Deep Dive: The Silicon Engine and why economic collapse rests on one manufacturer
If you don't know who TSMC is, read this. Taiwan, China, Semiconductors, Trump, and Global Economic Security all hang on a knife edge lightly grasped by one supplier.
Whoever controls semiconductors controls the future.
As we begin to understand the integration of the Internet of Things (IoT) and AI, many of us may have overlooked the influence of the semiconductors that power them. These tiny mechanical marvels sit at the core of geopolitics. They are behind almost every on-off switch in our lives. They are a critical infrastructure to how our world runs.
From PCs to cars, microwaves, and refrigerators, all come equipped with small silicon devices that measure as little as 3 nanometres (about 25,000 times smaller than the width of a human hair). If you buy an iPhone today, it will contain around 15 billion transistors. Smaller than a virus, they are the most powerful and mass-produced devices humans have ever created.
In the same way that you couldn’t understand geopolitics in the 20th century without understanding oil and other forms of energy — where it was, and who had it, and who needed it, and what they would do to get it — you can’t understand the major stories of the 21st century without understanding semiconductors. Whoever controls semiconductors controls the future. - Ezra Klein on The Most Amazing — and Dangerous — Technology in the World
Semiconductors are the backbone of our digital and physical infrastructure. They enable everything from 5G networks and renewable energy systems to robotics and industrial automation. Their presence in nearly every aspect of modern life makes them not only a technological necessity but also a strategic asset, highlighting the importance of understanding who controls their production and supply.
And herein lies the risk.
As conflicts evolve and political tensions rise, semiconductors are becoming the geopolitical glue stretched to its limits. The risks of a single point of failure, the bargaining power of an invasions, and the race to reduce reliance on East Asian manufacturers by the U.S. make semiconductors arguably our greatest vulnerability.
You need to know about TSMC
Before discussing the fragile risks associated with this critical infrastructure, it’s important to understand how we got here and why it’s so difficult to break free. It starts with a 36 year old Taiwanese company.
In 1987, Morris Chang, a former tech executive at Texas Instruments, was approached by the Taiwanese government to establish a company that would create chips in a booming economy. The government provided half the capital required to build the business while encouraging Taiwanese businesses to contribute an additional 25%.
The strategy behind Chang’s Taiwan Semiconductor Manufacturing Company (TSMC) was brilliant. He recognized the increasing complexity of both design and manufacturing, which necessitated the creation of specialist firms. By focusing exclusively on manufacturing, TSMC could serve a diverse range of customers without competing with them. Today, they are the sole manufacturer of chips for Apple, Nvidia, AMD, and Qualcomm. They are a neutral, yet indispensable, powerhouse in the global supply chain.
As the world's largest chipmaker, TSMC leverages economies of scale to drive down costs. The sheer volume of chips they produce has also enabled them to continuously refine their manufacturing technology. Because of this, they are currently a generation or two ahead of Intel's capabilities and have billions of dollars in surplus, allowing them to invest in highly specialized and expensive equipment.
Consider EUV lithography machines. These are highly complex, costing over $150 million each, and produced by only one company in the world. The sophisticated supply chain needed to manufacture these machines was uniquely developed by TSMC. For example, the laser used in an EUV lithography machine requires nearly half a million components sourced from various suppliers. The precision and reliability of these components are extraordinary, with a mean time to failure measured in decades.
TSMC represents a profound challenge for the global economy. Their specialized manufacturing processes and strategic model make them the sole supplier of 90% of the world’s most advanced processor chips (with Samsung producing the remaining 10% in South Korea). This dominance creates a single point of failure in the global economy, where any disruption to TSMC would have catastrophic consequences for all of us.
Unlike oil, which can be sourced from multiple countries, the production of computing power depends on a series of choke points (like tools, chemicals, and software) that are often controlled by a handful of companies, sometimes just one.
During the chip shortage of 2020–2021, the global car industry suffered an estimated $200 billion in lost sales due to an inability to secure enough chips to meet demand. A typical new car contains around 1,000 chips, with 10–30% of them sourced from Taiwan. Replacing that volume would be an immense challenge.
