US-China tech war: semiconductor links across Taiwan Strait faces political headwind

semiconductor, Taiwan, cross-strait tensions, US-China relation, Covid-19 pandemic, ongoing chip shortage, Joe Biden, Taiwan is among 110 invitees, “US-Taiwan Economic Prosperity Partnership Dialogue”, 5G, Taiwan Semiconductor Manufacturing Co, US trade sanctions, Huawei Technologies Co, handed over chip supply chain information, US Department of Commerce, poaching skilled workers from the island

The long-standing bond between mainland China, the world’s second-largest economy, and semiconductor powerhouse Taiwan faces its stiffest challenge in decades amid increased cross-strait tensions and growing friction between Beijing and Washington.

While the close economic ties between the mainland and Taiwan are not expected to unravel, analysts warn that the strained cross-strait and US-China relations could bring more uncertainty to global supply chains after the disruptions caused by the Covid-19 pandemic and the ongoing chip shortage.

Speculation about what could happen next is expected to rise this week when US President Joe Biden hosts the first of two Summits for Democracy on December 9-10. Taiwan is among 110 invitees to the virtual event, which brings together leaders from government, civil society and the private sector, according to the US State Department. China and Russia were not invited.

To mark that summit, the US Treasury Department will impose a series of sanctions, targeting people engaged in corruption, serious human rights abuse and who undermine democracy, according to a Reuters report last Friday. The US-led event comes weeks after Biden and President Xi Jinping’s virtual summit, in which Washington underlined its opposition to unilateral change to the status quo over the Taiwan Strait.

The Summit for Democracy is expected to raise the stakes for Beijing, weeks after it urged the US government to stop further contacts with Taiwan officials. The call was made by Chinese foreign ministry spokesman Zhao Lijian last month after the second “US-Taiwan Economic Prosperity Partnership Dialogue”, which focused on issues such as supply chain resilience, digital economy, science and technology and 5G network security, as well as Beijing’s alleged economic coercion.

The Biden administration intends to continue developing closer ties with the democratic island, which mainland China refers to as a renegade province, amid soaring tensions with Beijing and Washington’s efforts to resolve the global semiconductor shortage, which has forced cuts to US car production.

While the relationship between Washington and Taipei has become closer, the ties between Taiwanese chip makers and their customers on the mainland remain strong, according to Arisa Liu, senior semiconductor research fellow at the Taiwan Institute of Economic Research.

“The Taiwanese semiconductor industry still wants to be closer to mainland China, which is the world’s largest market for chips,” Liu said.

Recent developments, however, indicate that Taiwanese investments in mainland China are decreasing.

In the first 10 months of this year, Taiwanese investments on the mainland reached US$4.3 billion, which was the second-lowest amount of capital outlay in a decade and about a third of the US$14.6 billion total recorded in 2010, according to the Investment Commission of the Ministry of Economic Affairs in Taiwan. That data, however, does not provide specific breakdowns of the island’s semiconductor-related investment on the mainland.

Earlier this month, Taiwan’s ASE Group, the world’s largest chip assembly and packaging services provider, sold its four factories on the mainland to Chinese fund Wise Road Capital for about US$1.46 billion. The firm said its profit from the sale would be used to expand operations in its home market.

“We think that the transaction was basically made to meet the company’s need for business diversification,” said Eric Tseng, chief executive of Taiwan-based Isaiah Research. “Some orders from existing customers currently fulfilled in mainland China could be transferred to its facilities in Taiwan or other Southeast Asia countries, which would minimise the impact of tense US-China relations.”

Taiwan Semiconductor Manufacturing Co (TSMC), by comparison, has managed to deepen its ties on the mainland, as part of efforts to cover its bases in response to the trade and tech war between the world’s two largest economies.

The world’s largest contract chip maker plans to expand its chip fabrication facility in the eastern city of Nanjing, as it proposes to spend US$12 billion to build a new plant in Arizona with US government support. It has recently teamed up with Sony Group Corp to establish a factory in Japan.

TSMC, however, had to comply with US trade sanctions against Huawei Technologies Co, which used to be a customer for advanced chips. TSMC last month also handed over chip supply chain information to the US Department of Commerce, which requested information about product inventories, demand and delivery dynamics to better understand the global chip shortage.

The community of Taiwanese semiconductor engineers employed on the mainland remains large, despite cross-strait tensions, according to an engineer from the island who has worked at two different firms on the mainland the past two years.

In March, Taiwan Economic Minister Wang Mei-hua said mainland China’s semiconductor firms have been poaching skilled workers from the island to help advance Beijing’s technology self-sufficiency efforts. In the same month, Taiwanese authorities prosecuted two recruitment companies for poaching local chip talent for a mainland Chinese artificial intelligence chip maker.

While it is early to tell how Beijing will ultimately respond to the upcoming US Summits for Democracy and Taipei’s part in it, the ramifications are likely to be felt by global supply chains. These rely on the mass manufacturing prowess and vast consumer market of the mainland, and depend on Taiwanese chip foundries’ products used on smartphones, computers and home appliances, cars and telecommunications networks.

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