[blind-democracy] FW: Why Taiwan Is at the Heart of a Geopolitical Struggle to Produce Cutting-Edge Computer Chips
- From: "Miriam Vieni" <miriamvieni@xxxxxxxxxxxxx>
- To: <blind-democracy@xxxxxxxxxxxxx>
- Date: Sun, 9 Aug 2020 21:33:50 -0400
From: Economy for All <info@ind.media>
Sent: Friday, August 7, 2020 4:18 PM
To: miriamvieni@xxxxxxxxxxxxx
Subject: Why Taiwan Is at the Heart of a Geopolitical Struggle to Produce
Cutting-Edge Computer Chips
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Why Taiwan Is at the Heart of a Geopolitical Struggle to Produce Cutting-Edge
Computer Chips
Geopolitical contests between the U.S. and China hinge on technology more than
the ability to deploy a gunboat somewhere; Taiwan could resemble a prototype
for a tech proxy war.
By Marshall Auerback
The media likes to dabble in war game fantasies between the 21st-century great
powers China and the U.S., but it’s a distraction from the hybrid economic
warfare that is underway—from Trump’s tariff hikes to the shores of the
advanced economy.
Here in a nutshell is the problem facing the United States. The country that
used to be a world leader in all forms of high tech, especially semiconductor
chips, now spends its time re-designing chocolate chips
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. By contrast, Taiwan, officially a “rogue province” of China, but in reality
operating as an independent nation of 23 million people, ranked 22nd as a world
economy
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(right behind Switzerland), is now a leading global player in the production
of semiconductor chips. As such, it has emerged as the key supply link to a
multiplicity of American and Chinese high-tech companies at a time when the
Trump administration is working hard to cut China’s access to Taiwan’s
semiconductors.
For all of China’s significant technological advancements, the country still
lags in the production of semiconductor chips.
Memory chips are principally made by two South Korean companies, Samsung and SK
Hynix, and one U.S. company, Micron. Intel, another U.S. company, also makes
some memory chips for its own use. Memory chips are a big issue for China.
Beijing has deployed considerable fiscal resources into producing them and last
year set a goal of producing 5 percent of the world’s total production by the
end of 2020
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.
That’s ambitious. It’s one thing to produce memory chips, another to get a
usable “yield
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,” i.e., the percentage of output that actually works. It is a singularly
challenging industry in which to attain industrial self-sufficiency.
Taiwan Semiconductor Manufacturing Company (TSMC) produces customized
semiconductor chips “for use in various types of electronics, such as digital
cameras, smartphones, and the new technologically sophisticated ‘smart’ cars
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.” It is a “fabless chip maker
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,” meaning it “designs and sells the hardware and semiconductor chips but does
not manufacture the silicon wafers, or chips, used in its products; instead, it
outsources the fabrication to a manufacturing plant or foundry.” TSMC also
produces chips for the military, and for 5G base stations. China’s leading
telecom equipment manufacturer, Huawei, had been a large customer
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for TSMC. But in May, the Trump administration mandated
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that all semiconductor chip manufacturers using U.S. “chipmaking equipment,
intellectual property or design software will have to apply for a license
before shipping chips to Huawei,” as Nikkei Asian Review reported
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, thus forcing TSMC to stop taking fresh orders from Huawei
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, as TSMC’s manufacturing process uses equipment from U.S. companies
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such as Lam Research and Applied Materials.
The wisdom of so many companies relying on manufacturing facilities located in
Taiwan is debatable. Intel and Micron locate fabrication plants (“fabs”) around
the world, in part to diversify risk (earthquake, weather, politics) and to
access skilled labor pools. Intel has long had production facilities
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in Ireland, Israel, and China itself; it has also purchased
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Israeli companies for their research and development. But it also has
retained significant production facilities still in the United States.
Similarly, Micron has fabs
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both abroad—in Singapore, Japan, and Scotland—and in the U.S., in Boise,
Idaho; Utah; and Manassas, Virginia (right near the CIA and Pentagon).
TSMC is important because it is pretty much the only place to get processor
chips fabricated, unless you’re Intel. In that regard, Intel’s second-quarter
earnings announcement
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on July 23 that its planned launch of the company’s next generation of chips
will be delayed by six months is most concerning. News of the production delay
(which now pushes the production of the company’s latest central processing
unit—aka the “brain” of the computer—out to early 2023) generated considerable
market anxiety, as evidenced by the 17 percent fall
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in the share price in the wake of the disclosure. From a long-term
perspective, however, the more alarming aspect is Intel’s decision to consider
outsourcing its manufacturing capacity
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, a sharp break from the company’s historic practice.
Intel has been one of the few leading American high-tech companies that has
hitherto largely resisted the panacea of offshoring its production. As the
Indian Express has written
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: “The Santa Clara, California-based company has been the largest chipmaker
for most of the past 30 years by combining the best designs with cutting-edge
factories, several of which are still based in the U.S.” Much of this is a
product of the corporate culture established by former CEO Andy Grove, who had
warned that Silicon Valley risked “squandering its competitive edge in
innovation by failing to propel strong job growth in the United States,”
according to a New York Times op-ed
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by Teresa Tritch written shortly after Grove’s death. Tritch explains Grove’s
belief that the lower cost to companies that outsourced to Asia actually
“masked the high price of offshoring as measured by lost jobs and lost
expertise. Silicon Valley misjudged the severity of those losses, he wrote,
because of a ‘misplaced faith in the power of start-ups to create U.S. jobs.’”
