The Economist May 28th 2022 47
AsiaSemiconductorsandstrategyBargaining chip
F
or a brief moment on May 23rd, it
seemed as if American policy towards
Taiwan had undergone a sudden and dra-
matic change. Asked if America would “get
involved militarily” to defend Taiwan in
case of an invasion, President Joe Biden re-
plied that it would. “That’s the commit-
ment we made,” he said. It was the third
time he had made a similar statement—
and the third time it was quickly dialled
back by his aides.
Good thing then that Taiwan has huguo
shenshan, or the“magic mountain that pro-
tects the nation”. The mountain is not a so-
phisticated defensive fortification, nor a
treaty with a big power. It is instead what
Taiwanese call their $147bn semiconduc-
tor industry, equivalent to 15% of gdp. It ac-
counts for nearly 40% of its exports and is
a pillar of the island’s economy. It is also a
guarantor of its security. Taiwanese com-
panies make the world’s most advanced
chips, which in turn make the island an in-
dispensable part of the global supply chain
for crucial industries such as consumer
technology, cars and aviation. America’sfirms (and its armed forces) depend on Tai-
wan’s semiconductors, and so do China’s
businesses and military hardware.
For the mountain to retain its magic,
the industry must retain its technological
edge. Taiwan Semiconductor Manufactur-
ing Company (tsmc), the world’s largest
contract chipmaker, controls 90% of the
market for the most advanced kind of
chips—those with components smaller
than ten nanometres (see chart on next
page), or about 10,000 times thinner than a
sheet of paper. Such chips sit at the heart of
the most powerful computing devices,from iPhones to supercomputers. Only
two other companies, Intel and Samsung,
can make semiconductors approaching
this level of sophistication, but their tech-
nology is not as good as tsmc’s, nor are
they innovating as fast.
tsmcrose to dominance by focusing on
making chips rather than designing them.
Specialisation allowed the company to be-
come the best at a complex manufacturing
process that involves manipulating sub-
atomic particles to create a super-precise
form of ultraviolet etching light. How that
process works involves many levels of
trade secrets that rivals are desperate to ac-
quire. Headhunters prowl Hsinchu Science
Park, where most of Taiwan’s chip compa-
nies are based, seeking potential recruits
who could bring valuable know-how to
South Korea or America—or China.
Semiconductors pose a big and growing
problem for China. The government has
set a target of producing 70% of its own
chips by 2025. It set up a 139bn yuan
($23bn) National Semiconductor Fund in
2014, which it topped up with another
$30bn in 2019. Local governments have
poured at least $25bn more into their own
such funds. In 2020, by when China pro-
duced 16% of the chips it used, it an-
nounced ten years of corporate-tax exemp-
tion for the most advanced chip manufac-
turers. That year, America restricted ex-
ports of chip-making equipment to China’s
leading manufacturer of semiconductors.
Such incentives have prompted a bigS INGAPORE AND TAIPEI
Taiwan’s security rests on computing hardware as much as the military kind→Alsointhissection
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