Taiwanese semiconductor chips are the new Saudi oil fields

Constant and unencumbered access to them is key to the global economy.

30 years after the start of the first Gulf War, clearly fought by the US-led coalition to deter Iraq from taking over the Saudi oil fields, the world could see a decisive pivot to another “hot” conflict, this time over preserving access to semiconductor chips. 

These chips could act as “the new oil”, in the sense that constant and ready access to them is key to the global economy.

President George HW Bush convinced a coalition of 35 nations to rout Saddam Hussein to ensure the flow of oil in 1990-91 and the preservation of control of the Saudi oil fields. Given the importance of Taiwan-produced semiconductors to the global economy President Biden could be forced 30 years later to re-assemble a large coalition to guarantee access to semiconductors, should China’s military steps disrupt their production.

Semiconductors are crucial in diverse industries such as electronics (smartphones, computers) but also automobiles (brake sensors). Constant access to a steady flow is paramount to profit-rich production lines and GM and Ford have been forced to shut down their light truck lines for 2 weeks this past month because of a short term shortage in semiconductor chips. It’s estimated that the US auto industry overall could lose 2.5 million vehicles, costing it more to lose more than $60 billion.

While chip designs often resides with household names such as Qualcomm and Apple, Taiwan, an island nation with a population slightly larger than New York state and ranked #33 worldwide in GDP, holds a 63% market share in the semiconductor production industry, with flagship Taiwan Semiconductor Manufacturing Co (TSMC) alone representing more than 50% by itself. Mainland China controls a mere 6% market share and as TSMC projects $12 billion in Q1 21 revenue, its nearest Chinese competitor forecasts only $1 billion.

Political and diplomatic levers are constantly at play and the chip arms race is set between DC and Beijing: the US has been pressuring Taiwan to stop collaborating with mainland China’s chip industry and in 2020 the Trump administration forced Taiwan to stop working with Huawei, effectively crippling a significant portion of its telecoms business. 

Jordan Schneider, Chris Miller and Danny Crichton co-authored a report on the issues facing the US semiconductor industry. Some of their key findings on the risks linked to a major conflict in the region: “If TSMC’s facilities in Taiwan were knocked offline, it could cause years of delays to computer, data center, and smartphone production. Second, America’s ability to control China’s access to technology—a tool that Washington has used repeatedly against Chinese tech firms like Huawei in recent years—will be eroded as more manufacturing happens offshore.”

The ability for the US to dictate strong terms to Taiwan is inevitably linked to American support for the island’s self defense. Skirmishes between Beijing and Taipei went as far as Scud missile “tests” in nearby Taiwanese waters by the People’s Liberation Army in 1995-96.

April 12 (today) saw twin events with potential geostrategic consequences:

• Joe Biden convened a White House virtual summit on semiconductors to address the current short term shortage forcing leading US automakers to halt production and TSMC (Taiwan Semiconductor Manufacturing Company) was a central player. President Biden called for the US to address an ongoing shortage of semiconductors by investing in its chip “infrastructure”.

  

  President Joe Biden holds up a silicon wafer as he participates virtually in the CEO Summit on Semiconductor and Supply Chain Resilience in the Roosevelt Room of the White House on April 12, 2021. Photo by: Patrick Semansky / AP

• 25 Chinese planes performed their deepest incursion in 12 months into Taiwanese airspace

  

  A file photo of two People’s Liberation Army’s Jian-16 fighter jets. Taiwan reported that 14 such aircraft were part of an incursion into the island’s airspace on Monday. Photo: 81.com

The Chinese incursion was preceded yesterday Sunday by Secretary of State Anthony Blinken reaffirming US support to Taiwan’s self defense. He expressed his concern about China’s aggressive actions and warned it would be a “serious mistake” for anyone to try to change the status quo in the Western Pacific by force.

On March 23, incoming commander of the US Indo-Pacific Command Adm Aquilino’s words were equally strong as he commented on the Chinese Communist Party’s stance on invading the island: “They view it as their No 1 priority. The rejuvenation of the Chinese Communist party is at stake, very critical, as they look at the problem.” On the invasion itself he said “My opinion is that this problem is much closer to us than most think and we have to take this on.”

The US Navy operates as a military-diplomatic force to ensure open seaways for trade and commerce. Its presence in the South China Sea has been a matter of concern for the CCP for decades. Nonetheless, James Fallows noted in a 2016 article in The Atlantic “Almost no one [..] foresaw a realistic danger of a shooting war between China and the United States or any of its allies—including the frequently discussed scenario of an unintentional naval or aerial encounter in the South China Sea. Through the past few years, in fact, U.S. military officials, led by the Navy, have engaged their People’s Liberation Army counterparts in meetings, conferences, and exercises, precisely to lessen the risk of war by miscalculation.”

The next phases in this possibly escalating conflict reside in who’s at the helm. Fallows wrote about Xi Jinping in the same 2016 piece: “ “Xi is a weak man who wants to look strong,” a foreign businessman [..] told me. “He is the son of a famous father and wants to prove he is worthy of the name. As we’ve seen in other cultures, this can be a dangerous mix.”

As a backdrop to this piece, this writer noted in 2020 that “for all its bluster, Beijing remains an assembly shop,“Chinese” companies with world-class IP are in fact mostly Taiwanese: TSMC, HTC, Acer, etc. Even Foxconn, Apple’s main partner, is not a mainland company but hails from the island state. Chinese unicorns, such as Alibaba and Tencent, mostly operate on their domestic market and are not yet known for intellectual property deemed crucial enough for the West to really care. Taiwan has the upper hand as it publicly supports Hong Kong to show the world that the Chinese are in fact ready and able to function as a democracy, which the Chinese  Communist Party refuses to acknowledge, as this endangers its power base. Its praised management of the covid-19 crisis on the island is to be celebrated and has further enhanced Taiwan’s soft power.”

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America’s preeminent economic role since 1945 has revolved around its global alliances and deft control of the inflows of raw resources key to production and consumption of value-generating products.

As mainland China was central to the production of our now daily PPE masks pre-COVID19, a nation of 23 million, Taiwan, holds an outsized place in the current zero inventory global supply chain due to its huge market share in the production of chips. 

There are no clear alternatives to an American-led “management” of this crisis and a new “coalition of the willing” will determine the next steps of the Cold War between DC and Beijing. 

A worrying sign of possible coordination between Russia and China surfaces, as the escalation in Ukraine is occurring at the exact same time as the Chinese air incursion into Taiwan. Western media inexplicably forgets to point out that Russia is China’s #1 energy provider (Russia barters its oil&gas to escape the dollar restrictions and obtains much needed industrial goods) and that the 2 former rivals are closer militarily than NATO would like. Also of note, Putin’s 20+ year asymmetric warfare strategies are a source of inspiration for Xi Jinping, who is more of a disciple than he lets on.