6/6/23, 2:35 PM How Taiwan became the indispensable economy

TA I W A N

How Taiwan became the indispensable economy

Technology

Fearing a potential conflict in Asia, western companies are looking to move production
out of Taiwan. But turning away from the self-ruled island will come at a high price for
manufacturers

By Lauly Li in Taipei, Cheng Ting-Fang and the Visual Storytelling Team in London
MAY 31 2023

In the days after then US House Speaker Nancy Pelosi visited Taiwan last year, Taiwanese suppliers
to American tech giants including Apple, Google, Meta and Amazon were inundated with requests
from their customers. Could they produce from outside Taiwan to secure supplies, in case Beijing
went to war over the island?

Pelosi’s visit had sparked more than a diplomatic spat between Washington and Beijing, which
conducted unprecedented military exercises around Taiwan in response to her trip. It triggered a tech
industry crisis, which may now threaten the global electronics supply chain.

“If anyone hits Taiwan, or there is a serious disruption . . . the tech and electronics industry
worldwide is basically screwed,” says Hsieh Yong-fen, founder of chip and material testing provider
MA-tek.

Taiwan is best known for making cutting-edge semiconductors. But its companies also turn out other
crucial components from printed circuit boards to advanced camera lenses and they run huge device
assembly operations in China.

This has created a triangle of critical interdependence between Taiwan, China and the US that has
deepened even as tensions between Taipei, Beijing and Washington have risen.

To understand why, take a look inside the ubiquitous iPhone.

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It is one of the most successful

consumer devices of all time:
2.4bn units sold since its launch

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in 2007, racking up over $1tn in

revenue for Apple in 15 years.

Its success rests on a sprawling

Asian supply chain producing
chips, displays, speakers and
more on an almost
unimaginable scale. At its heart

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lie both mainland China and

Taiwan.

The iPhone’s components

reveal just how tightly bound
the supply chains of the US,
China and Taiwan have become.

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Each iPhone needs some 1,500

different components.

Nearly 70 per cent of Apple’s

top suppliers, making
everything from processors to
casings, are based in either
China (26 per cent), Taiwan (23
per cent) or the US (18 per

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cent). Japan and South Korea

round out the top five.

The most valuable components

— including core processors, 5G
modems, Wi-Fi chips, and
premium camera lenses — are
made in ⬤ Taiwan by
Taiwanese companies. All told,
the island’s suppliers account
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for nearly $200, or 36 per cent,

of the total materials bill for
each iPhone.

These chips, however, are

designed by Apple, or other
⬤ US , Japanese or European
chip developers, such as
Qualcomm, Sony, and Bosch.
High performance materials are
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also provided by American

makers, such as display glass
from Corning and adhesive
from 3M.

Chinese suppliers are

concentrated in less
technologically demanding
areas, like product assembly
and mechanical parts. The
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number of ⬤ China -based

suppliers has overtaken all
other countries to become the
largest supplying source by
number of companies over the
past few years. They have also
started to move up the supply
chain.

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China’s Luxshare Precision Industry, originally a component supplier to Apple, started to build
iPhones in 2021. Its display champion, BOE Technology Group, now makes some of the advanced
OLED screens for iPhones, previously the exclusive domains of South Korean manufacturers. Chinese
camera lens maker Sunny Optical appeared for the first time in the 2023 supplier list, eating into a
market that formerly belonged only to Taiwanese players.

China is also where 95 per cent of all iPhones are assembled, a figure that has changed little since its
launch. The country is a major market for Apple, too, providing around a fifth of its total annual
revenue.

Complicating the picture is the fact that many Taiwanese and US suppliers serve Apple from
hundreds of facilities in mainland China. Apple declined to comment on this story.

Without any of these components, an iPhone would not be an iPhone. But a formula that has worked
for a decade and a half is being put to the test as geopolitical tensions rewrite the rules of tech
manufacturing.

G7 leaders meeting in Japan this month vowed to “reduce excessive dependencies in our critical
supply chains”. Washington is determined to claw back advanced chip production from Asia while
Beijing is racing to establish its own tech supremacy. Taiwan is caught in the middle.

Made in America
In early December, standing under the blinding Arizona sun, Apple CEO Tim Cook took the stage
with President Joe Biden to celebrate a milestone: Taiwan Semiconductor Manufacturing Co was
moving equipment into its new $40bn chip plant in Phoenix — the Taiwanese contract chipmaker’s
first plant in the US in more than 20 years.

“This is an incredibly significant moment. It’s the chance for the United States to usher in a new era
in advanced manufacturing,” Cook told the crowd of assembled politicians and tech industry
heavyweights. TSMC, the world’s biggest contract chipmaker, plans to make some of its most
advanced semiconductors on US soil starting next year.

And as one of the plant’s earliest customers, Apple will be able for the first time to stamp “Made in
America” on core chips it has designed.

Left unsaid was that advanced semiconductors like these are only a small part of the electronics
supply chain. A single smartphone requires a wide range of chips, including a host of less advanced
“companion chips” not to mention final assembly, all of which are concentrated in Asia, particularly
China and Taiwan.

