Chips with everything: how one Taiwanese company drives the world economy

By Helen Davidson in Taipei, and Martin Farrer
A logo of Taiwan Semiconductor Manufacturing Co (TSMC)
It is hard to overstate the importance of the Taiwanese semiconductor maker TSMC to the world’s economy, and to vehicle manufacturers. Photograph: Tyrone Siu/Reuters

Living on an island long coveted by a large and increasingly powerful neighbour, the residents of Taiwan have given some thought to where might be the best place to go should the worst happen. Some think it might be the hills, others historic buildings that China will want to preserve. By the same reasoning, some believe it is the factory run by the world’s biggest computer chip maker, TSMC.

Taiwan has for decades been both a global strategic flashpoint and one of the world’s economic powerhouses. In an industrial park about an hour’s drive from Taipei, those twin identities merge almost perfectly in the form of the factory run by TSMC, the world’s largest maker of computer chips – a facility so vital that some Taiwanese think it could be the safest place to flee to should China one day invade.

It is hard to overstate the importance of the Taiwanese semiconductor maker to the world’s economy. TSMC dominates production of the world’s most sophisticated semiconductors, and counts Apple and Qualcomm among its biggest customers. It is a global hegemony that China envies.

The current worldwide shortage of chips that began early in the coronavirus pandemic is now reaching crisis proportions, making TSMC’s role even more pivotal.

Financial markets are increasingly alarmed about how the shortages are fuelling inflation in western economies and – with executives predicting the chip scarcity could last for years rather than months – are casting a spotlight on how a company that few people have heard of can have such a grip on the world’s economy.

Tough road ahead

The chip shortage has sent the cost of new and used cars and trucks soaring, which in turn fed a 4.2% jump in US consumer prices in April. Stock markets saw an instant correction as investors calculated that inflation meant the US Federal Reserve would begin to raise interest rates to take the heat out the economy sooner than expected.

Ever since they emerged from the shock of the pandemic recession last year, carmakers have been unable to get their hands on enough semiconductors to make cars to meet demand. Chips are not used just in computers – they are the brains behind a whole range of everyday devices and are integral in car production as vehicles do more and more of the thinking for drivers.

Ford said in April that it would make only half its normal number of vehicles through to June because of the chip shortage. Other manufacturers such as GM, Volkswagen and Jaguar Land Rover have also been affected.

Around 5,000 unfinished cars were parked outside the Volkswagen Navarra factory in Pamplona last week due to a lack of semiconductors.
Around 5,000 unfinished cars parked outside the Volkswagen Navarra factory in Pamplona due to a lack of semiconductors. Photograph: Ander Gillenea/AFP/Getty Images

The end result was that US cars were 10% more expensive in April than they had been in March, the biggest monthly gain since records began. Secondhand cars were up 21% from last April as the shortage of vehicles coincides with consumers, many cashed-up because of pandemic restrictions on holidays and eating out, going out in search of something to spend their money on. The pattern is repeated in many countries. Car sales and prices are rising quickly in the UK in the wake of the third lockdown, while they are also booming in Australia.

A simple solution would be make more chips, but the market for these components is finely tuned, and adding manufacturing capacity – known as “fabs” – is extremely complex, expensive and takes a long time. When carmakers shuttered factories in the first wave of the pandemic in 2020, manufacturers such as TSMC and Samsung in Korea shifted production to chips for consumer electronics where demand continued to build as people spent more time at home during lockdowns.

Carmakers compounded the problem by failing to place enough future orders, believing the economic shutdown would be longer lasting. But the world economy, helped by massive government intervention, has roared back more quickly than many thought, leaving a shortage of components. Analysts calculated this week that the car industry would lose $110bn this year because of production lost due to the dearth of chips.

‘Dependency poses a threat’

Mark Williams, chief Asia economist at the consultancy Capital Economics, said the car industry’s problems showed how semiconductors have become an essential input in products that aren’t traditionally considered electronics, and also how dependent the world is on Taiwan to produce them.

“This dependency poses a threat to the global economy that can be mitigated but won’t be fully addressed in the foreseeable future,” he said.

So what appears to be a strength also places Taiwan in a tight spot. The concentration of chip production in Taiwan, which could be disrupted by earthquakes and drought as well as any possible military threat from across the Taiwan Strait, is a risk to the global economy.

Superpowers the US and China are striving desperately to catch up with Taiwan’s hi-tech champion, amid growing diplomatic and geopolitical tension between Washington and Beijing. TSMC is believed to be considering expanding its current plans to pump billions of dollars into cutting-edge factories in the US state of Arizona, Reuters reported this month.

China is also desperate to increase its ability to make the most sophisticated chips but, according to Capital, has failed to reduce its dependence on overseas producers such as TSMC. In fact, TSMC is reportedly considering ventures in China worth billions – including a new facility in Nanjing. In 2018, Chinese companies such as Huawei stockpiled chips in response to threats of US export controls, exacerbating the shortage. Trump-era sanctions on China’s leading chip maker, SIMC, have not helped.

Ultimately, the best way out of the current situation is to spread the load, said John Lee, who is co-running a joint project by the thinktanks SNV and MERICS analysing the semiconductor value chain. “The smart way to build resilience across the global supply chain is greater coordination across different countries, rather than chasing self-sufficiency with the huge risk and expense that would involve,” he said.