Technology · August 4, 2022

Pelosi’s visit to Taiwan puts TSMC back in the spotlight of the US-China rivalry

Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest contract chip manufacturer. But it was pushed amid geopolitical tensions between the US and China. logo displayed on the screen.

Rafael Henrique | Sopa Pictures | Light Rocket | Getty Images

US House Speaker Nancy Pelosi may have left Taiwan, but the visit has once again put the spotlight on the island’s critical role in the global chip supply chain and particularly on the world’s largest chipmaker, Taiwan Semiconductor Manufacturing Co., or TSMC.

In the controversial visit, which angered Beijing, Pelosi met with TSMC Chairman Mark Liu to show how important semiconductors are to US national security and the important role the company plays in making the most advanced chips.

Semiconductors, which go into everything from our smartphones to cars and refrigerators, have become a key part of the US-China technology rivalry in recent years. More recently, a semiconductor shortage has prompted the US to try to catch up with Asia and stay ahead of China in the industry.

“Taiwan’s unresolved diplomatic status will remain a source of intense geopolitical uncertainty. Even Pelosi’s trip underscores how important Taiwan is to both countries,” Reema Bhattacharya, head of Asia research at Verisk Maplecroft, told CNBC’s Street Signs Europe on Wednesday.

“The obvious reason is its critical strategic importance as a chipmaker and in the global semiconductor supply chain.”

Pelosi’s visit to Taiwan and meeting with TSMC shows that the US cannot do it alone and requires cooperation with Asian companies that master the latest chips.

The crucial role of TSMC

TSMC is a foundry. That means it makes chips that other companies design. TSMC has a long list of customers from Apple to Nvidia, some of the world’s largest technology companies.

As the US has fallen behind in chip manufacturing over the past 15 years, companies such as TSMC and Samsung Electronics in South Korea have pioneered the development of cutting-edge chip manufacturing techniques. While still relying on tools and technologies from the US, Europe and elsewhere, TSMC in particular has managed to cement its place as the world’s leading chipmaker.

According to Counterpoint Research, TSMC accounts for 54% of the global foundry market. Taiwan alone as a country accounts for about two-thirds of the global foundry market when you look at TSMC alongside other players like UMC and Vanguard. This underscores Taiwan’s importance in the global semiconductor market.

If you throw Samsung into the mix, which holds 15% of Foundry’s global market share, then Asia really dominates the chip manufacturing sphere.

For this reason, Pelosi made a point of meeting with the chairman of TSMC.

Fear of an invasion of Taiwan

China views democratically self-governing Taiwan as a breakaway province that needs to be reunited with the mainland. Beijing spent weeks telling Pelosi not to come to Taiwan.

During her visit, China exacerbated tensions by conducting military exercises.

There is a concern that any sort of Chinese invasion of Taiwan could severely disrupt the power structure of the global chip market and give Beijing control of a technology it didn’t have before. Added to this is the fear that an invasion could choke off the supply of state-of-the-art chips to the rest of the world.

“Most likely, the Chinese would ‘nationalize’ it (TSMC) and start integrating the company and its technology into their own semiconductor industry,” Abishur Prakash, co-founder of consulting firm Center for Innovating the Future, told CNBC via email.

What is the US doing?

How is China doing?

SMIC is vital to China’s ambitions, but sanctions have cut it off from the key tools it needs to make the most advanced chips like TSMC does. SMIC lags years behind its competitors. And China’s semiconductor industry is still heavily dependent on foreign technology.

TSMC has two chip factories in China, but they produce less sophisticated semiconductors than the production facility in Arizona.

Chip Manufacturing Alliances

The US has sought semiconductor partnerships with allies in Asia, including Japan and South Korea, to secure supplies of crucial components and stay ahead of China.

TSMC, meanwhile, is caught in the middle of the US-China rivalry and may be forced to choose sides, according to Prakash. Its commitment to an advanced semiconductor plant in the US could already be a sign of which country it is championing.

“In fact, a company like TSMC has already ‘chosen sides’. It is investing in the US to support American chip manufacturing and has said it wants to work with “democracies” like the EU on chip manufacturing,” Prakash said.

“Increasingly, companies are adopting an ideological tone when it comes to who they work with. The question is, with rising tensions between Taiwan and China, will TSMC be able to assert its position (align itself with the West) or be forced to recalibrate its geopolitical strategy.”