She continues:
“Mr. Grove contrasted the start-up phase of a business, when uses for new
technologies are identified, with the scale-up phase, when technology goes from
prototype to mass production. Both are important. But only scale-up is an
engine for job growth—and scale-up, in general, no longer occurs in the United
States. ‘Without scaling,’ he wrote, ‘we don’t just lose jobs—we lose our hold
on new technologies’ and ‘ultimately damage our capacity to innovate.’”
The expectation is that Taiwan’s TSMC would be the likely beneficiary if Intel
were to embrace the offshoring option, which, according to Grove, would
ultimately undermine its capacity to innovate. It is consistent with recent
historic trends, but Intel’s decision comes at a time when American
policymakers are finally beginning to appreciate the adverse economic and
strategic consequences of such moves
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. Were Intel to follow through on its outsourcing threat, it too would further
exacerbate America’s strategic reliance on Taiwan for customized semiconductor
manufacturing (as well as eviscerating what is left of America’s industrial
base).
Additional outsourcing will not only undermine the impact of recent legislative
attempts
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to rebuild the country’s semiconductor manufacturing capacity, but also
likely enhances the prospect of intellectual property theft, via sabotage or
“hidden backdoors
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” that could facilitate external surveillance. This would also constitute a
national security risk, particularly as production gets more automated.
A key thing to do in dealing with China (or Taiwan) is something like the
economic patriotism bill that Joe Biden has proposed
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: namely, one that would reward companies for insourcing. Research and
development tax credits on their own are unlikely to induce the requisite shift
(as these can easily be matched by the recipient investment country’s
government), as I’ve written
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before: “The state can and must drive this redomiciling process in other
ways: via local content requirements (LCRs)
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, tariffs, quotas and/or government procurement local sourcing requirements.”
The Biden proposal doesn’t go that far, but it represents a good step in the
right direction and definitely is preferable to a military response to solve
what is essentially a strategic industrial vulnerability.
By contrast, economic competition that degenerates into out-and-out war would
be a disaster for all sides. As David Arase
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, resident professor of international politics at the Hopkins-Nanjing Center
of the Johns Hopkins University School of Advanced International Studies,
contended in a July 20
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Asia Times
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article
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, “Even an unsuccessful invasion of Taiwan would cause a supply chain
disruption.” By the same token, actively upgrading diplomatic relations with
Taiwan
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to something akin to the old mutual defense treaty
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that existed prior to Washington’s recognition of Beijing in 1979 as the one
sovereign government representing China would almost certainly provoke a more
aggressive response from Beijing. In that regard, Secretary of State Mike
Pompeo’s hawkish speech
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, seemingly exhorting China’s population to rally against the Communist Party
leadership, on July 23 was profoundly misguided.
U.S. goals should be far more modest: not to underwrite the freedom aspirations
of another country (even a vibrant multiparty democracy such as Taiwan) but,
rather, to fix a key vulnerability in the global supply chain that currently
renders the U.S. so reliant on Taiwan. Even TSMC has implicitly acknowledged
its own geographical shortcomings, as it announced plans
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in May to build a new $12 billion chip manufacturing facility in Arizona.
Consider this a form of political risk insurance.
A full-scale defense of Taiwan would cost thousands of lives, and potentially
entrench the U.S. military in a long-term quagmire; it would also represent a
logistical nightmare in terms of supplying such a force over so many thousands
of miles (while the Chinese army only needs to cross a mere 100 miles
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to reach Taiwan.) This is to say nothing of the risks posed to numerous
substantial American multinationals already operating in China.
A key conceptual problem that our policymakers and business leaders have today
is an addiction to 19th-century concepts that are anomalous in the context of a
21st-century economy. The “comparative advantage
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” (“an economy’s ability to produce goods and services at a lower opportunity
cost than that of trade partners”) of David Ricardo’s 1817 book has less
relevance at a time when such advantage can be largely created as a byproduct
of state policy. Countries such as Taiwan, South Korea and now China itself can
dominate any number of targeted industries by subsidizing them aggressively,
whether the industry is steel production, cars, or semiconductor chips. Because
of increasing returns to scale, there is a winner-take-all pattern in which at
any given time, a limited number of nations tends to dominate a huge global
market share of the underlying product. We’ve seen this pattern manifest itself
repeatedly in Asia since the 1970s through today, as Robert Wade illustrated in
his work,
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Governing the Market. This strategy has also created huge employment
opportunities in high-quality jobs for the countries as they scale up
production. This was also a key insight of Andy Grove
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.
None of these countries had a natural “comparative advantage” in semiconductor
production; they just followed the classic pattern
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of subsidizing their growth via substantial government support (creating them
out of nothing over a matter of a few decades, in the case of South Korea and
China) relentlessly driving down cost inputs to push other marginal and less
efficient manufacturers out of the industry.
The incessant focus on market share usually comes at a cost of short-term
profitability (a no-no for Wall Street, which focuses on quarterly earnings as
intently as an audience waiting for the white smoke to emerge from a papal
election). However, businesses usually recoup these costs later once they’ve
established dominant market share. The semiconductor industry is one with a
great high-value-added, high-tech manufacturing platform that has employed lots
of people and has a huge, growing global market, and a significant multiplier
effect on the domestic economy. It represents an area that should be
prioritized by the U.S., not de-emphasized (as Intel’s proposed move threatens
to do). The road back to manufacturing relevance is a long one, but the
perpetuation of the current policy risks exacerbating longstanding pathologies
in the U.S. economy, while simultaneously creating new national security
vulnerabilities.
Taiwan is a vibrant multiparty democracy that constitutes a model of economic
development. But those virtues could be threatened if we shortsightedly try to
rush turning it into a U.S. protectorate to address problems that should be
resolved much closer to home.
Marshall Auerback is a market analyst and commentator. He is a regular
contributor to Economy for All
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