How Taiwan became the indispensable economy

The Covid pandemic revealed the logistical weak points of the international supply chain, which was built up over decades of globalisation. Geopolitical tensions — more specifically the threat of war over Taiwan — are heaping additional pressure on tech companies to change how they operate.

In one indication of the nervousness, a top US air force general recently predicted America and China are likely to go to war over Taiwan in 2025.

“Two years ago, due to Trump’s trade war, customers told us they wanted ‘out of China’ production options, so we decided to enlarge manufacturing capacity in Taiwan, our home base,” said an executive with Unimicron, a printed circuit board maker supplying Apple, Intel and others.

Then, as the company was in the midst of a multibillion-dollar expansion in Taiwan, Pelosi visited Taipei last August. An infuriated Beijing, which considers the island part of its territory, responded by conducting live military drills off Taiwan’s coast — and Unimicron’s clients got nervous.

“Our customers then said they wanted some production alternatives that are outside of China and also out of Taiwan over fears of a war,” the executive said. “We were stunned and speechless, and so were a lot of our peers . . . How can the supply chain be moved out of China and Taiwan? The majority of electronics supply chains are here.”

Since the middle of last year, Intel, AMD, Nvidia, Meta, Google and Amazon have all requested production capacity outside of both China and Taiwan, several tech executives told Nikkei Asia and the FT. HP and Dell — the world’s second and third biggest makers of notebook computers — told their suppliers specifically to start building capacity in south-east Asia. Dell even aims to phase out made-in-China chips by 2024.

“We have a business contingency plan — the so-called BCP — to prepare for supply chain disruptions, such as a war,” an executive at chip testing equipment maker Advantest of Japan told Nikkei Asia and the FT. “But if a military conflict really happens here in the Taiwan Strait, honestly, I think any BCP will be totally useless. It would be doomsday for the chip supply chain, and no one ever wants to imagine that happening.”

AMD said it worked continuously with suppliers to improve business continuity plans, including the “important” goal of geographical diversification. Intel said it had consistently supported its suppliers’ “long-standing” efforts towards diversification, which were not related to Pelosi’s Taiwan visit. Nvidia declined to comment.

Dell has said previously that it continuously explores supply chain diversification across the globe. HP has said it has a robust global supply chain. Meta, Google and Amazon did not respond to requests for comment.

Even without a full-scale war, disruption from, say, a Chinese blockade of Taiwan could cause serious global turmoil. According to a Semiconductor Industry Association estimate, a disruption in the production of logic chips at contract chipmakers in Taiwan could cause nearly $500bn in lost revenues for electronic device manufacturers that depend on this supply. A recent estimate by Rhodium Group said a Taiwan conflict would put well over $2tn of economic activity at risk.

“People underestimate Taiwan’s position in the supply chain. It’s much more than just about semiconductors. We have a very complete supply chain from chips, components, PCBs [printed circuit boards], casings, lenses to assembly . . . anything you can think of,” a senior executive at Compal, a vital product assembler to Dell, HP and Apple, said. “If there’s military friction happening to Taiwan, the entire global supply chain will collapse for sure.”

Such a scenario, in other words, would leave Apple with “Made in America” chips and no devices to put them in.

The threat of conflict

At first, fears over a possible conflict came largely from western clients. But now even Taiwanese companies are concerned by developments across the strait.

Beijing concluded another round of military exercises on April 10, encircling Taiwan in protest against Taiwanese President Tsai Ing-wen’s meeting with US House Speaker Kevin McCarthy in California. The three-day drill included 91 incursions in a day.

“We grew in tandem with China’s reform and opening-up in the past several decades, but now the good old days are over. It’s becoming obvious that Beijing puts politics over economic growth,” said an executive at an Apple supplier whose facilities in China employ hundreds of thousands of workers. “Our strategy is to lay low, to accelerate production shifts [to south-east Asia and India], and divest our money gradually from China in the next few years.”

“Gradually” is the operative word for many companies looking to diversify their supply chains, whether they want it to be or not.

“It takes at least three years in some countries and even five years [in others] to build a semiconductor plant from start to finish, and then it needs to start operation,” said Benjamin Hein, an executive for China and south-east Asia at Germany’s Merck, a chemical and material group. “Sometimes there are some misunderstandings that this [supply chain shift] could happen overnight because of some geopolitical issue [but] it could take us at least five years, and even more than 10 years, to see some more fundamental shift.”

Washington is attempting to speed the process along, with a focus on chips. It is offering incentives to encourage companies like TSMC and Samsung of South Korea to help build up America’s semiconductor industry.

TSMC’s plant in Arizona, which will make ultra-advanced 3-nanometer chips that can be used in supercomputers, smartphones, cars, fighter jets and military equipment, is seen as one of the crowning achievements of this push.