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Top: TSMC's only semiconductor factory in China is located in Nanjing, Jiangsu province; Bottom: A worker tests chips at a semiconductor plant in
Suqian, Jiangsu province, China © Future Publishing via Getty Images.

The Covid pandemic revealed the logistical weak points of the international supply chain, which was
built up over decades of globalisation. Geopolitical tensions — more specifically the threat of war over
Taiwan — are heaping additional pressure on tech companies to change how they operate.

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In one indication of the nervousness, a top US air force general recently predicted America and China
are likely to go to war over Taiwan in 2025.

“Two years ago, due to Trump’s trade war, customers told us they wanted ‘out of China’ production
options, so we decided to enlarge manufacturing capacity in Taiwan, our home base,” said an
executive with Unimicron, a printed circuit board maker supplying Apple, Intel and others.

Then, as the company was in the midst of a multibillion-dollar expansion in Taiwan, Pelosi visited
Taipei last August. An infuriated Beijing, which considers the island part of its territory, responded by
conducting live military drills off Taiwan’s coast — and Unimicron’s clients got nervous.

“Our customers then said they wanted some production alternatives that are outside of China and
also out of Taiwan over fears of a war,” the executive said. “We were stunned and speechless, and so
were a lot of our peers . . . How can the supply chain be moved out of China and Taiwan? The majority
of electronics supply chains are here.”

Since the middle of last year, Intel, AMD, Nvidia, Meta, Google and Amazon have all requested
production capacity outside of both China and Taiwan, several tech executives told Nikkei Asia and
the FT. HP and Dell — the world’s second and third biggest makers of notebook computers — told
their suppliers specifically to start building capacity in south-east Asia. Dell even aims to phase out
made-in-China chips by 2024.

“We have a business contingency plan — the so-called BCP — to prepare for supply chain disruptions,
such as a war,” an executive at chip testing equipment maker Advantest of Japan told Nikkei Asia and
the FT. “But if a military conflict really happens here in the Taiwan Strait, honestly, I think any BCP
will be totally useless. It would be doomsday for the chip supply chain, and no one ever wants to
imagine that happening.”

AMD said it worked continuously with suppliers to improve business continuity plans, including the
“important” goal of geographical diversification. Intel said it had consistently supported its suppliers’
“long-standing” efforts towards diversification, which were not related to Pelosi’s Taiwan visit. Nvidia
declined to comment.

Dell has said previously that it continuously explores supply chain diversification across the globe. HP
has said it has a robust global supply chain. Meta, Google and Amazon did not respond to requests for
comment.

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Even without a full-scale war, disruption from, say, a Chinese blockade of Taiwan could cause serious
global turmoil. According to a Semiconductor Industry Association estimate, a disruption in the
production of logic chips at contract chipmakers in Taiwan could cause nearly $500bn in lost
revenues for electronic device manufacturers that depend on this supply. A recent estimate by
Rhodium Group said a Taiwan conflict would put well over $2tn of economic activity at risk.

“People underestimate Taiwan’s position in the supply chain. It’s much more than just about
semiconductors. We have a very complete supply chain from chips, components, PCBs [printed
circuit boards], casings, lenses to assembly . . . anything you can think of,” a senior executive at
Compal, a vital product assembler to Dell, HP and Apple, said. “If there’s military friction happening
to Taiwan, the entire global supply chain will collapse for sure.”

Such a scenario, in other words, would leave Apple with “Made in America” chips and no devices to
put them in.

The threat of conflict

At first, fears over a possible conflict came largely from western clients. But now even Taiwanese
companies are concerned by developments across the strait.

Beijing concluded another round of military exercises on April 10, encircling Taiwan in protest
against Taiwanese President Tsai Ing-wen’s meeting with US House Speaker Kevin McCarthy in
California. The three-day drill included 91 incursions in a day.

“We grew in tandem with China’s reform and opening-up in the past several decades, but now the
good old days are over. It’s becoming obvious that Beijing puts politics over economic growth,” said
an executive at an Apple supplier whose facilities in China employ hundreds of thousands of workers.
“Our strategy is to lay low, to accelerate production shifts [to south-east Asia and India], and divest
our money gradually from China in the next few years.”

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“Gradually” is the operative word for many companies looking to diversify their supply chains,
whether they want it to be or not.

“It takes at least three years in some countries and even five years [in others] to build a
semiconductor plant from start to finish, and then it needs to start operation,” said Benjamin Hein,
an executive for China and south-east Asia at Germany’s Merck, a chemical and material group.
“Sometimes there are some misunderstandings that this [supply chain shift] could happen overnight
because of some geopolitical issue [but] it could take us at least five years, and even more than 10
years, to see some more fundamental shift.”

Washington is attempting to speed the process along, with a focus on chips. It is offering incentives to
encourage companies like TSMC and Samsung of South Korea to help build up America’s
semiconductor industry.

