Semiconductors, Geopolitics, and Taiwan
Why Taiwan Semiconductor (TSMC) has become one of the most important companies in the world and why this has made Taiwan a geopolitical hotbed
Semiconductors are on the news as the US Senate just agreed to pass the US CHIPS Act. Taiwan is also on the news as the US Speaker of the House Nancy Pelosi is planning to visit Taiwan and China threatening retaliation against Speaker Pelosi’s visit. So what are the geopolitics and significance of Semiconductors, Taiwan, and TSMC?
What are Semiconductors?
In layman’s terms, semiconductors conduct electricity within a computer. A computer takes in data and processes the data and converts these data into usable information. This data is transported through electric currents. These electric currents are conducted by semiconductors. For example, as I type this article the data sent from me typing these letters on my laptop’s keyboard, the message to put these words on this article is transported through electric currents. These currents will not be possible to move if it weren’t for semiconductors. Semiconductors are on every electronic device. If you used your iPhone to hail an Uber, order DoorDash, or play your favorite Spotify hit, none of this would be possible if it weren’t for semiconductor chips in your phone. Semiconductors are the brain of your electronic device.
Importance of Semiconductors
We are entering the 4th Industrial Revolution. The 4th Industrial Revolution is the merge of emerging technology (which includes big data, AI, Internet of Things [IoT], robotics, and other emerging technologies) with traditional industry. These industries include healthcare, education, automotive, agriculture, construction, government, defense, and every other industry. What we are seeing is big data, data analytics, and artificial intelligence are going to be utilized in all fields. During the COVID-19 pandemic, we saw everything go remote. This included areas like education and healthcare. As we all went remote during the COVID-19 pandemic tools like Zoom, Teledoc, DoorDash, and not to mention big tech like Facebook, Amazon, and Google played an even larger role in our lives, where everything we did from learning, getting help when we were sick, to supporting our local restaurants, majority of our day-to-day activities became digitized. As we see our everyday life become digital, semiconductors are more important than ever.
As you can see below in 2020 the market cap for Semiconductor companies took over energy. While many will remember 2020 for the COVID-19 pandemic this event is the most significant geopolitical/macro/technological event to happen since the dawn of the iPhone in 2007. Basically, semiconductors/chips/silicone have become the new oil.
The fast rise of semiconductor company market capitalization during the 2010s while energy has been steadily declining shows the rise of the digital industry and how everything (even your fridge!) is going digital.
Global Semiconductor Market
As shown below Semiconductor sales have gone up immensely over the past 20 years.
Semiconductor sales in 2020 totaled $440.48 billion. Personal computing had the most demand for semiconductors. But demand for chips in other fields is increasing as well.
As for the global semiconductor market, US companies still dominate the overall industry. But there is a catch.
As shown below the US dominates CHIPS R&D. So basically, R&D heavy companies dominate the US. But in terms of chip manufacturing, the US lags.
This is where the main problem facing the US semiconductor industry. The US dominates R&D-heavy companies (like Chip design) while manufacturing is mostly in Asia (especially Taiwan). This has been the case for the US economy eversince the dawn of globalization during the 1990s and 2000s. While America thrived in the heavy R&D and innovation space, creating some of the largest and most influential tech behemoths like Apple, Amazon, and Google, the country outsourced all of its manufacturing to Asia (in particular China). This is why we see China dominating in heavy industry and being able to build massive infrastructure projects and heavy machinery home and abroad. This manufacturing boom made China the global manufacturing leader where the country was able to build things faster and cheaper. This is why if you see your iPhone it says, “Designed in California, Assembled in China.” Basically, the heavy R&D and research were done in America where the actual phone was built in China. This is the overall state of the US economy. Thanks to globalization and labor offshoring heavy R&D and IP-based services dominated the US economy while manufacturing severely declined. This is also the case for the US semiconductor industry.
De-Industrialization, Financialization, Decline of American Manufacturing Capabilities, and the rise of TSMC
The financialization and de-industrialization of the US economy have affected every industry (thus leading to the decline of iconic US industrial corporations like GE, GM, and Boeing etc.) and semiconductors are no exemption. Though many chips are designed here in the US, Asia dominates chip manufacturing. 75% of the world’s semiconductor manufacturing is based in East Asia.
As you can see above China has emerged to be the world's largest technology exporter, displacing the United States. If we look at semiconductor manufacturing the US used to be 37% of global semiconductor manufacturing in 1990 but has fallen to 10% while China' manufactures 24% of global chips.
Intel, just like the rest of corporate America, has increasingly been engaged in financial engineering. Between 2011 and 2015 while Intel spent $53 billion on R&D the company also spent $36 billion on stock buybacks. Between 2016 to 2020 the company spent $66 billion on R&D while spending $45 billion on stock buybacks. One major hit to Intel was when Apple decided to not go with Intel for their Mac computers and design their own chips and outsource the manufacturing to TSMC. Currently, 53% of Apple’s chips come from TSMC. One of the key events to happen in 2020, besides of course the global pandemic, was TSMC beating Intel in terms of market capitalization.
