Recovery from TSMC's Taiwan earthquake will not ease global concerns about semiconductors

For months, if not years, governments and industries that rely on semiconductors have been concerned about the possibility of China invading Taiwan. The island, after all, makes about 92% of the most advanced computer chips that now power practically every aspect of our lives, and any disruption to its chip-making capacity would have rapidly cascading effects.

Last week, the world sent a grim reminder that China is not the only threat when a 7.4-magnitude earthquake struck Taiwan's east coast — the largest earthquake the island has seen in a quarter-century. For now, the damage has been relatively contained, and the island's major semiconductor factories — including those of industry giant Taiwan Semiconductor Manufacturing Co. — were back in operation about 24 hours later.

“Apart from some production lines in areas that experienced greater seismic impact, equipment in Taiwanese factories has been largely fully recovered as of April 5,” the company said in an emailed statement to Foreign Policy, adding that more than 70 Percent of the recovery process took place within 10 hours of the earthquake.

TSMC has spent years preparing for exactly this scenario. “TSMC has a well-established enterprise risk management system to minimize potential disruption,” the company said, adding that its factories are designed with earthquake prevention in mind, and it conducts regular “disaster drills” among its workforce to ensure this. They can get their facilities back up and running quickly.

For Taiwan, the quake may have been more of a bump than a blow. But for senior figures in government and the chip industry – especially in the US – it was another warning about the need to reduce dependence on the island.

“It just reinforces the point [that] “We need flexibility in supply chains,” Intel CEO Pat Gelsinger said during a Council on Foreign Relations event last week. Gelsinger noted that the quake struck the east coast of Taiwan, which minimized the devastation, rather than the more urbanized and populated west, where most of TSMC's factories are located. But add to that the threat posed by China, just 160 kilometers (100 miles) away, and “boy, this is not a sustainable situation for the world,” he said.

Intel has been one of the biggest supporters and beneficiaries of the global push to change this, receiving a commitment of $8.5 billion in direct financing and $11 billion in loans under the US government's Chips and Science Act in an agreement announced last month. The legislation, which allocates more than $52 billion in subsidies to return more chip factories to the country where they were invented, is being replicated in various forms by many governments around the world, including in Europe, India, Japan and South Korea.

The administration of US President Joe Biden is helping to accelerate these efforts beyond its borders, as it is transferring CHIPS Act funds through the State Department to countries such as Costa Rica, Panama, Vietnam, and the Philippines. The stated goal is to give the global semiconductor supply chain more protection from failure (with the added benefit of excluding China from the industry).

This shift predates the Taiwan earthquake by several years, and the earthquake itself is unlikely to significantly change its course, according to experts, industry executives and government officials. “If the earthquake was a sudden wake-up call for anyone, especially in the global semiconductor industry, then they were sleepwalking,” said Michele Giuda, CEO of the Crash Institute for Technology Diplomacy at Purdue University and a former State Department employee. Official during the Trump administration. In terms of non-geopolitical wake-up calls, the Covid-19 pandemic and resulting global shortages have provided much greater momentum, Giuda and others said.

If anything, the earthquake and TSMC's rapid recovery demonstrated how resilient and well-prepared Taiwanese industry is to face all eventualities. “It's like confirming that they know what they're doing, that they're planning it; They are preparing for it. “They implemented the plan in an emergency, and it validates what a lot of people are saying,” said a U.S.-based executive at a Taiwanese semiconductor company, who spoke on condition of anonymity because he was not authorized to speak to the government. Media. “The reason Taiwan is really good at this is because this is not a wing and a prayer — it's a very careful, thoughtful and flexible supply chain.”

However, the quake will likely serve as another reminder to many in the West, particularly of how concentrated the cutting-edge chip industry is on a troubled island, both geographically and geopolitically.

