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Leadership in microchip production is a shield for Taiwan


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It is not just for geopolitical reasons that Taiwan remains important to the United States. The island claimed by the Chinese is also protected by something much more subtle – its absolutely central role in world markets.

More specifically, Taiwan is a colossus in the global semiconductor market, the brains of modern electronics. His mastery of microchip manufacturing is as essential to the 21st century economy as oil was a hundred years ago.

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Taiwan produces most of the world’s high-tech silicon chips — fingernail-sized slivers embedded in billions of microscopic transistors.

The best chips are made at Taiwan Semiconductor Manufacturing Company, or TSMC, which is perhaps the most important company most people in the United States have never heard of.

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Taiwan Semiconductor is the most valuable company in Asia and one of the 12 most valuable in the world, with a market capitalization of over US$400 billion.

If you invest in international equities through a broad and diversified mutual fund or exchange-traded fund, you likely own a portion of it.

It has been a splendid investment. Over the 20 years to Sept. 7, it returned 18.6% a year, including dividends, according to FactSet data. It outperformed the S&P 500, with an annual return of 10.3%, and Intel, the largest US chipmaker, with 6.7%.

Taiwan Semiconductor is not a household name because it does not sell its products directly to consumers. But your own customers certainly are. The microchips it makes for Apple are the core of every iPhone it sells.

The iPhone 13 mini in my pocket, as well as the new iPhone 14 models introduced recently, are built around chips designed by Apple in California, produced by Taiwan Semiconductor in Hsinchu, and shipped for assembly in mainland China or perhaps, currently, in another country.

The origins of Taiwan’s success story go back to the 1980s. The Taiwan government wanted to develop a local Silicon Valley, it had cheap land, available capital, and a highly skilled workforce willing to work for much lower wages than were paid by companies in the United States.

But he didn’t have the experience until he brought in Morris Chang, a Chinese-born US tech veteran, who realized that making chips, not designing them, would be Taiwan’s forte.

Chang founded Taiwan Semiconductor, and the rest is history.

China has made producing its own state-of-the-art silicon chips a national priority, but it has failed to catch up with Taiwan.

The Biden administration intends to ensure that does not happen by imposing restrictions on the export to China of the most advanced chips – and chip-making equipment. And with $50 billion in the new Chips and Science Act, the government is trying to bring some of the best chip manufacturing back to the United States.

As David Leonhardt says, “The most advanced category of mass-produced semiconductors – used in smartphones, military technology and more – is known as 5nm. A single company in Taiwan, called TSMC, makes about 90% of them. US do not produce anything”.

The structures engraved on these microchips are very small. “Nm” is the abbreviation for nanometer. Read this slowly: a nanometer is a millionth of a millimeter.

The coronavirus that started to spread across the planet in 2020 was only about 100 nanometers in diameter. In the same year, Taiwan Semiconductor was engraving shapes less than half that size on tens of millions of chips for Apple.

Furthermore, the world’s modern weapons systems of all descriptions and telecommunications infrastructure, as well as applications in artificial intelligence, autonomous vehicles, and more, rely on these extremely complex chips.

As Dale C. Copeland, professor of international relations at the University of Virginia, wrote in Foreign Affairs: “China today has the capacity to produce chips with transistors smaller than 15 and even 10 nanometers. But to remain at the forefront of technological developments, “China needs chips “measuring less than 7 or 5 nanometers, which only Taiwan can mass-produce with a high level of quality”.

The central problems in the US-China relationship were never resolved. Since the February 1972 Shanghai Communiqué, which reopened diplomatic relations, the two sides have agreed that there is only “one China”.

Chinese leaders made it clear that “the Taiwan issue is the crucial issue that stands in the way of normalizing relations between China and the United States” and, 50 years later, it remains a huge problem.

China would prefer to achieve reunification peacefully, but it does not rule out a military solution, if any. The United States remains committed to protecting Taiwan, but it cannot stop China from degrading or destroying the island’s semiconductor manufacturing capabilities.

The extraordinary importance of Taiwan’s semiconductor industry in world trade may be the only thing capable of providing such protection.

At the moment, however, almost everyone depends on the power of the silicon shield.

Translated by Luiz Roberto M. Gonçalves

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