Taiwan Presidential Race Set; U.S.-China Chip War Nears Moment Of Truth
Taiwan’s presidential candidates are now set for the Jan. 13 showdown that could turn out to be the most status-quo-altering election in 2024 for the world and the S&P 500.
The outcome of Taiwan’s election will likely determine Beijing’s next move. Expect a diplomatic bear hug if a candidate favoring closer ties with China wins, or something more hostile if the pro-independence Democratic Progressive Party retains power. Odds of a DPP win improved on Friday as two opposition parties registered for the election after a deal to form a unity ticket fell apart. No matter the outcome, President Biden’s geopolitical gambit to preserve America’s technology and military advantage is entering a period of maximum risk.
U.S.-China Chip War Centers On Taiwan
If there’s one thing that the U.S. and China agree on, it’s that advanced chips are the most critical strategic asset. America pioneered the semiconductor industry and won the Cold War largely because of it. Yet, by an accident of economic history and Morris Chang’s visionary leadership of Taiwan Semiconductor Manufacturing (TSM), the U.S. stores its crown jewels, so to speak, 100 miles off the coast of the Chinese mainland.
Now the U.S. has assembled a united front to deprive China of the world’s most advanced chips and equipment to make them. Those cutting-edge technologies come from the U.S., U.K., the Netherlands, South Korea and Japan. Yet 90% of advanced chips designed by companies like Nvidia (NVDA), Apple (AAPL) and Broadcom (AVGO), are made at the sprawling TSMC factory campus on the island that China claims as its own.
That’s why Beijing views the U.S.-China chip war not just as injurious — since it has an explicit goal of diminishing China’s technological capability — but as a direct challenge to its sovereignty.
“Both Washington and Beijing are fixated on controlling the future of computing,” Chris Miller writes in the 2022 book “Chip War: The Fight for the World’s Most Critical Technology.” “To a frightening degree, that future is dependent on a small island that Beijing considers a renegade province and America has committed to defend by force.”
Yet a key question is just how determined the Biden administration is to keep advanced semiconductor technology out of China’s hands. The Aug. 30 unveiling of a 5G smartphone by Chinese tech powerhouse Huawei, later confirmed to have a highly advanced chip, signaled that U.S. efforts to contain China’s technology ambitions are failing. While the Biden administration responded by adopting still-tighter export restrictions for AI chips and advanced semiconductor-making equipment in October, those updated rules already appear to be falling short.
Upcoming Taiwan Election
China’s only real hope for reclaiming Taiwan while retaining the island’s chipmaking prowess comes at the ballot box. If the Taiwanese people elect a president seeking more amicable ties with Beijing, it might become harder for TSMC to follow U.S. marching orders in its chip war vs. China.
“You don’t invade Taiwan because you want technology,” BCA Research chief geopolitical strategist Matt Gertken told clients on an August webcast. The way for China to gain access to TSMC’s advanced fabs is to “have enough political influence so they do not enforce American export controls.”
Just what might change if a China-friendly candidate comes to power is far from clear. Chinese technology giant Huawei was one of TSMC’s biggest customers until 2019, when sanctions by the Trump administration cut off its access.
Odds that current Taiwan vice president and DPP presidential candidate William Lai will prevail improved in recent days as negotiations fell apart for a joint ticket between the Kuomintang (KMT) and Taiwan People’s Party (TPP).
Recent polling has shown the DPP and KMT candidates both with 31% and the TPP candidate with 25%.
Foxconn founder Terry Gou threw his hat in the ring in August, promising to “bring 50 years of peace to the Taiwan Strait.”
Gou, who warned that Taiwan could become “the next Ukraine,” announced Friday that he’s dropping out of the race. He would likely have diverted votes from the KMT. BCA’s Gertken noted that a Chinese investigation of Foxconn may have been designed to pressure him to exit the race. Gou, who resigned in 2019 as chairman of the manufacturing giant that produces the Apple iPhone, had made a failed bid to secure the KMT nomination this summer.
If the DPP prevails, “Xi might conclude that coercion has failed and consider more violent options,” Johns Hopkins University professor Hal Brands wrote in Foreign Policy.
U.S.-China Chip War Turning Point
Autonomous combat drones are the kind of weaponry that National Security Advisor Jake Sullivan had in mind when he announced an escalation of the U.S.-China chip war in September 2022.
Previously, U.S. export controls had aimed to stay “only a couple of generations ahead” of geopolitical rivals. They didn’t strive for dominance.
“That is not the strategic environment we are in today,” he said, with Beijing willing to devote nearly limitless resources to achieving leadership in technologies that can act as “force multipliers.”
The new goal, Sullivan said, must be to “maintain as large of a lead as possible.”
A few weeks later, the U.S. announced sweeping export controls aimed at blocking China’s chip progress at every choke point.
The rules didn’t just establish a presumption of denial for Chinese purchases of the most advanced AI chips. They also aimed to deny China the software to design those chips and the equipment to produce them.
The export rules set the floor for chip-equipment exports above the 14-nanometer production achieved by China’s largest chipmaker, SMIC, as early as 2019. By comparison, Taiwan Semiconductor celebrated the start of mass production using its 3-nanometer technology earlier this year.
