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Taiwan Tensions Spark New Round of US War-Gaming on Risk to TSMC

(Bloomberg) -- President Joe Biden has been explicit in vowing to commit US forces in the event of a Chinese attack on Taiwan. The question occupying US and Taiwanese officials is the fate of the island’s flagship semiconductor industry.

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Contingency planning for a potential assault on Taiwan has been stepped up after Russia’s invasion of Ukraine, according to people familiar with the Biden administration’s deliberations. The scenarios attach heightened strategic significance to the island’s cutting-edge chip industry, led by Taiwan Semiconductor Manufacturing Co. In the worst case, they say, the US would consider evacuating Taiwan’s highly skilled chip engineers.

Estimates by the US National Security Council project that a Chinese invasion and the loss of TSMC could disrupt the world economy to the tune of more than $1 trillion, around twice the value of the entire semiconductor industry’s annual global sales.

That doomsday scenario injects a new dynamic to Washington’s war-gaming that highlights an uncomfortable dilemma: For all the talk of strong support for the government in Taipei, the US has concluded that it’s too dependent on Taiwan for the kind of advanced chips that are essential for the latest smartphones and next-generation military hardware, and is working to build more domestic capacity as a result.

“The focus among policymakers — and this is true of the US and elsewhere — is of understanding where risks are or concentration is,” said Chris Miller, an associate professor at Tufts University and the author of Chip War: The Fight for the World’s Most Critical Technology. The chip industry’s concentration in Taiwan, he said, “has raised red flags.”

The following account of the contingency planning being undertaken was provided by multiple officials and former officials who requested anonymity to speak candidly. They stressed that plans are purely hypothetical and many details remain unresolved.

The US sees Taiwan as a key part of a new chip alliance it’s trying to set up, and last month the Senate Committee on Foreign Relations approved an act conveying staunch support. Despite those reassurances, Taipei is feeling pressured by Washington on the chip front as attempts are also made to reduce Taiwan’s role in the global supply chain, effectively diminishing what President Tsai Ing-wen has called the island’s “Silicon Shield.” China views the democratically governed island of Taiwan as its territory.

The paradox was on show during Kamala Harris’s September visit to Asia. Hours before hailing Taiwan’s technological contributions to the “global good,” the vice president touted a new US bill authorizing $50 billion for semiconductor research and manufacturing in America.

“Our dependence on Taiwan for chips is, you know, cut substantially,” Commerce Secretary Gina Raimondo said Sept. 29, when asked at an Atlantic Council event where she saw the US in 10 years. “It’s just like a new dawn.”

TSMC’s might lies in its leading-edge technologies and its indispensable role in keeping the global economy humming. Companies including Apple Inc., Tesla Inc. and Volkswagen AG all need chips from TSMC, and so does the US military. California-based Intel Corp. is a couple of generations behind the Taiwanese company’s technology and is struggling to catch up.

Taiwan is trying to assuage Washington’s concerns: This week the government pledged to work closely with the US and other allies to prevent China’s military from acquiring its state-of-the-art technology. Taiwan’s Minister of Economic Affairs Wang Mei-hua is visiting the US later this month to discuss supply chain resiliency and geopolitics with relevant stakeholders.

TSMC has meanwhile agreed to build a $12 billion chip fabrication plant, or fab, in Arizona, a facility in Japan, and is mulling a European hub. Yet it has also said it doesn’t plan to move its most advanced technology abroad.

Miller of Tufts, in a recent report for the Center for a New American Security, suggests the US threaten export controls on chip design software and manufacturing equipment in a bid to pressure TSMC to roll out its newest process technologies simultaneously in the US and in Taiwan. He says TSMC could also be pressed to commit that every dollar of capital expenditure in Taiwan be matched at one of its new overseas facilities.

Washington is showing no signs of willingness to exert that kind of pressure.

Taiwan’s economy ministry said in a statement that the chip supply chain is long and complex, involving divisions of labor, with the US, Europe and Japan all playing critical roles. “Rather than saying chip production is centralized in Taiwan, it’s more apt to say that like-minded countries are creating innovation and leadership by focusing on their own strengths,” it said.