“It highlights the fact that globally we have a lot of eggs in one basket,” said Sean Mumma, director of supply chain innovation and emerging technologies at the Digital Supply Chain Institute. “You can't continue to keep 90% of your advanced manufacturing capacity in one country, no matter how safe that country is.”

The timing of the disaster will further help diversify the drumbeat of chips in Washington. On Monday, less than a week after the quake, the Biden administration announced it would grant TSMC up to $6.6 billion under the CHIPS Act, similar to that awarded to Intel in March. TSMC responded in kind by announcing that it would build a third semiconductor manufacturing plant, or “fab,” at its site in Arizona. The facility will manufacture the types of advanced chips it currently makes only in Taiwan, bringing the company's total investment in the United States over the past four years to $65 billion.

“As the Biden administration looks to give these two awards, there has been a natural event that has occurred that you can point to and say: This is why we need it, regardless of what happens in the South China Sea,” he added. “Diversify and de-risk manufacturing,” Mumma said.

TSMC is engaged in a global diversification drive of its own, announcing major expansions in Germany and Japan last year. Industry observers say this is driven in part by geopolitical and other risks, but also simply by business imperatives.

“There is some political pressure on companies like TSMC from the United States and other governments, but there is also pressure from customers as well,” said Lotta Danielsson, vice president of the US-Taiwan Business Council. Diversification and increased global demand means chipmakers are also “getting closer to their customers,” she added. “A lot of their customers are in Europe and the US, so putting factories there makes a lot of sense.”

However, there is one entity that may not be thrilled about the impact of the global chip rollout: the Taiwanese government. Not only does the semiconductor industry power a large portion of Taiwan's economy, but the island's importance to global technological capabilities is also seen as protecting it from a potential invasion by China by ensuring allies such as the United States defend the island to preserve their chips. Flow – a phenomenon referred to as “silicon shield”.

“I think that perhaps for the first 25 years of its founding, TSMC was responding to the demands of its constituency, which was the government of Taiwan, so it built exclusively in Taiwan because it was seen as a national hero and really a national security institution,” he said. An anonymous chip industry executive whose company is one of TSMC's many clients. “The real challenge for TSMC is threading that needle between them [global customers and] Satisfy their constituents at home, who may view any effort to transfer power abroad as treason.

It's a fear previously expressed by TSMC's now-retired founder, Maurice Chang, warning last year that Taiwan's semiconductor industry was being “hollowed out” and its national security weakened. But he is no longer in charge, and the company's current leadership may have different priorities and be driven more by global market forces, according to Danielson.

“The government in Taiwan is very concerned about this issue of hollowing out its star industry,” she said, adding that TSMC's investments abroad – on a large scale – would only make up a small portion of the company's overall capacity. “They maintain their state-of-the-art in their home country, and I think more importantly, they maintain their research and development [research and development] “At home…they are trying to diversify away from Taiwan, but they still maintain Taiwan as the core of who they are and who they are.”

When asked whether she faced any pressure from the Taiwanese government to retain advanced manufacturing on the island, the answer was a resounding no. “TSMC is and will remain committed to our Taiwan operations to manufacture and deliver the world's most advanced chip technology, while continuing to expand global manufacturing based on customer demand and the necessary level of government support,” the company told Foreign Policy. “We have worked and continue to work very closely with the Taiwan government, as we do with all governments where we have facilities.”

Despite the flurry of expansion announcements, the global chip supply chain will not change dramatically overnight. “TSMC is probably at least a year, maybe two years behind where it would like to be,” said Mumma, the supply chain expert. “It takes five to seven years to build the FAB.”

At the same time, this ongoing transformation will be difficult to reverse. “For TSMC in the past decade, it has gone from being a Taiwanese company operating globally to being a truly global company,” the semiconductor executive said.

From the U.S. perspective, it's not about excluding or replacing Taiwan, Giuda said, noting, “I think it's less about diversifying away from Taiwan and more about, 'What's the 'Taiwan Plus' strategy?'”

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