Taiwan: The kitchen making tasty chips

There is some common belief and media spin in the West that mainland China wants to invade Taiwan by force in order to gain control of chip production in light of the US's sanctions on chip manufacturing equipment. Such belief belays the reality of the global supply chain around semiconductor production, as recently explained to me by some semiconductor professionals.

Taiwan currently makes 60% of the world's semiconductors and over 90% of the most advanced ones. The industry overall is over 15% of Taiwan's GDP corresponding to around 50% of total exports. For those that have visited Taiwan, it's a pretty simple island, with simple people living a fairly simple life, with an incredible manufacturing industry bolted onto the side.

Perhaps the best analogy to use is that of cooking (since most analogies I use tend to involve food). In preparation of a meal, one sources ingredients, kitchen appliances, necessary utilities such as water, gas and electric to cook with. There's quality assurance, testing, tasting and presentation. Chefs assemble the meal, it passes checks, and it's shipped out into the restaurant.

The reality is that in semiconductor manufacturing, Taiwan is the location of the kitchen and chefs, and they are damn good at making a fine meal. The chefs can of course move to other countries if they like. More importantly the supply chain and dependencies on it are global and incredibly complex. By "taking control of the kitchen and chefs," one cannot make a meal. At best, you can use up whatever ingredients are left in the fridge, whatever water is left in the tank, and whatever gas is sitting in the pipe, until the kitchen is cut off. Long before things run out, the chefs see the writing on the wall and have moved on to another restaurant.

Looking at the semiconductor supply chain

The processes involved in making a semiconductor are complex, intricate and globally interdependent. Let's take a look at some of the stages and suppliers, based on some public briefs from CSIS. The manufacturing of an advanced semiconductor comprises more than 500 discrete stages taking many months. According to Accenture, the inputs to a typical IC chip must cross over 70 international borders before the final product can be delivered. Chip sellers have tens of thousands of suppliers distributed around the world, and some suppliers are truly unique for a given technology.

1. IP: Core IP is licensed from various IP vendors to put together SoCs. The US controls more than half the market in core IP (firms such as Synopsys, Cadence, Microchip, Rambus etc) with the UK (ARM, Imagination etc) being responsible for much of the rest. There's almost no new IP coming out of Taiwan or China. When one buys semiconductor IP, it's not soure code, it's an irreversible connectivity map called a netlists or even a physical layout.
2. EDA software: The US controls the vast majority of EDA technology. Cadence, Synopsys and Mentor Graphics are 70% of the global market. There's nothing out of Taiwan, and China only has three upstarts for older process technology.
3. Fabrication materials: Silicon wafers, masks, photoresists and chemicals are required to make semiconductors. This is over a $40bn/year market. The US, Japan, Taiwan, South Korea and China are all key suppliers. Taiwan has a monopoly on masks but is not self sufficient in other areas. Taiwan and China collectively, however, account for 30%-50% of most material supply in most areas. This is the one possible part of the supply chain where a combine Taiwan + China could be self sufficient: They can source the water, gas and electric to run the kitchen, but it's not enough to make anything useful unless your restaurant just serves boiling water and hot air!
4. Manufacturing equipment: Wafer, lithography, packaging, and assembly equipment are very complex. The US (firms such as Applied Materials, Lam Research and KLA Tencor), Japan and the Netherlands (ASML) together dominate 90% of the market for manufacturing equipment for semiconductors, and 100% of the market for advanced equipment. Assembly is dominated by European suppliers. China and Taiwan have little to no legacy capability and no advanced capability whatsoever. Furthermore such tools are incredibly complex to continue to operate, requiring continual post-sales support, troubleshooting, software updates and spare parts.
5. Test equipment: Japan is the largest supplier of test equipment, followed by the US, together with over 80% of the market share. All advanced test equipment comes from Japan.

This picture is clearly far more complicated than putting together a professional kitchen! However one can see that what goes into putting together and running a semiconductor fab comes from all over the world, the supply of such a fab requires stuff from all over the world, and the operation of such a fab requires the continual help and assistance from geographically diverse businesses. It's a kitchen with a global supply chain of thousands of ingredients, a complex cooking process involving international machinery that's so complex it can't be understood by anyone but the manufacturer, and secret multi-stage techniques that only work on certain ingredients, preparing meals that take months to put together. Even that's an understatement!

So, why all the noise and sabre rattling?

One can clearly see that if the communist-run part of China invades Taiwan and the international community decides to no longer participate in semiconductor manufacturing, China won't suddenly become self sufficient in chip product. In fact it will spell disaster for much of the rest of the world's semiconductor supply chains too and likely involve China being 100% cut off from any international semiconductors whatsoever which will push it back to the technological stone age. It's just not an option.

China will only reclaim Taiwan by force if their leader goes mad. Sometimes that happens to lifelong leaders and dictators (sometimes I worry about my own sanity); hopefully it won't in this case. The Chinese government realises this, so much of the rhetoric that comes out of the mainland directed towards Taiwan is to increase the feelings of nationalism and leverage the strong feelings associated with such national pride in the population – a political stance and pattern that's unfortunately become all to common all over the US, UK and elsewhere and lead to the election of serial liars, criminals as national leaders and extreme nationalist sentiment.

The US realises this, which is why it's encouraging TSMC and others to set up chip fabs in the US in order to de-risk production from East Asia. However the Taiwanese are fairly savvy and realise that by setting up shop there, they lose their key leverage and global value, so will likely take it really slowly in practice. Taiwan Inc also realises that TSMC's expansion into the US will actually harm Taiwan's economy by reducing its industrial base at the benefit of Arizona. Although chips are 15% of GDP,

Overall the Americans will still do their best to stir the pot because, as I explained in my previous article, the partisan US government is unable to actually do anything useful whatsoever without the presence of an enemy, and that enemy right now is China. Having an enemy galvanizes the support of political parties against a common cause and allows progress to be made on industrial policy and defence such as the CHIPS act. The more the Chinese government continue to react immaturely to such stirring to promote nationalism, the more dangerous the situation will get.

My conclusion

Maintaining the status quo is in the best interest of the whole world, Taiwan and China. The Chinese will threaten to invade if Taiwan declares independence. The US will try their best to edge Taiwan that way. Really the best the whole world can do is just leave China and Taiwan alone. The two territories — which most recently used to be China, ruled by monstrous leaders who regularly committed atrocities against their own people, Chairman Mao and Chiang Kai Shek — will not agree on a common governing structure. There's no international precendent to say independence is OK — just look at the Catalonian independence movement in Europe, which wasn't decried by the national press as a human rights abuse yet locked up plenty of people by force who had committed a crime for trying on behalf of a majority of their population. Spain wasn't the enemy otherwise they should and would have been sanctioned too.

Unfortunately the world, and in particular the US, is running out of pragmatic leaders who aren't either associated and profiting from the military-industrial complex or are just plain nasty warmongering individuals, and China appears to be hell bent on increasing nationalism, can't maturely respond to any provocation, and is a risk of a leader who will go mad later in life. We can only just continue to hope for peace.

I found this article incredibly helpful in putting together the summary above.