TAIWAN’S SILICON SHIELD

Intro: The term “Silicon Shield” refers to the geopolitical theory that Taiwan’s dominance in the global semiconductor industry acts as a deterrence against a Chinese invasion. But the dynamics are complicated; there is now a diversification risk, and experts differ on the safeguards of Taiwan’s security

Behind the nondescript grey buildings that line the streets of Hsinchu lies one of the most important pieces of technology in the world.

Whirring away inside are rows of white machines that are so advanced – and so secretive – that only a select few have ever been allowed inside.

This is Taiwan’s “Silicon Valley” and these facilities produce the majority of the world’s semiconductors – small microchips that power virtually every electronic device in use today, from coffee machines to fighter jets.

Every country in the world relies on these chips, including China, which despite threatening to “reunify” Taiwan by force, imports nearly half of the island’s semiconductors.

Economists warn that an invasion of Taiwan would cost the world’s economy £7.5trillion. That’s far more than the cost of the Russian invasion of Ukraine or the Covid-19 pandemic.

It is argued that this very fact would act as a key deterrence against Beijing following through on its threats. China knows, too, that if it does invade, its economy would take a direct hit from the fallout.

Known as the “silicon shield”, the theory implies that Taiwan’s semiconductor industry offers a de facto security blanket, which would stop China from invading – both because of its own dependency on the computer chips and the US’s, which would come to Taiwan’s defence.

Taiwan’s former president, Tsai Ing-wen, popularised the theory in 2021 when she wrote that the silicon shield “allows Taiwan to protect itself and others from aggressive attempts by authoritarian regimes to disrupt global supply chains”.

Nonetheless, leading Taiwan companies within the semiconductor industry have been moving production sites to countries such as China and the US.

Experts have warned that this is effectively disintegrating Taipei’s valuable economic deterrence, making it more likely that Beijing would attack Taiwan.

The monopolistic position

Taiwan produces approximately 60 to 70 per cent of all the world’s semiconductors and more than 95 per cent of the advanced chips.

While thousands of companies are involved in semiconductor production, in Taiwan the industry is synonymous with one name – Taiwan’s Semiconductor Manufacturing Company (TSMC).

Founded in 1987, the company now makes up more than 60 per cent of the global market share and 9 per cent of Taiwan’s GDP. It is the most important company to the country’s economy and, in many ways, its national security.

It is one of more than 400 companies based in the Hsinchu Science Park, a concentrated industrial zone in central Taiwan often compared to Silicon Valley in the US.

The park’s unique “ecosystem” is one of many reasons that Taiwan has become a global leader in the semiconductor industry. Analysts speak of the “cluster effect” because of the availability of spare parts, equipment, material, design, software, integrated circuit manufacturing, and assembly tests all situated in one place. There is a complete supply chain, a complete ecosystem.

TSMC’s monopoly over the industry in Taiwan and around the world is often linked to its unprecedented structure as a foundry model. This means it manufactures chips for other companies but is not responsible for the designs. Instead, companies like Apple and Nvidia come to TSMC with orders for products they want to build. By choosing not to design, manufacture, or market any semiconductor products under its own name, the company ensures that it never competes with TSMC’s customers.

A wake-up call to the growing threat

While most of its production is still based in Taiwan, the company has gradually been opening fabrication plants, factories where semiconductors are made, in China, the US, and Japan.

There is one under construction in Germany, which is set to begin operations by the end of 2027. TSMC announced in March that it plans to invest an additional $100bn (£75bn) to grow its US manufacturing operations.

It is believed that TSMC and other companies in the supply chain are moving production out of Taiwan in response to the growing threat from China. Beijing’s increasingly hostile rhetoric towards Taiwan, and its routine shows of force toward the island, has spooked foreign governments and semiconductor customers.

Researchers on Taiwan at the US-based Hoover Institution, propagate that the Covid-19 pandemic served as a wake-up call for many companies reliant on chips from Taiwan and had to scramble overnight when their supply was interrupted.

It offered an insight into what would happen if China launched an attack against Taiwan, which could result in the supply of chips being permanently cut off.

The Institution says that by having over-concentration from one supplier located in one place is a big problem for TSMC’s business model in the new world. It also points to the economic benefit of having some supply or some production that’s closer to its ultimate customers.

Kowtowing to the US

Pressure from the US government and the Trump administration specifically has also been a factor in moving production out of Taiwan. Trump’s MAGA – Make America Great Again – is wholly directed to bring manufacturing back to the United States. That’s a prime reason why America intends to build its own manufacturing infrastructure for semiconductors.

But this means that Taiwan could lose an element of its deterrence. If the US is making its own semiconductor chips, rather than relying on Taipei’s, it may be less likely to come to Taiwan’s defence in a war.

The US is Taiwan’s main defence supplier, responsible for equipping the island with virtually all of its military technology. Taiwan is beholden to the US in its ability to make or break a future conflict with China.

War game simulations have shown that the US’s decision to come to Taiwan’s defence could be the difference between the country remaining autonomous and it falling under the auspices of Chinese control.

However, TSMC has kept an insurance policy. It has made sure that only its mature chips will be manufactured overseas. The production of advanced chips will remain in Taiwan.

In fact, in October, Taiwanese officials criticised and highlighted a proposal by the US commerce department, who said that Washington was talking to Taipei about a “50-50” split in semiconductor manufacturing. The response from Taiwan was swift: “No one can sell out Taiwan or TSMC, and no one can undermine Taiwan’s silicon shield”.

Diversification risk

While the diversification of TSMC’s production and the semiconductor industry more generally offers a safety net for other countries, experts disagree on how this affects Taiwan.

Some believe that increasing the number of TSMC fabrication plants around the world strengthens Taiwan’s ties with other nations. By investing outside of Taiwan – such as in Europe, America, or Japan – these countries become bonded with TSMC. Others have also said that by operating fabrication plants in other countries will give them a stronger incentive to care about what’s happening in the Taiwan industries and provide increased vigilance of security threats than previously would have been known.

In theory, at least, this could support the second branch of the silicon shield argument. This stipulates that the US and allies are more likely to come to Taiwan’s defence in the event of a conflict, thereby deterring China.

However, other experts are concerned that if reliance on Taiwan’s chip production decreases, and China is able to source its semiconductors outside the country, there will be less standing in Beijing’s way.

Those within the industry are also worried about Beijing’s habit of stealing innovations from other countries. Building a competitor that can beat you through technological pilferage are efforts to undermine the island’s defences.