How Taiwan became the indispensable economy

In the days after then US House Speaker Nancy Pelosi visited Taiwan last year, Taiwanese suppliers to American tech giants including Apple, Google, Meta and Amazon were inundated with requests from their customers. Could they produce from outside Taiwan to secure supplies, in case Beijing went to war over the island?

Pelosi’s visit had sparked more than a diplomatic spat between Washington and Beijing, which conducted unprecedented military exercises around Taiwan in response to her trip. It triggered a tech industry crisis, which may now threaten the global electronics supply chain.

“If anyone hits Taiwan, or there is a serious disruption . . . the tech and electronics industry worldwide is basically screwed,” says Hsieh Yong-fen, founder of chip and material testing provider MA-tek.

Taiwan is best known for making cutting-edge semiconductors. But its companies also turn out other crucial components from printed circuit boards to advanced camera lenses and they run huge device assembly operations in China.

This has created a triangle of critical interdependence between Taiwan, China and the US that has deepened even as tensions between Taipei, Beijing and Washington have risen.

To understand why, take a look inside the ubiquitous iPhone.

China’s Luxshare Precision Industry, originally a component supplier to Apple, started to build iPhones in 2021. Its display champion, BOE Technology Group, now makes some of the advanced OLED screens for iPhones, previously the exclusive domains of South Korean manufacturers. Chinese camera lens maker Sunny Optical appeared for the first time in the 2023 supplier list, eating into a market that formerly belonged only to Taiwanese players.

China is also where 95 per cent of all iPhones are assembled, a figure that has changed little since its launch. The country is a major market for Apple, too, providing around a fifth of its total annual revenue.

Complicating the picture is the fact that many Taiwanese and US suppliers serve Apple from hundreds of facilities in mainland China. Apple declined to comment on this story.

Without any of these components, an iPhone would not be an iPhone. But a formula that has worked for a decade and a half is being put to the test as geopolitical tensions rewrite the rules of tech manufacturing.

G7 leaders meeting in Japan this month vowed to “reduce excessive dependencies in our critical supply chains”. Washington is determined to claw back advanced chip production from Asia while Beijing is racing to establish its own tech supremacy. Taiwan is caught in the middle.

Made in America

In early December, standing under the blinding Arizona sun, Apple CEO Tim Cook took the stage with President Joe Biden to celebrate a milestone: Taiwan Semiconductor Manufacturing Co was moving equipment into its new $40bn chip plant in Phoenix — the Taiwanese contract chipmaker’s first plant in the US in more than 20 years.

“This is an incredibly significant moment. It’s the chance for the United States to usher in a new era in advanced manufacturing,” Cook told the crowd of assembled politicians and tech industry heavyweights. TSMC, the world’s biggest contract chipmaker, plans to make some of its most advanced semiconductors on US soil starting next year.

And as one of the plant’s earliest customers, Apple will be able for the first time to stamp “Made in America” on core chips it has designed.

Left unsaid was that advanced semiconductors like these are only a small part of the electronics supply chain. A single smartphone requires a wide range of chips, including a host of less advanced “companion chips” not to mention final assembly, all of which are concentrated in Asia, particularly China and Taiwan.

The Covid pandemic revealed the logistical weak points of the international supply chain, which was built up over decades of globalisation. Geopolitical tensions — more specifically the threat of war over Taiwan — are heaping additional pressure on tech companies to change how they operate.

In one indication of the nervousness, a top US air force general recently predicted America and China are likely to go to war over Taiwan in 2025.

“Two years ago, due to Trump’s trade war, customers told us they wanted ‘out of China’ production options, so we decided to enlarge manufacturing capacity in Taiwan, our home base,” said an executive with Unimicron, a printed circuit board maker supplying Apple, Intel and others.

Then, as the company was in the midst of a multibillion-dollar expansion in Taiwan, Pelosi visited Taipei last August. An infuriated Beijing, which considers the island part of its territory, responded by conducting live military drills off Taiwan’s coast — and Unimicron’s clients got nervous.

“Our customers then said they wanted some production alternatives that are outside of China and also out of Taiwan over fears of a war,” the executive said. “We were stunned and speechless, and so were a lot of our peers . . . How can the supply chain be moved out of China and Taiwan? The majority of electronics supply chains are here.”

Since the middle of last year, Intel, AMD, Nvidia, Meta, Google and Amazon have all requested production capacity outside of both China and Taiwan, several tech executives told Nikkei Asia and the FT. HP and Dell — the world’s second and third biggest makers of notebook computers — told their suppliers specifically to start building capacity in south-east Asia. Dell even aims to phase out made-in-China chips by 2024.

