Analysis: Chip industry rethinks Taiwan risk after Pelosi visit but options limited

Macronix International

07/10/2022 02:00

By Sarah Wu
       TAIPEI, Oct 7 (Reuters) - Chinese missiles flying over
Taiwan and naval drills in the Strait in August that simulated a
blockade by China have jolted the semiconductor industry into
contemplating what once seemed a remote possibility: war over
the major chip-producing island.
    From drafting contingency plans to inquiring about
manufacturing capacity outside Taiwan, some companies are now
weighing how to respond if China attacks or restricts access to
the democratic island, according to 15 semiconductor executives
interviewed by Reuters. 
    While Taiwan has lived under the Chinese threat for decades,
with occasional spikes in tensions, the war games in early
August following the visit of U.S. House Speaker Nancy Pelosi to
Taipei rattled nerves, said the executives, who asked for
themselves and their companies not to be identified due to
concerns over relations with China. 
    China claims Taiwan as its own territory. Taiwan's
government rejects China's sovereignty claims.
    Taiwan produces the vast majority of the world's most
advanced chips and is home to Taiwan Semiconductor Manufacturing
Company Ltd (TSMC)  2330.TW , the world's largest contract
chipmaker and supplier to major companies like Apple Inc
 APPL.O , U.S. chipmaker Nvidia Corp  NVDA.O  and chip designer
Qualcomm Inc. 
    Chips are crucial for building everything from iPhones and
washing machines to cars and fighter jets.
    The executives said it would be hard to wean the world off
its reliance on Taiwan's hi-tech chips quickly but geopolitical
challenges confronting the industry are increasing.
    "Everyone is currently talking about business continuity
plans," said Terry Tsao, president of the SEMI Taiwan industry
group. "A small portion of companies have only started to make
these plans recently. From what I've heard, most are foreign
companies."
    Forty percent of respondents polled by the American Chamber
of Commerce in Taiwan the week after Pelosi's visit said their
companies were revising or about to revise their crisis
contingency or continuity of operations plans in Taiwan.
    One chip executive at a large foreign firm with operations
in Taiwan said his company was asked about its business
continuity plans by its customers and had in turn asked their
suppliers in Taiwan the same questions.
    "No-one really ever highlighted any kind of military action
in their business continuity plans and now they are," he said.
Unsettled by the Chinese drills, which showed how easily Taiwan
could be blockaded, management had launched efforts to plan for
disruption in supplies and other scenarios, he said: "I don't
think anybody believes the political environment is going to get
any better."
    Some say the presence of chipmakers provides Taiwan with a
‘silicon shield’ – making China less likely to attempt to take
the island by force and the United States reluctant to allow it
to fall into Chinese hands. While the government in Taipei has
downplayed this theory, it is keen to avoid any weakening of its
economically vital semiconductor sector. 
    Later in August, officials from Taiwan's foreign ministry,
economy ministry, and top military think tank made their case
for the island remaining a safe place for chip investment at a
closed-door AmCham event.
    Sebastian Hou, senior investment analyst at Neuberger Berman
in Taipei, said that after the U.S.-China trade war began many
Taiwanese non-chip tech companies had reshored manufacturing or
relocated to Southeast Asia because they were asked by their
clients in the United States or Europe to diversify away from
China.
    However, following Pelosi's visit, "customers in the Western
world expressed their concerns about being too concentrated in
Taiwan", Hou said: "There's no immediate action requested by
their Western clients, but some discussion is already underway."
    INDISPENSABLE ISLAND
    One foreign chip executive with factories outside of Taiwan
said more companies contacted him after Pelosi's visit to
discuss options, but those meetings have not yet translated into
new orders. He declined to name the companies involved.
    "People are looking at: ‘If I have choices, where else can I
go to ensure that my device - my supply chain - does have
alternatives if missiles do start flying?" the executive said.
    These are customers seeking chips made with older technology
because, when it comes to the bleeding-edge, there are no
alternatives to TSMC with the production capacity to serve
leading firms, the executive said.
    Executives told Reuters it will be difficult to replicate
the efficiency of Taiwan's semiconductor industry, with chip
giants and hundreds of their suppliers arranged in clusters
along the western coast of the island - especially given higher
costs in countries such as the United States.
    An executive at another major foreign chip company with
operations in Taiwan said that – while the drills were forcing a
closer consideration of the risks of future investment there -
withdrawing was not on the table.
    "It is still the business or financial terms that have a
much bigger say," he said.
    Kung Ming-hsin, minister of Taiwan's National Development
Council, told reporters last month that major chip companies,
including foreign ones, will invest around $210 billion in
Taiwan over the next five years on advanced manufacturing.
    German chip materials giant Merck is redoubling its
investment.
    Last year, Merck announced a 500-million-euro investment in
Taiwan over the next five to seven years. John Lee, managing
director of Merck Group in Taiwan, told Reuters after Pelosi's
visit that it has no plans to change course because the demand
for chips is growing exponentially and Taiwan remains the
world's largest semiconductor materials market.
    
    'BEYOND OUR CONTROL'
    One executive at a major Taiwanese tech firm said it started
to produce daily geopolitical reports following the drills to
assuage foreign clients that it was taking the issue seriously –
rather than because it was concerned about the risk of war.
    "Taiwan is used to this but if you are sitting in the
C-suite overseas, it's much more alarming," the executive said.
    A senior executive at another Taiwanese chip company said,
however, that his firm has yet to receive significant pressure
from foreign clients because of the military tensions.
    "They understand no matter how hard they twist our arm,
there's very little we can do," said the executive.
    In recent years, Taiwanese chip companies have ramped up
investments abroad, but the planned capacity is still only a
fraction of their overall output, executives and analysts say.
    When asked whether cross-strait tensions would affect his
business, Miin Wu, the chairman and CEO of Taiwanese chipmaker
Macronix International Co Ltd, told reporters last month: "Of
course we worry about it". But he added that worrying did no
good.
    "Rather, we just continue to invest and come up with better
and better products," he said. 
 (Reporting by Sarah Wu; Additional reporting by Ben Blanchard
in Taipei and Jane Lanhee Lee in San Francisco;
Editing by Daniel Flynn)
 ((S.Wu@thomsonreuters.com;))