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Home / Opinion / Columns /  America’s exit from Afghanistan and semiconductor supply risks

The US departure from Afghanistan has sent seismic waves through the world, and even more so in Asia. While there will be a direct impact on nearby countries, a country where the tectonic plates might shift the most is far-away Taiwan. It is no coincidence that there has been a flurry of diplomatic activity between Taiwan and the US, with the former placing an order for the latter’s upgraded Patriot air missile defence system and American fighter jets. The obvious reason behind these tremors is China, which has always considered Taiwan a breakaway province and bristled at countries recognizing it diplomatically. As China emerges as a global power, its official policy is to make Taiwan a part of itself, along with Hong Kong and several other islands. But the recent kerfuffle, perhaps, has to do with one more reason, a company called Taiwan Semiconductor Manufacturing Company (TSMC). Firms and factories have caused wars in the past: the East India Company led to British rule in India, fruit and agri-produce companies ‘owned’ small countries in Africa, and even China fought the British over its opium ‘factories’. So, it is plausible for history to repeat itself over a cutting-edge technology product that powers much of the globe.

The product is semiconductors, and TSMC is its sovereign. Semiconductor chips run the world: its factories, phones, computers, cars, planes, artificial intelligence (AI) and quantum computers. These are the backbone of a modern economy and the pandemic has brought this into sharp focus. Disrupted supply chains and resurgent post-lockdown demand has led to a global chip shortage, forcing car and appliance makers to scale down output. Semiconductors have been around for decades, drawing their origin from the transistor chip invented in 1947, but they have evolved unrecognizably. In 1998, write John Lee and Jan-Peter Kleinhans in The Diplomat (bit.ly/2V1aplz ), the average personal computer processor had roughly 7 million transistors, while smartphone processors in 2018 had 7 billion. Whereas in the late 1990s more than 20 companies operated 180 nanometer (nm) fabrication plants (fabs), today only TSMC and Samsung run cutting-edge 5 nm fabs. In fact, they have a duopoly, with TSMC claiming 60% of the global market. It is also the only pure-play fab; Samsung makes chips for itself too. Big customers prefer TSMC, as it’s not their competitor.

The reason for just two players is that is an expensive technology which is very hard to make. Today’s advanced logic fabs, write Lee and Kleinhans, operate on the atomic level, and it requires deep process knowledge, intricate supplier linkages, deep research and government backing to build and run one. The equipment is complex: a single 180-tonne machine has around 100,000 components and costs over $120 million. TSMC estimates that its next-gen 3 nm fab will cost nearly $20 billion. So the number of these chip-makers went from over 20 to just two over 20 years. A new ‘fabless’ business model, powered by chip designers like ARM, has emerged and firms like Apple and Tesla contract out chips to one of the two duopolists. Switching costs from one supplier to another are high. TSMC is sometimes the only supplier that serves demand.

And this brings us back to Taiwan. Technologies have been ‘weaponized’. Note the US crackdown on Huawei and its 5G monopoly, or the use of AI for surveillance and war. With the emergence of China as a threat to the US, TSMC has been forced to pick sides. The US accounts for 60% of TSMC’s sales, but China makes up 20%, growing very fast. Recent supply disruptions mostly favour the West, but there is one wild card: China’s ability to wage war on its neighbour. China depends heavily on semiconductors to fuel its rapid growth and has invested untold billions in its own fab, SMIC, but it is still years away from 5nm capability and may never catch up. So why not acquire the global leader by acquiring the country it is based in?

While this has been a looming threat for years, Afghan developments might catalyse Beijing’s thinking. Taiwan has operated under a presumptive security umbrella of the US, with the latter’s Pacific fleets poised to defend Taiwan if attacked. America’s recent actions have shaken the confidence of every US ally. This might embolden China, which has started making noises about America’s unreliability as an ally. Perhaps this is paranoiac thinking. Lee and Kleinhans offer some good reasons why this scenario is unlikely and might never come to pass. However, it might be wise to remember what one of the pioneers of chip-making, Andy Grove of Intel, said: “It is only the paranoid that survive."

Jaspreet Bindra is the author of ‘The Tech Whisperer’, and founder of Digital Matters

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