Thursday, May 18, 2023

The Tipping Point?

TSMC & TSMC-AZ in the scales. Image credit: SNi 5/23

Taiwan (Republic of China) and China (People's Republic of China) have been in the news recently as tensions between the two have increased recently. The U.S. ostensibly agreed to a "One China" policy with The Shanghai Communique of 1972.

FOREIGN RELATIONS OF THE UNITED STATES, 1969–1976, VOLUME XVII, CHINA, 1969–1972 203. Joint Statement Following Discussions With Leaders of the People’s Republic of China1 Shanghai, February 27, 1972.

The U.S. has always maintained some level of ambiguity, acknowledging there is only one China while simultaneously expressing opposition to any unilateral changes of the (undefined) status quo. And there are variations on how the U.S. views Taiwan which have varied depending on who is speaking or acting on the subject e.g. see 'The One-China Policy in Transition.'

OK, given this background, let's focus on semiconductors. Here is a backgrounder by McKinsey & Co. One of the most important and valuable companies that designs and manufactures cutting-edge semiconductors is the Taiwan Semiconductor Manufacturing Company Limited (TSMC) with the majority of its facilities located on the island of Taiwan. This items plays an important role in considerations related to Taiwan, China, and any potential military solution initiated by the Chinese leadership. For example, "𝐁𝐫𝐨𝐀𝐞𝐧 𝐧𝐞𝐬𝐭" is the idea that if China invades Taiwan π‘‘β„Žπ‘’ π‘ˆ.𝑆. π‘ β„Žπ‘œπ‘’π‘™π‘‘ π‘‘π‘’π‘ π‘‘π‘Ÿπ‘œπ‘¦ 𝑇𝑆𝑀𝐢 π‘‘π‘œ π‘π‘Ÿπ‘’π‘£π‘’π‘›π‘‘ πΆβ„Žπ‘–π‘›π‘Ž π‘“π‘Ÿπ‘œπ‘š π‘”π‘Žπ‘–π‘›π‘–π‘›π‘” π‘π‘œπ‘›π‘‘π‘Ÿπ‘œπ‘™. This was first mooted in 2021 in a scholarly journal, Parameters (U.S. Army War College); however, this has been picked up and similar thoughts have been expressed by various U.S. officials, politicians, etc.

However, adherents of this supposedly 'deterrent' suggestion appear not to have seriously thought through this scenario! Since China is already cut off from TSMC chips by U.S. sanctions (see here and here), this would only effect China π₯𝐨𝐧𝐠-𝐭𝐞𝐫𝐦 while being a huge and immediate blow to the U.S. (and world) economy. As such, this threat may 𝐧𝐨𝐭 be quite the deterrent some think it is! In fact this could, perversely, π›πž 𝐚𝐧 𝐒𝐧𝐜𝐞𝐧𝐭𝐒𝐯𝐞 for China to take action sooner!

Meanwhile, there is another 'wild card' at play in this consideration - following pressure by the U.S. government, TSMC is currently building a huge fab/foundry in the U.S. ( in Arizona) which when completed (initial production is forecast to begin in 2024, with a second fab coming online in 2026) would ensure a safe and sufficient supply of chips for the U.S. So, what might be some of the consequences of this new plant (which I will refer to as TSMC-AZ) to the various parties? There are both beneficial and adverse possibilities.

  • What effect might this have on the U.S. commitment to and support of Taiwan? With its reliance on Taiwan-based production eliminated, the opportunity cost to the U.S. of a Chinese takeover of Taiwan would be greatly reduced, and it is conceivable that this could lessen the likelihood of the U.S. choosing to take military action in support of Taiwan!

  • What effect might this have on the Chinese calculus with respect to their timeline to 'incorporate' Taiwan? This could depend on their forecast of what the U.S. might do. If they come to believe that the U.S. would indeed be more likely to follow through with a 'broken nest' approach once they were insulated by the Arizona-based manufacturing, then China might feel the need to move on Taiwan before TMSC-AZ achieves critical mass. However, if they come to believe that U.S. support for Taiwan would 'soften' after TMSC-AZ comes online and that 'broken nest' would not be implemented, that might cause the Chinese leadership to opt for a longer time frame before taking any action.

With TMSC-AZ coming along, we might know sooner rather than later!

On a side note, simply destroying the main fabs/foundries in Taiwan, while certainly dealing China a major setback, would not necessarily eliminate the associated knowledge, expertise, and know-how. To really cause a decades-long setback it would be necessary to also destroy all the design facilities, online documentation, knowledge repositories, etc., and also the associated human capital. If I were a Taiwan-based semiconductor engineer/expert, I might be more than a little uncomfortable in the near future.