Geopolitical conflicts exacerbate global supply chain issues. In recent years, the Russia-Ukraine war has disrupted energy supplies and trade, while the Iran-Israel conflict threatens stability in the Middle East, impacting global markets.
Additionally, China’s military drills near Taiwan are being perceived as rehearsals for a potential invasion. If China were to invade Taiwan, it could pose a significant risk to the global semiconductor and electronics supply chains. There will be a devastating and long-lasting impact across value chain players and pervasive shortages for multiple end markets. The current situation is reminiscent of the huge chip shortage of 2020 due to the Covid-19 pandemic, which lingered on until 2022.
“Semiconductor is the new crude and majority of the wafer production required for advanced chips which is the new oil comes from Taiwan. With players like TSMC, UMC and other players, Taiwan contributes to more than two thirds of pure play foundry output globally,” says Neil Shah, Vice President of Research at Counterpoint Research.
Taiwan is a significant player in semiconductor manufacturing on the world stage. If an invasion by China occurs, the repercussions would extend throughout the semiconductor value chain, affecting various industries such as automotive, smartphones, PCs, servers, and wireless computing. This impact would be long-lasting.
Currently, only a select few nations engage in the fabrication of wafers, the foundation upon which semiconductor chips are crafted. China holds the lead with 27% of wafer fabrication capacity, trailed closely by Taiwan at 24%, South Korea at 22%, and the US at 8.5%, according to Fab Economics. However, in the realm of leading-edge wafer fabrication, specifically below 14nm/16nm, Taiwan emerges as the dominant force, commanding 72% of the capacity, with South Korea following at 10%. Furthermore, when focusing on cutting-edge chips below 7nm, Taiwan solidifies its position with an impressive 84% capacity share, as reported by Fab Economics.
To put things in perspective, these leading-edge chips play critical roles across various sectors such as data center servers, networking, smartphones, PC/notebooks, and automotive applications, particularly in advanced driver-assistance systems (ADAS). But it is not just the majority of the leading edge technology manufacturing capacity resides in Taiwan.
“If China invades Taiwan, the impact of the devastating chip shortage that will be induced across the globe will not only be on leading edge (say 5nm and below segment) but also on the legacy technologies as well on the 28nm performance compute technology. Also, China would have access to the world’s most advanced semiconductor fabrication equipment. This would also make United States sanctions on China from preventing the latter from advancing in semiconductor technology, ineffective. This will be a whole geopolitical turn around. It’s a geopolitical race. It’s a commercial race,” says Danish Faruqui, CEO, Fab Economics.
In the aftermath of the Covid-19 pandemic and the subsequent global chip shortage, numerous nations, including the USA, EU, Japan, South Korea, Malaysia, and India, have embarked on aggressive initiatives to bolster and expand their semiconductor supply chains. The aim is to reduce dependence on external sources and bring a significant portion of this critical ecosystem in-house. However, despite these efforts, none of these nations are fully equipped or prepared to handle the potential impact of an invasion on the semiconductor supply chain.
“The worldwide demand for semiconductors is not slowing down anytime soon. The goal is for much of the new supply to come up in diverse geographies so that the global system has a better capacity to handle conflicts in any one region. It is therefore very encouraging to see so many countries, including India, rapidly investing in building their semiconductor capabilities,” says Prithvideep Singh, General Manager at CDIL Semiconductors, a semiconductor company that began fabricating and packaging chips in 1964, but now works on a fabless model.
While certain industry experts regard China’s military drills as routine exercises, they voice concern about potential ramifications if they escalate. Arun Mampazhy, an independent semiconductor analyst, emphasies, “Should this unfold, semiconductor prices will surge dramatically, triggering widespread uncertainty. If an invasion materializes in the near future, say days or months, India, which lacks lacking domestic semiconductor manufacturing, will bear a substantial impact.”
After years of wait, India has approved its first commercial fab in February this year, which will easily take a couple of years before it can start shipping out chips. “We have probably just started construction and the technology transfer can happen only after the factory is built and the equipment’s moving, which we easily take two and a half years or maybe three years,” adds Mampazhy.
The approved semiconductor fabrication plant of the Tata Group has forged a partnership with Taiwan’s Powerchip Semiconductor Manufacturing Corp (PSCM) as its technology collaborator. However, the looming question that remains unanswered is if China invades Taiwan, could it impede Taiwanese chip manufacturers from executing technology transfer.
