to see how this conflict overseas can quickly become a situation here at home.

Taiwan Semiconductor Manufacturing Company: Unintended Power Player?

Located in the Taiwanese municipality of Taichung, Taiwan Semiconductor Manufacturing Company Ltd (TSMC) has become an unintended power player in the trade war between the United States and China, as both countries have become dependent on the mega manufacturer’s output of semiconductors.

TSMC uses some of the most advanced technology today to yield roughly 90% of the microchips found in everything from mobile phones to the medical research tools central to fighting the COVID-19 pandemic. Tensions have been steadily rising over the company’s supply control and how Chinese leader Xi Jinping’s plan to reunify Taiwan under Beijing–and potential seizure of TSMC’s fabs—would dismantle a global supply chain.

A potential seizure of TSMC’s Taiwan factories by Jingpin would hurt the US military’s access to warfare firearms, but more importantly, impact global technological leadership. For instance, if the foundries were to avoid any damage or destruction from a Chinese invasion, industry experts believe Xi Jinping would restrict the exporting of TSMC’s chips to a vast majority of global suppliers, further disrupting supply chains that were affected by COVID-19. Though, if TSMC factories were to be impacted by warfare, China’s massive electronic industry would, too, be detrimentally affected. This inability to predict the fate of TSMC in a Chinese-Taiwanese war has fueled both the US and China to break their dependency on the manufacturing giant and seek alternative solutions.

Seeking Solutions At Home

To control its need for microchips, the US is funneling capital to reinvigorate its domestic semiconductor manufacturing processes. Recently, Congress passed the China Competition Bill or “CHIPS-plus” package, which will allocate $52 billion in funding to US companies producing computer chips and a provision that offers a tax credit for investment in chip manufacturing.

US officials have also coaxed TSMC to establish a $12 billion operation in Arizona that will produce 5-nanometer chips by 2024. However, TSMC Chairman Mark Liu told shareholders that the construction costs for the operation are turning out to be “more costly.” As a result, Liu has urged the US to seek support for chip needs from other foreign and domestic companies, leading large-scale electronic companies like Samsung and Intel to open chip fabs of their own.

Establishing semiconductor fabs has been the US’s approach to staying ahead in the race to use artificial intelligence (AI) in weaponry. According to Frank Kendall, Secretary of the US Air Force, AI has already been utilized within the military to identify and kill human targets. AI’s potential to revolutionize warfare hinges on semiconductors or devices roughly a few square millimeters in size yet packs billions of electronic components. The production of these specific chips, described as 10 nanometers or below, is dominated by Taiwan.

Potential Costs for China

While China may see an invasion of Taiwan as a crucial element of Jinping’s reunification plan, there is more at stake for Beijing and its economy. In the event that TSMC is destroyed in combat, Taiwan’s inability to produce microchips would not only destroy many Chinese sectors, as China is responsible for roughly 60% of global semiconductor demand according to a Congressional Research Service, but effectively bring the international electronic supply chain to a halt.

Almost all semiconductors (90%) are imported or manufactured by foreign suppliers in China, and, according to data from Taiwan’s economy ministry, nearly half of Taiwan’s exports to China in the first quarter of 2022 were semiconductors, more than a quarter (33%) increase from the island’s largest trading partner. It’s undeniable that Taiwan is a critical supplier for not only the US, but China.

The likelihood that TSMC’s fabs could experience damage due to warfare is fairly likely due to their location. Most of Taiwan’s semiconductor factories are located along the island’s west coast, near beaches that could serve as potential landing sites for the Chinese army. And while the value of Taiwan’s semiconductor industry (92% of the world’s most advanced semiconductor manufacturing capacity is located there) has certainly delayed any potential warfare activity from China’s end, it’s uncertain how long it will be before Jinping takes action to bring the island under China’s control.

Taiwan’s chip fabs are “thoroughly beneficial” to protecting the island from invasion, Marine Corps Lieutenant General Wallace Gregson said in a Reuter’s report, but once the “dogs of war get loose,” there’s little chance of predicting the outcomes. “[JingPin] can’t be seen to compromise, much less back down,” Gregson said. “He is tied to this achievement.”

Will There Be War?

There is speculation that China could impose a reunification through means of strengthening their economic ties or similarly peaceful matters rather than through warfare or combat. However, neither Taiwanese President Tsai Ing-wen nor Xi Jinping are entertaining one another’s offers.

Ing-wen has said that Taiwan will continue to build its defenses and ensure that neither its freedom nor democracy is in jeopardy of China’s control. At the same time, Jinping vowed to explore “peaceful reunification” with Taiwan this past Saturday by offering a “one country, two systems” model of autonomy similar to one implemented in Hong Kong. All major Taiwanese parties have rejected the proposal.

Ing-wen’s response illustrated a strong position against any association with Jingpin’s vision of a unified front: “But there should be absolutely no illusions that the Taiwanese people will bow to pressure,” she said in a speech outside the presidential office in central Taipei. “We will continue to bolster our national defense and demonstrate our determination to defend ourselves in order to ensure that nobody can force Taiwan to take the path China has laid out for us.”

China’s constant military presence on the island has seriously affected Taiwan’s air defense zone, affecting its national security and aviation safety. Ing-wenis is currently participating in a military modernization program, which includes building new submarines and long-range missiles to build their frontlines of defense.

Want to dive further into the current state of Asian economies so far in 2022? Interested in what’s next on the horizon and what investors should be paying attention to in the coming months and years? Check out our recent webinar hosted in partnership with HSBC, The Year of the Tiger: The Economic Outlook for Asia in 2022.