Semiconductors are barely visible, yet they play a vital role in the global economy. These minuscule components, also known as chips, act as the brains for electronic devices of every kind. As semiconductors have simultaneously become both smaller and more powerful, they have enabled technological advances in everything from smartphones to artificial intelligence and military hardware.

Perhaps the most astonishing feature of the semiconductor industry is the extent to which it has come to be dominated by a single island. More than half of the world’s semiconductors, including more than 90% of the most advanced chips, are manufactured in Taiwan.

However, policy-makers in both the US and China are unsettled by how their vital industries depend on a single source. China’s stance towards Taiwan has become increasingly aggressive under President Xi Jinping and Washington has grown fearful that Taiwan’s semiconductor industry could fall under Beijing’s control.

TSMC, the world’s leading chipmaker and Taiwan’s largest company, has been heavily incentivised to build two new fabrication plants for advanced semiconductors in Arizona. Generous incentives paved the way for its expansion in other countries such as Japan and Germany. Meanwhile, China has made progress in advanced semiconductor manufacturing, despite US sanctions designed to slow down its capabilities.

Is this the beginning of the end for Taiwan’s dominance of semiconductors? And, if Taiwan’s position in the industry does erode, can the island find other industries to keep its economy on track?

Mixed fortunes

Geopolitical tensions “could be a threat” for Taiwan’s semiconductor industry, acknowledges Kai-An Cheng, senior analyst in the Market Intelligence and Consulting Institute at Taiwan’s Institute for Information Industry. Reduced demand from Chinese customers would be a major blow for Taiwanese chipmakers, he says, given that China accounts for around 40% of their orders.

Darson Chiu, research fellow at the Taiwan Institute of Economic Research, agrees that the outlook for the industry is unclear beyond the next five years. And he warns there is no other domestic industry that could compensate for any decline in semiconductor manufacturing. “Taiwan has been looking for next-generation industries for the past 30 years,” he says, adding that efforts to promote biotech manufacturing have been a “disappointment”.

Semiconductors account for more than 40% of Taiwan’s exports and around 25% of its GDP. TSMC is the largest taxpayer in the country.

However, many insiders are sanguine about the industry’s prospects. Multiple sources in Taiwan pointed out to fDi Intelligence, often with a degree of amusement, that TSMC has found building fabrication plants in Arizona to be a more challenging process than in Taiwan. Its first fabrication plant in the state is now expected to begin production in 2025, rather than this year as originally planned. The second facility is also running at least a year behind schedule.

While TSMC’s overseas investments are capturing the headlines, the company continues to invest heavily in Taiwan. Its facilities in Arizona are slated to produce three-nanometre chips, whereas it is already in the process of manufacturing more advanced two-nanometre designs at facilities in Taiwan. Local media reported in February that a 1.4-nanometre TSMC facility would begin production in the central city of Taichung in 2027.

Taiwan’s ecosystem 

Linwu Kuo, vice-president of Public Affairs and Corporate Communications at UMC, TSMC’s main rival in Taiwan, says that his company is not planning any future overseas fabrication in addition to its existing facilities in Singapore, China and Japan. Taiwan has a “very, very rich” ecosystem for the semiconductor industry, he says; building this from scratch in other countries is far from easy.

Both TSMC and UMC are headquartered at Hsinchu Science Park, around an hour south-west of the capital Taipei. Here, the companies are literally surrounded by suppliers, as well as by companies that design chips for them to manufacture, including major Taiwanese firms such as Mediatek, Novatek and Realtek. The “flexibility” in the supply chain is a key factor that enables Taiwanese companies to partner successfully with major international brands, says Mr Cheng. Other countries may try to copy Taiwan’s model, he says, yet such a comprehensive industry cluster “takes time to evolve and develop”.

Tsu-Yu Chao, director of the Industry, Science and Technology International Strategy Centre at Taiwan’s Industry Technology Research Institute, echoes this point. He argues that Taiwan will benefit as demand for semiconductors for AI-based applications, which require huge processing capacity, grows “very dramatically” in the coming years.

Mr Chao believes that Taiwan will continue manufacturing the most advanced chips and has scope to expand further in chip design. “In the future, there will be a very good opportunity for Taiwan’s semiconductor industry as a whole, not only the manufacturing, but also the [integrated circuit] design,” he says.

New technologies

As Taiwan seeks to diversify into other types of advanced electronics, one of its biggest problems is a talent shortage. “Our population is only 23 million,” notes Ching-Ray Chang, president of the Taiwan Association of Quantum Computing and Information Technology. “To support the semiconductor industry is already very difficult.” Indeed, with so many of the country’s engineers locked into the semiconductor industry, it is hard to find skills to develop cutting-edge technology in new areas.

Mr Chang warns that Taiwan’s tight focus on semiconductors has led it to “overlook” some of the possibilities with quantum computing. The government has only begun to direct research and development efforts towards this rapidly evolving field in the past few years, he says. 

But he notes that Taiwan’s skills in semiconductor manufacturing — particularly its remarkable prowess in the miniaturisation of advanced chips — could prove important for quantum computing and enable Taiwanese companies to collaborate with international partners in the industry. “I think there’s still the opportunity for Taiwan,” he says. “We just need to spend time to find a way to apply the semiconductor technology to the new paradigm.”

Taiwan’s success with advanced semiconductor manufacturing has been so extraordinary that it is hard to believe it could ever be repeated in other critical technologies. Nevertheless, the ecosystem for computing technology clearly provides a foundation that should allow the island’s economy to punch above its weight for many years to come.

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This article first appeared in the April/May 2024 print edition of fDi Intelligence.