Even Bloomberg called this an end of an era as Intel considered outsourcing its manufacturing and sticking to heavy R&D and chip design. Intel in 2020 announced that the launch of the company’s 7-nanometer chips will be delayed even till 2023. This is while TSMC is racing ahead to mass produce 5nm chips used in 5G phones. Delays, financialization, and quite frankly TSMCs mass rise in chip manufacturing and decline in Intel’s capabilities have eroded America’s semiconductor manufacturing capability. It is not just the civilian economy affected by TSMC. The US Department of Defense (i.e the Pentagon) is heavily reliant on TSMC as well. For this reason, the Pentagon has also shown a keen interest in and is encouraged by the CHIPS Act. TSMC manufactures 92% of the world’s advanced semiconductors. These semiconductors are in ballistic missiles and F-35 fighter jets. The Pentagon is fully aware of this problem.
Geopolitics of Semiconductors
US-China “Cold War”: It is the country that will be a leader in emerging technologies (i.e. AI, Quantum Computing, Big Data, Robotics, and IoT) is going to be the next superpower. The invention steam engine built the British empire. Oil and a global economy unearthed by World War II and the invention of the Semiconductor and the internet (i.e. Silicon Valley in the 1970s) built the American Century. Now as China and America are competing for global primacy emerging technology is going to play a key role. This is why China has created the China 2025 plan, to be a leader in ten key emerging technology sectors. These sectors include new information technology, robotics, aerospace, ocean engineering and high-tech ships, high-end rail transportation, electronic vehicles, electronic equipment, agriculture technology, new materials like polymers, and medical technology. As the competition heats up for dominating emerging technology so does the demand for chips, making chips and rare earth materials that make chips more important than oil.
Taiwan: As 92% of the world’s most advanced semiconductors come from here, Taiwan has become one of the most important economic and high-tech hubs in the world. Taiwan, the South China Sea, and the Pacific have become a geopolitical hot spot. As China gains an upper hand in technological innovation, one of Washington’s preferred ways to contain China is to cut off its access to advanced semiconductors. In response, Beijing can nationalize all TSMC’s property, plant, and equipment based in mainland China. Another risk for the US is that for years now the Communist Party of China (CPC) has vowed to reunite Taiwan with China. With Tsai Ing-wen being defiant of Beijing, it is possible that China may invade Taiwan. If an invasion happens, prepare for a major economic depression. Major companies in the US like NVIDIA, Qualcomm (both happen to be major chip designers but outsource most of their chip making to TSMC), Apple, the auto industry (that is already suffering from a chip shortage), and any other industry that has an electronic component (and uses chips) are going to get affected. This will put the US (and the globe) into a global economic depression. This is one major reason why the US government and especially the DoD has been urging semiconductor manufacturers to restore manufacturing capabilities home.
China’s Heavy Investment in Semiconductors: For China, to be a leader in global emerging technology the CPC has learned that the country has to start being self-sufficient in chip manufacturing. China has invested more than $300 million RMB ($44 billion) into building chip manufacturing plants. Ironically, US sanctions and the US putting some major Chinese chip manufacturers like SMIC on the US Commerce Department entity list has bolstered the country’s investment into chip factories. VC investment into the chip sector has tripled and the STAR Market has listings of many chip companies to raise capital for chip manufacturing. 17% of companies listed on the new STAR Market (to challenge the NASDAQ in New York) are semiconductor companies. China plans to build 31 chip factories by 2024. Thanks to this massive investment Chinese chip companies have now taken over Taiwan when it comes to Semiconductor chip exports (still Taiwan and Korea, mainly led by Samsung, are the only two countries manufacturing advanced semiconductors on a rapid scale). By being independent and able to design and produce its own semiconductors, China will have no need to depend on Qualcomm, NVIDIA, Intel, Samsung, or TSMC. This has major semiconductor companies, especially US-based chip designers like NVIDIA and Qualcomm worried. These companies consider China a huge market.
SMIC also went through a major semiconductor breakthrough despite US sanctions and export controls. SMIC has started manufacturing and shipping 7nm chips. The 7nm chip is the most advanced chip currently built and is on your electronic device. This is a feat even Intel is not able to achieve! Only two companies are able to manufacture the 7nm, which are TSMC and Samsung. Now SMIC has joined the list. This is a massive wake-up call for Silicon Valley.
Challenges of Reshoring: As China is ascending in Chip manufacturing capabilities, restoring chip manufacturing to the US is not going to be easy. TSMC's expansion into Arizona has been rife with challenges. One of its major challenges has been hiring engineers. Many engineers in the US who are more used to heavy R&D industries are turned off by working in manufacturing. Also, many software engineers working in big tech firms like Microsoft, Facebook, or Google on average get paid up to six figures. TSMC is unable to match these salaries. Also, the labor shortage has made it harder to hire technicians and engineers. The lack of qualified engineers in the US has made chip companies like NVIDIA and Qualcomm expand their engineering teams in Taiwan and India. Another hurdle facing TSMC is company culture. TSMC is known for its grueling hours, strict management, and emphasis on discipline and hierarchy. Employees worked grueling hours and were on call to solve any issues happening in the chip plant. This type of work environment is unheard of for American engineers. Also, even with the passing of the CHIPS Act many analysts say that the US is years away from mass-producing chips. Intel will not open its Ohio factory till 2025 and TSMC won’t open its chip factory in Arizona till 2024. Even TSMC’s founder Morris Chang has doubts about America’s ability to produce chips. Overall, the story of TSMC in Arizona highlights America’s difficulty to recreate industry after years of de-industrialization and financialization.