If TSMC were to shut down, the world would face an unprecedented economic crisis. The production of smartphones, personal computers, and data centres would grind to a halt. Additionally, the manufacturing of countless goods would be disrupted, as even everyday appliances like dishwashers and microwaves depend on chips.
While we currently lack a comprehensive mitigation strategy, progress is being made through incentives like the CHIPS Act.
Risk Mitigation: The CHIPS Act
Policymakers and industry experts are increasingly concerned about the over-reliance on TSMC. To mitigate these risks, they are exploring strategies such as subsidizing domestic production. The U.S. are offering incentives for companies to establish domestic chip manufacturing facilities. However, questions remain about the long-term effectiveness of these subsidies, given the complexity of machines like EUV lithography and the intricacies of the semiconductor supply chain.
Another approach involves restricting access to Chinese companies. Policymakers are advocating for limitations on the market access of Chinese chipmakers like Semiconductor Manufacturing International Corporation (SMIC), particularly in "critical" sectors such as medical devices and electric vehicles.
This effort builds on prior U.S. policy initiatives, such as President-elect, Donald Trump’s ambition to revisit harsher tariffs. Discussions have also included imposing tariffs to counter potential dumping by Chinese companies flooding the market with cheap chips. However, this strategy is complicated by the fact that many chips are embedded in finished devices rather than imported directly.
The Creating Helpful Incentives to Produce Semiconductors Act by the U.S. Government, aims to bolster domestic semiconductor manufacturing and innovation. Enacted in 2021 as a response to COVID-19 and geopolitical tensions, the Act allocates billions of dollars in subsidies, research funding, and tax incentives to reduce reliance on foreign semiconductor production. By encouraging local production, fostering technological advancement, and strengthening supply chain resilience, the CHIPS Act aims to mitigate risks associated with over-dependence on a few foreign producers.
All Eyes on 2027
U.S. intelligence assessments suggest that Chinese President Xi Jinping has directed the People's Liberation Army (PLA) to develop the capability to invade Taiwan by 2027. This directive aligns with China’s rapid military modernization, which includes significant investments in naval and missile systems and an increase in military exercises near Taiwan. FBI Director Christopher Wray has even described China as a “pacing threat.”
Control over Taiwan's semiconductor industry would give China enormous economic and technological advantages.
The combination of China’s military ambitions and Taiwan’s critical role in the semiconductor supply chain highlights the geopolitical tensions in the region. And while a political decision to invade Taiwan has not necessarily been made, preparations for such an action have been targeted for 2027.
If conflict arises in the Taiwan Strait, the global chip supply would face severe disruption. Some argue that Taiwan’s semiconductor industry serves as a deterrent to conflict due to its global value, while others believe that conflict is inevitable and that the chip industry would be among the first sectors dramatically affected.
China’s Semiconductor Ambitions
The other side of the Taiwan-China coin is China’s ambitions to reduce its reliance on imported advanced chips. Currently, its economy remains vulnerable due to this dependence. To address this, China has invested billions of dollars since 2014 in efforts to produce cutting-edge chips domestically. But like the U.S., progress has been slow, and the country remains largely reliant on imported chips and the equipment necessary to manufacture them.
And so, concentration of chip production in Taiwan gives China significant leverage over the global economy. This leverage could be used as a tool for economic coercion, pressuring other countries to comply with Beijing’s demands.
The geopolitical and economic stakes surrounding semiconductors are immense. As nations grapple with the risks of over-reliance on Taiwan and the challenges posed by China’s ambitions, the global semiconductor industry remains a focal point of both innovation and vulnerability.
The story of our technology is developing with very little guidance. As we’re seeing with AI, it moves faster than policy and regulation can keep up. The character that TSMC plays is a vulnerable one, and the odds seem against her. Having a single point of failure of this scale is truly a developing risk, so now is the time to consider the disruption and what this means to you.
How we educate ourselves is how we prepare.
Additional source links
Chip War: The Fight for the World's Most Critical Technology by Chris Miller
Foundational Chips: China’s Ambitions and Implications for the U.S. Manufacturing Base
Opinion | To win the chip war, the U.S. must prioritize revolutionary research
Western nations need a plan for when China floods the chip market