China needs chipmaker TSMC more than TSMC needs China

Taiwan’s TSMC is the world’s leading manufacturer of silicon chips. It controls more than 90% of the world market for high-end chips. That’s obviously one reason China would love to see a “peaceful reunification” with the mainland happen, since it would effectively put China in charge of the pinnacle of the tech industry overnight. But as appealing as that might be, the reality is that TSMC isn’t dependent on China in the same way Germany is currently dependent on Russian energy.


Pelosi’s itinerary included a visit with Taiwan Semiconductor Manufacturing Company, the world’s largest and most critical chip manufacturer. Its products are an integral part of everything from consumer products to military aircraft.

But just 10% of TSMC’s revenue comes from China, according to the company. More than half of its revenue comes from the United States.

“As we speak, the status quo is that these chip companies may not be as dependent on China as the other way around,” said Patrick Chen, head of research for CLSA in Taiwan.

The truth is, no part of the world is in a position to do without the chips that TSMC supplies. And that may be one thing that is actually protecting Taiwan from an invasion. Because the reality of an invasion would lead to a disruption to the supply of chips that would cause a global downturn in the economy.

“If you look at the secular demand drivers, cloud infrastructure, electric vehicles, next generation of industrial facilities, they all require chips that are made at TSMC,” said Mehdi Hosseini, senior tech hardware analyst at Susquehanna.

“If, God forbid, TSMC’s fabs in Taiwan cannot operate, I think the global economy would slow down more so than what Covid did [to growth],” he said.


Even in some kind of best case scenario where China used soft power to take over the island, similar to what it did in Hong Kong, the end result would still be a disruption of supply. The company’s chairman explained why:

Speaking to CNN this month, TSMC chairman Mark Liu said any invasion would render the company’s factories “non-operable.”

“This is such a sophisticated manufacturing facility,” he said. “It depends on real-time connections with the outside world – with Europe, with Japan, with the U.S. – from materials to chemicals to spare parts to engineering software diagnosis” – all of which would be cut off during a military conflict.

TSMC may make the world’s most advanced chips, but as I explained here, the machines that make those chips are produced by one company in the Netherlands (ASML) using components and expertise from many other free countries around the world. The moment China seizes Taiwan by force, TSMC’s ability to purchase those machines or even have them serviced by experts from abroad ends immediately. How long could China keep them operating? A few months? Maybe a year or two at best?

And that’s assuming Taiwan doesn’t embrace the “broken nest” approach to discouraging such an invasion. The idea behind that paper from the Army War College was that Taiwan could vow to destroy assets such as the TSMC foundry if the country were invaded, denying China any chance of profiting from the invasion technologically.


The bottom line here is that China continues to put on a good show but there’s no way for them to really win this conflict by force. They could perhaps seize the territory but they can’t seize the assets because Taiwan’s leadership in chipmaking is entirely dependent on continued cooperation with the free world.

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Jazz Shaw 8:30 AM | February 25, 2024