Finally, Intel reported its Q2 financial results and it was dismal, to say the least. As we mentioned above, engaging in financial engineering over actual engineering is costing the company dearly. Just in Q2, the company spent $4.5 billion in dividends and over $4 billion in CAPEX (Capital Expenditure). Intel’s downfall displays the true tragic state of American industry thanks to globalization and the challenges the US faces in building emerging technology to compete with China.
My Final Thoughts
We are already seeing how supply chain issues and de-industrialization of the US economy have affected the American economy. Due to ship shortages, we are seeing new cars not coming to American dealerships and used car prices skyrocketing. But the current supply chain problems and US-China tensions are showing that semiconductors are also a national security issue. For China, as mentioned above to be dominant in emerging technologies semiconductors are essential. That is why the country is pouring billions into chip factories and developing a homegrown semiconductor industry. Beijing wants to not be dependent on foreign powers when it comes to sourcing the country’s chips. The Pentagon is also very concerned about chip supply chains. Many of the US military’s high-tech defense technology and F-35s depend on TSMC semiconductor chips. The Pentagon has raised concerns about a possible invasion of Taiwan and how this can disrupt semiconductor and high-tech supply chains. For the Pentagon, being able to build chips in the US is a major national security issue.
Just as I am writing this article the CHIPS Act just passed the US Senate and is on President Biden’s desk. This is truly a big win for Washington. This bill will allocate close to $250 billion for semiconductor manufacturing and scientific research in the United States. This legislation will also create 25% of tax credits for companies building semiconductor manufacturing capabilities in the United States. This is also a rare moment where the majority of US Senators from both sides of the aisle agree on the importance of manufacturing chips in the United States. Outside of the legislature, this is also a unique moment where both the Commerce Department and Defense Department agree on the importance of making chips in the US. Even the US Chamber of Commerce, which has usually been a cheerleader of unfettered offshoring of US manufacturing, has applauded the CHIPS Act. Overall, everyone in the US establishment agrees with the importance of making chips in the US.
Last but not least, it is not just the US, China, Korea, and Taiwan which are investing heavily in semiconductors. Even the Europeans see the need to invest billions into building chips in Europe. The UAE has also done a strategic investment in GlobalFoundries which is the third largest semiconductor foundry in the world.
In my personal view, for the US to remain a global superpower and own the 21st Century, the US needs a second Manhattan Project which involves emerging technology. These emerging technologies include next-generation semiconductors, AI, EVs, green energy, quantum computing, advanced manufacturing, and many other emerging technological advancements. For the US, China’s dominance in 5G (with Huawei) and SMIC’s recent achievement of building 7nm chips is a “Sputnik Moment”. After witnessing the Soviet Union launch Sputnik, a furious President Eisenhower implemented the National Defense Education Act, funded major investment into STEM education, and signed legislation creating NASA. Then President John F. Kennedy vowed to land a man on the moon, which happened in 1969. The US is facing a geopolitical rival even larger and much more technologically advanced than the Soviet Union. Washington will need to start implementing a techno-industrial policy to match the 21st Century. The CHIPS Act is a good start but the US has a long way to go.
Finally, emerging technology leads to the emergence of new superpowers. The steam engine and the first industrial revolution helped create the European Century. The second industrial energy, petroleum, and the technological revolution helped create the American Century. Now as we enter the 4th Industrial Revolution, where all sectors are going to involve emerging technology, two powers are eying to rule the 21st Century. It is the power that dominates emerging technology that will make the rules of the 21st Century. As competition to dominate emerging technology heats up, semiconductors have become the new oil.
Thank you for reading my post. This is one of my first deep researched long newsletters. There is much more to come. If you love this please sign up for my newsletter. Please don’t forget that we are still on Medium. Please give yours truly a like and leave a comment on your thoughts about chips, geopolitics, and Intel. Share this article on your favorite social media platform. Spread the word about Armchair Banker.
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Links:
The State of the US Semiconductor Industry: 2021-SIA-State-of-the-Industry-Report.pdf (semiconductors.org)
Geopolitics of Semiconductors (Eurasia Group)
US-China Clash of Empires by Gavekal Research and Luis-Vincent Gave
Krystal and Saager’s Breaking Points Take on the CHIPS Act
Intel’s dismal Q2 numbers by Dylan Patel of SemiAnalysis and Doug’s Fabricated Knowledge
Does The United States Need a Techno-Industrial Strategy? (substack.com)