Incoming Taiwan president amplifies support for semiconductor industry

President-elect LAI Ching-te (William Lai) of Taiwan’s Democratic Progressive Party has won the much-anticipated Taiwan elections and appears poised to continue the pro-Western policies of his predecessor. Lai’s Taiwan independence leanings have been the focus of China’s concern and vitriol; how he handles relations with the mainland over the next four years has implications for regional stability and the security of global supply chains.

Taiwan – global hub for advanced chips

Taiwan is the hub of the global semiconductor industry, and its significance was not lost on the president-elect. Speaking to media after his acceptance speech, Lai stated: "The semiconductor industry is critical to the global artificial intelligence era, in which Taiwan has an advantage, but Taiwan also owes a responsibility to the world. The semiconductor industry in Taiwan is a common asset of the world, and we are a part of the global division of labor in the supply chain. Taiwan cherishes the semiconductor industry, and we hope China and the international society will cherish this industry as well.”

He added: “As for the development of the semiconductor industry, I will vigorously assist the semiconductor industry in the future to form a more complete industrial chain — from materials, equipment, research and development, IC design, manufacturing, packaging, and testing, so that the semiconductor industry in Taiwan can continue to flourish and can also benefit the economic development of the world.”

Lai argued that peace in the Taiwan Strait “is to every country’s benefit” and that the world’s reliance on the semiconductor supply chain in Taiwan, means that “no one wants to disrupt it.”

TSMC has a major role to play

The Taiwan Semiconductor Manufacturing Company (TSMC) is the crown jewel of Taiwan’s electronics industry. According to the Taiwan firm TrendForce, TSMC's market share in 3Q23 was 57.9%, with almost total dominance in contract fabrication of advanced semiconductors with a 90% market share – China relies on Taiwan for around 70% of its chips.

US companies make up most of TSMC’s contract fabrication revenues with the Taiwan company being the exclusive contract manufacturer for Apple, Google, Nvidia, Intel, AMD, and others.

TSMC has invested around $40 billion (the largest-ever foreign investment in the US) in building two cutting-edge chip foundries in Arizona, as well as increasing capacity at its foundry in Kumamoto, Japan, which it operates in partnership with Sony and Denso. TSMC also is building foundries in Dresden, Germany in partnership with Bosch and two other companies that have €4.2 billion in support from the “European Chips Act” and €5 billion from the German government.

TSMC’s new foundry in Phoenix will produce 4nm chips for iPhones and MacBooks, while Nvidia and AMD have committed to using its production capacity. Opening of the facility has been delayed by “labor shortages” but is expected to come online in 2025.

The Japanese facility will increase production of chips in 4Q24 – TSMC also is looking to increase local contribution to the foundry to 60% by 2030 (currently 25%), enhancing Japan’s semiconductor supply chain. TSMC is discussing with the Japanese government the possible opening of a third foundry that could produce 2nm chips.

Challenges for Taiwan’s chip industry

While Lai did not elaborate on how he would help the chip industry in Taiwan, he faces several challenges. First, he must manage Taiwan Strait tensions. He must also confront Taiwan’s own challenges with its domestic chip industry. The production of advanced chips requires energy, water, human expertise, and land. With Lai staunchly against nuclear energy and committed to increasing renewable energy, these factors may lead to energy-shortage challenges in producing advanced chips at global scale.

As well as navigating its relationship with China, Taiwan must also ensure that it meets US compliance regulations around technology and chip production. The US Department of Commerce plans to send a delegation to Taiwan this month to meet local semiconductor manufacturers and designers, as confirmed by Taiwan’s Minister of Economic Affairs WANG Meihua in December at a press briefing, where he stated: "The US is willing to explain to major customer countries, allowing manufacturers to understand the relevant provisions better. Taiwan factories can communicate with the US face to face. Taiwan and Taiwanese companies need to do so."

The results of the elections in Taiwan will no doubt take some time to fully reveal their geopolitical impact and effects on the global chip supply chain. With years of experience in providing risk assessment and strategic advice to leading US multinationals doing business with Chinese and other foreign companies, Pamir is a go-to resource for insights on the business impact of China’s geopolitical trends.