Fateful Choices For ICs and Taiwan : Page 2 of 3

February 25, 2021 // By Malcolm Penn
Fateful Choices For ICs and Taiwan
Malcolm Penn of analysis firm Future Horizons discusses how western prosperity has come to depend on an island state that lies close to a China growing into its role as a world superpower.

This problem has been brewing for years, the combined result of an efficient out-sourcing regime driven faultlessly by TSMC, aided and abetted by super-efficient chip-design tools. Both trends have been manna from heaven to chip firms and their investors alike as it offered lower chip costs and allowed firms to deploy outsourcing-rich, asset-lite manufacturing strategies, increasing profits and diverting their cash flows from investments to dividends and share buy-back schemes. It was accounting Excel Sheet heaven.

No-one paid any attention to the loss of control of a key strategic manufacturing industry, why should they? Taiwan was the West's friend and TSMC an outstanding company and, in any case, chips were just another commodity and the balance sheet impact was fantastic. What could possibly go wrong? The 'Real men have fabs' nay-sayers were ridiculed as out of touch, out of date, twentieth century dinosaurs.

As more and more firms adopted the out-sourcing business model, no-one really seemed concerned how much the world is now directly or indirectly wholly dependent on Taiwan, with no supply chain risk assessment plan. Partly because TSMC has proved such a reliable supplier, no-one believed there was a need to think the unthinkable. And in a normal geo-political world, such complacency might be understandable, if somewhat imprudent ... until the outsourcing dries up.

China has been aware of this out-sourced dependency risk for years, hence its drive for national self-sufficiency in chip production, but any fast follower catch-up strategy is notoriously hard to achieve. As a benchmark, it took TSMC over twenty-five years to come close to manufacturing parity with the best in practice manufacturers and only in the past five has it moved into pole position, yet they are, without doubt, the best chip firm in the world. If it took TSMC this long to catch up, what chance has anyone else, hence the reason why, even before the US-imposed sanctions, China has made such modest progress.

But, as The Economist points out, the Taiwan conundrum represents unfinished business from the 1949 war when the defeated Nationalist regime fled into exile in Taiwan. President Xi to fulfill China's pledge to bring the 23rd Province of China under Communist Party control is more a matter of when, not if, with D-Day shaped more by the judgement call whether America would (could?) stop him.

At the same time China is trying to reduce its vulnerability to external economic pressure, especially in semiconductors. Taking back control of Taiwan would automatically 'nationalise' TSMC and leapfrog China's technology gap with the west overnight.

Next: Has America the reach?

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