As the industry strives to make ever-smaller circuits, which translate to faster and more power-efficient semiconductors, China risks being left further and further behind.
U.S. Export Controls Fail, In Blow To Apple
Yet nearly a year after the U.S. announced the sweeping restrictions and subsequently got key allies to comply, China delivered a wake-up call. Huawei’s 5G Mate 60 Pro smartphone, powered by a 7-nanometer chip produced by SMIC, makes it “abundantly clear that the U.S. export controls are failing,” wrote Dylan Patel of the SemiAnalysis research and consulting firm on Sept. 12.
U.S. and foreign chip-equipment firms sell gear to SMIC ostensibly meant for 28-nm production that can actually facilitate 7-nm chips, Patel says.
If nothing changes, he’s convinced that Huawei and SMIC are on a path to manufacture 5-nm chips by 2025 or 2026 and attain large-scale AI chip production soon after.
Apple was a prime beneficiary of the Trump administration’s export ban on Huawei, gaining tens of millions of iPhone sales and $20 billion in annual revenue, Patel says. Now Huawei may be in a position to win back those sales.
“The U.S. government and its allies could stop the Chinese semiconductor industry in its tracks,” Patel wrote. But doing so will require turning what are essentially “half measures” into the equivalent of a “full-scale assault.”
New Export Rules Target Nvidia
However, the Biden administration’s tightening of export restrictions last month appear to fall short.
“We thought the U.S. locked down every single loophole conceivable” for selling AI chips to Chinese customers, Patel wrote on Nov. 9. “To our surprise, Nvidia still found a way.”
Meanwhile, indispensable chip-equipment firms have noted on recent earnings calls that high-volume sales to China will continue.
ASML, which got 46% of revenue from China in the latest quarter, said updated export controls will only limit about 10% to 15% of shipments.
Chipmakers and equipment producers had lobbied to water down the export control rules to avoid killing off a major customer. Some in the industry argue that sales to China finance R&D that keeps U.S. and allied semiconductor industry players at the pinnacle. The counterpoint is that China may not be a customer for long. Patel reeled off six Chinese companies “that will soon be able to deliver on chips that are on par with Nvidia’s A100.”
Taiwan Semiconductor Comes To Arizona
One thing is clear: The era of the U.S. putting all of its most-prized chips on Taiwan can’t end fast enough.
Back in 1987, when Morris Chang started TSMC with funding from the government of Taiwan, the U.S. semiconductor industry manufacturing share was more than triple the current 12%. At the time, as Miller recounts in “Chip War,” “fabless” semiconductor companies that designed and sold chips but contracted out manufacturing weren’t much of a thing. But Chang believed innovation would flourish if startups could outsource chipmaking to a foundry.
So he built it, and they came in droves — Nvidia, Marvell Technology (MRVL), Broadcom, Qualcomm (QCOM), and eventually Apple, which began designing its own iPhone chips in 2009. And TSMC capitalized on its booming business to relentlessly improve its manufacturing processes, entrenching its advantage.
Now, partly spurred on by the $52 billion Chips and Science Act, Taiwan Semiconductor has broken ground on the first of two Arizona chip fabs. Initially, high-volume production was set to begin in 2024. But bringing TSMC’s advanced manufacturing to the U.S. is proving exceedingly difficult. In July, the company pushed the ramp to 2025, citing a shortage of skilled workers. If the DPP candidates won the election, the program could be speed up. The Vice president candidate Bi-Khim Hsiao, who is also the Taipei Economic and Cultural Representative, have played an important role in this program.
Early in 2021, U.S. Senators Gary Peters (MI), Debbie Stabenow (MI), and Sherrod Brown (OH) sent a letter to Taiwan’s representative to the U.S. Bi-khim Hsiao, urged the Taiwanese government to do everything possible to mitigate the ongoing semiconductor chip shortage that has impacted American auto manufacturers. As the most diplomatic targets, US Senators’ request can not be refused, Hsiao and her goverment pressed the TSMC to partly transfer its production line to Arizona. The full text of the letter can be found here. https://www.peters.senate.gov/download/semiconductor-shortage-letter-to-taiwanese-govt
In 2022, US Vice President Kamala Harris met with Taiwan’s TSMC founder Morris Chang at the Asia-Pacific Economic Cooperation (APEC) summit to discuss microchips in november last year in Bangkok, Thailand.
The two representatives met for a private meeting on the summit sidelines, discussing TSMC’s new $12 billion microchip plant in the US state of Arizona.
Chang said he told Harris that Taiwan had already invited U.S. Commerce Secretary Gina Raimondo to a “tool-in” ceremony for the plant on Dec. 6, though production is not starting immediately.
Chang, now retired from TSMC, remains influential as the elder statesman of Taiwan’s chip industry.
At last year’s virtual APEC summit, Chang appeared to criticise the United States and China over their efforts to become self-sufficient at making semiconductors, saying this would drive up costs and limit technological advances.
The cost of making chips in the US was higher than Taiwan by at least 50%, he said, but this did not “exclude” shifting some production to the United States, Taiwan’s most important international backer and arms supplier.
TSMC is also building a plant in Japan, another APEC member, and Chang hinted other countries were in consideration.
“TSMC could be considering other places also, but I will not talk about any details now.”