“We have a business contingency plan — the so-called BCP — to prepare for supply chain disruptions, such as a war,” an executive at chip testing equipment maker Advantest of Japan told Nikkei Asia and the FT. “But if a military conflict really happens here in the Taiwan Strait, honestly, I think any BCP will be totally useless. It would be doomsday for the chip supply chain, and no one ever wants to imagine that happening.”

AMD said it worked continuously with suppliers to improve business continuity plans, including the “important” goal of geographical diversification. Intel said it had consistently supported its suppliers’ “long-standing” efforts towards diversification, which were not related to Pelosi’s Taiwan visit. Nvidia declined to comment.

Dell has said previously that it continuously explores supply chain diversification across the globe. HP has said it has a robust global supply chain. Meta, Google and Amazon did not respond to requests for comment.

Even without a full-scale war, disruption from, say, a Chinese blockade of Taiwan could cause serious global turmoil. According to a Semiconductor Industry Association estimate, a disruption in the production of logic chips at contract chipmakers in Taiwan could cause nearly $500bn in lost revenues for electronic device manufacturers that depend on this supply. A recent estimate by Rhodium Group said a Taiwan conflict would put well over $2tn of economic activity at risk.

“People underestimate Taiwan’s position in the supply chain. It’s much more than just about semiconductors. We have a very complete supply chain from chips, components, PCBs [printed circuit boards], casings, lenses to assembly . . . anything you can think of,” a senior executive at Compal, a vital product assembler to Dell, HP and Apple, said. “If there’s military friction happening to Taiwan, the entire global supply chain will collapse for sure.”

Such a scenario, in other words, would leave Apple with “Made in America” chips and no devices to put them in.

The threat of conflict

At first, fears over a possible conflict came largely from western clients. But now even Taiwanese companies are concerned by developments across the strait.

Beijing concluded another round of military exercises on April 10, encircling Taiwan in protest against Taiwanese President Tsai Ing-wen’s meeting with US House Speaker Kevin McCarthy in California. The three-day drill included 91 incursions in a day.

“We grew in tandem with China’s reform and opening-up in the past several decades, but now the good old days are over. It’s becoming obvious that Beijing puts politics over economic growth,” said an executive at an Apple supplier whose facilities in China employ hundreds of thousands of workers. “Our strategy is to lay low, to accelerate production shifts [to south-east Asia and India], and divest our money gradually from China in the next few years.”

“Gradually” is the operative word for many companies looking to diversify their supply chains, whether they want it to be or not.

“It takes at least three years in some countries and even five years [in others] to build a semiconductor plant from start to finish, and then it needs to start operation,” said Benjamin Hein, an executive for China and south-east Asia at Germany’s Merck, a chemical and material group. “Sometimes there are some misunderstandings that this [supply chain shift] could happen overnight because of some geopolitical issue [but] it could take us at least five years, and even more than 10 years, to see some more fundamental shift.”

Washington is attempting to speed the process along, with a focus on chips. It is offering incentives to encourage companies like TSMC and Samsung of South Korea to help build up America’s semiconductor industry.

TSMC’s plant in Arizona, which will make ultra-advanced 3-nanometer chips that can be used in supercomputers, smartphones, cars, fighter jets and military equipment, is seen as one of the crowning achievements of this push.

If all currently planned investments go through, from both foreign and domestic players, the US will be making 26 per cent of the world’s advanced chips by 2027, up from 10 per cent now, according to a Counterpoint projection. Taiwan’s share would slip from 54 per cent to 45 per cent over that same period.

When it comes to technology specifically, the three economies are locked together even more tightly.

This is most obvious in advanced microchips. TSMC and its smaller Taiwanese peers control two-thirds of the world’s market for contract chipmaking, turning the semiconductor designs of Apple, Google and others into physical chips. As global leaders in cutting-edge chip technology, their output is indispensable for the production of everything from Chinese smartphones to American fighter jets.

Taiwan is also the leader in the humbler parts of the tech supply chain. One overlooked element is chip packaging and testing — the last stage of semiconductor manufacturing — where Taiwan controls 30 per cent of global market share. Another example is printed circuit boards, the basic material on which chips are mounted. The island makes just under a third of the world’s supply, much of which is shipped to assemblers in China for final production.

Apple’s “Made in America” chips, mounted on Taiwanese-made printed circuit boards, may well find their way to China before ending up in a smartphone or laptop bound for the US market.

Even where US companies appear to be making progress in reducing their reliance on China, the situation is less than straightforward.

Apple, for example, has spent years urging its suppliers to build capacity outside of China and has at least some alternative production capacity for all of its main product lines in countries such as India and Vietnam.

But more than 80 per cent of Apple’s top 188 suppliers still have at least one facility serving the company in China, according to a Nikkei Asia-FT analysis of the latest annual list published by Apple in 2023. Many key suppliers, including 3M, ON Semiconductor, Foxconn and Luxshare have three or more production sites in the country.