Read more on what could happen if China invaded Taiwan

There have always been contingency plans around TSMC. It lies in a seismically active area and it is hugely power intensive on an island that imports most of its energy. But the reality of war in Europe is giving added impetus to the planning for any Chinese attack.

One potential option is for Washington to try to entice TSMC workers to relocate to the US on the last planes out. The US would consider evacuating Taiwan’s chip engineers in a scenario that involves a full invasion.

Yet even if evacuation were feasible, replicating somewhere else the infrastructure that TSMC has established in Taiwan would take years if not decades, cost tens of billions of dollars, and wouldn’t mitigate the impact on the world economy of losing its factories.

At the extreme end of the spectrum, some advocate the US make clear to China that it would destroy TSMC facilities if the island was occupied, in an attempt to deter military action or, ultimately, deprive Beijing of the production plants. Such a “scorched-earth strategy” scenario was raised in a paper by two academics that appeared in the November 2021 issue of the US Army War College Quarterly.

That’s not something under consideration. Still, some former officials with ties to the Pentagon want the Biden administration to devise such a plan, arguing that there would be no other option in an invasion scenario.

“We can’t allow such a valuable equity to fall into Chinese hands, I think it would be nuts,” said Elbridge Colby, a former Pentagon official who helped write the Trump administration’s national defense strategy. Hawks in Washington doubt the Biden administration would pursue so extreme a path, however.

That doesn’t take into account Taiwan’s own plans for its most strategic company. TSMC declined to comment for this article. However, Chief Executive Officer Mark Liu said in a July interview with CNN that the company could not be controlled by force and an invasion would “render TSMC factories inoperable.”

“TSMC and Taiwanese chip firms are all a part of global supply chain,” the economy ministry said. “The notion of snatching TSMC by force doesn’t align with the reality of how the chip industry operates.”

US officials declined to comment publicly on the details of their planning. One said that thinking through worst case scenarios was the defense department’s bread and butter.

Still, in a September interview with Bloomberg Television, National Security Advisor Jake Sullivan described the prospect of a Chinese invasion as a “distinct threat,” without specifying a timeframe for any potential move by China. Global financial firms are reassessing the risks of doing business in China on the back of escalating tensions.

The concern in Taipei is that President Xi Jinping may be tempted to launch an attack to divert attention from a faltering Chinese economy and high unemployment.

China denies any such intention. Beijing blames the US for changing the status quo in the region, including by House Speaker Nancy Pelosi’s August trip to Taiwan. In any case, Xi has myriad other problems at home, and there’s no sign an invasion is imminent.

Chinese Ambassador to the US Qin Gang downplayed the threat of an imminent attack on Taiwan. “People are over nervous about it,” he told reporters in August. Speculation China had moved up the timeline for an invasion is “baseless,” he said.

Internal US meetings on Taiwan have intensified in frequency and scope in recent months regardless. At least two studies are under way, one at the Treasury Department on the overall market impact of an invasion, and one at the National Security Council about supply chains, semiconductors and US dependencies on TSMC.

To reduce its reliance on foreign supplies, the US has incentivized TSMC to build its Arizona fab and secured a $17 billion commitment from Samsung Electronics Co. of South Korea for a new advanced fab in Texas. Samsung, the only company to challenge TSMC at the leading edge, said this week it could add more fabs in the US. Meanwhile, Intel is adding capacities in Arizona and creating a new chip hub in Ohio.

But it will take another two years at least for these plants to come online.

US officials meantime believe China’s approach will harden following this month’s Communist Party Congress, when Xi is expected to secure a precedent-defying third term. They see him emerging emboldened, more aggressive in his territorial assertions and US engagement.

Not all US officials are convinced that Xi would push for a military invasion. But even a blockade or economic coercion would have grave consequences for Taiwan and the global economy.

Lately there’s been “a more acute concern about the prospect that the supply chain could be cut by some action by the Chinese,” whether a D-Day style attack or blockade, said Rupert Hammond-Chambers, president of the US-Taiwan Business Council. Businesses, like governments, are looking much harder at contingencies, he said, “so that if, God forbid, something does happen, they’ve actually got a game plan.”

(Updates with Economy Minister trip to US in seventh paragraph.)

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