TSMC’s plant in Arizona, which will make ultra-advanced 3-nanometer chips that can be used in
supercomputers, smartphones, cars, fighter jets and military equipment, is seen as one of the
crowning achievements of this push.

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TSMC’s new semiconductor plant in Phoenix, Arizona, will start producing cutting-edge chips next year. The site has space for six factories, with a
second planned to open in 2026 © Planet Labs

If all currently planned investments go through, from both foreign and domestic players, the US will
be making 26 per cent of the world’s advanced chips by 2027, up from 10 per cent now, according to a
Counterpoint projection. Taiwan’s share would slip from 54 per cent to 45 per cent over that same
period.

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Taiwan’s biggest trade partners

Total trade volume ($bn)
Imports to Taiwan Exports from Taiwan

China
US
Japan
Hong Kong
South Korea
Singapore
Australia
Malaysia
Germany
Vietnam

0 50 100 150
Sources: Taiwan Bureau of Foreign Trade, Ministry of Economic Affairs; Office of the United States Trade Repres

But for all the talk of

decoupling, trade between the

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US , China and Taiwan tells a

different story.

Taiwan is increasingly reliant

on trade with the geopolitical
rivals: in 2022, China accounted
for about 30 per cent of the
island’s total imports and

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exports by value, up 50 per cent

from 2017.

The self-ruled island’s trade

with the US nearly doubled
over the same period,

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accounting for more than 13 per

cent of Taiwan’s total last year.

Bilateral trade between the US

and China , the world’s two
biggest economies, also

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reached a record $690.6bn last

year.

Last year, ⬤ US imports from

China almost recovered to the

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all-time high reached in 2018 . . .

. . . while ⬤ US exports to
China rose 28 per cent over the

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same period.

When it comes to technology specifically, the three economies are locked together even more tightly.

This is most obvious in advanced microchips. TSMC and its smaller Taiwanese peers control two-
thirds of the world’s market for contract chipmaking, turning the semiconductor designs of Apple,
Google and others into physical chips. As global leaders in cutting-edge chip technology, their output
is indispensable for the production of everything from Chinese smartphones to American fighter jets.

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Taiwan is also the leader in the humbler parts of the tech supply chain. One overlooked element is
chip packaging and testing — the last stage of semiconductor manufacturing — where Taiwan
controls 30 per cent of global market share. Another example is printed circuit boards, the basic
material on which chips are mounted. The island makes just under a third of the world’s supply,
much of which is shipped to assemblers in China for final production.

Apple’s “Made in America” chips, mounted on Taiwanese-made printed circuit boards, may well find
their way to China before ending up in a smartphone or laptop bound for the US market.

Even where US companies appear to be making progress in reducing their reliance on China, the
situation is less than straightforward.

Apple, for example, has spent years urging its suppliers to build capacity outside of China and has at
least some alternative production capacity for all of its main product lines in countries such as India
and Vietnam.

But more than 80 per cent of Apple’s top 188 suppliers still have at least one facility serving the
company in China, according to a Nikkei Asia-FT analysis of the latest annual list published by Apple
in 2023. Many key suppliers, including 3M, ON Semiconductor, Foxconn and Luxshare have three or
more production sites in the country.

Number of Apple suppliers in China and Taiwan

Of the 188 suppliers Apple disclosed in 2023, 151 (more than 80%) had production facilities in China and 41 had
facilities in Taiwan (22%). The total number of facilities in China making parts for Apple increased to 276 from 251 the
previous year

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In total, there are more than 270 manufacturing facilities making components or providing
manufacturing services to Apple in China, still the largest supply chain hub. In Taiwan, more than 70
sites are serving Apple, mainly making various chips, high-end chip substrates, printed circuit boards
and premium camera lenses, as well as providing chip packaging and testing services.

Apple spent more than a decade building the world’s most sophisticated tech supply chain, trading
security and resilience for efficiency and low costs. Plenty of other global companies followed suit,
putting China and Taiwan at the heart of their manufacturing strategy.

Now that the time has come to rethink that approach, suppliers and their clients are grappling with
the complexity and cost of the task before them.

Suppliers who have met with Apple’s procurement team say they have been asked to do the
impossible: come up with a way to make parts in other countries at the same price as in China or
Taiwan.

“We’re often very puzzled after wrapping up those meetings. We really want to escape them,” an
executive close to Foxconn said. “Apple wants the price of components to go into their Indian-
assembled iPhones to be the same as in China . . . but how is that going to be possible? You’ll need to

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hire new people, you may need to build a new factory, or at least ship components from abroad. And
then you’ll have additional logistics costs.”

Decoupling from China will not be cheap, but severing ties with Taiwan will come at an even higher
price. Will anyone be prepared to pay for it?

Visual storytelling team: Emma Lewis, Irene de la Torre Arenas, Sam Joiner, Sam Learner, Steven Bernard.

Lauly Li and Cheng Ting-Fang are reporters with Nikkei Asia.

Copyright The Financial Times Limited 2023. All rights reserved.

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