The 'kill switch' that would cripple the global economy if China invades Taiwan - and how to protect your investments
It is the West’s worst nightmare.
After weeks of military build-up and rising international tension, communist China launches a full-scale invasion of Taiwan.
The island’s defences are soon overwhelmed and Beijing proudly proclaims the self-governing island has been ‘reunified’ with the mainland.
The land grab realises a dream that the Chinese Communist Party has cherished since Chairman Mao seized power in 1949.
The ripple effect is felt around the world, including in the pockets of millions of British savers. Anyone who has invested in technology shares or a fund specialising in tech would be likely to find themselves much poorer.
Why? Because the global economy depends to a terrifying extent on Taiwan, a small island of 24million people, roughly the size of Switzerland.
The US, which has vowed to defend Taiwan with force in the event of an attack, has warned that China aims to have the capability to invade within three years
Taiwan makes more than 60 per cent of the world’s chips, or semiconductors — silicon discs with billions of transistors carved into them, which underpin all digital computing.
Crucially, it also makes over 90 per cent of the most advanced chips used in satellites, stealth jets and, increasingly, artificial intelligence (AI).
UK investment funds such as Scottish Mortgage, one of the most popular among small investors, have poured money into the island’s dominant company, Taiwan Semiconductor Manufacturing Company or TSMC.
The fortunes of that business in turn are deeply intertwined with the US tech giants that have driven most of the gains on Wall Street, such as Nvidia, Tesla and Apple.
Naturally, companies like TSMC and western governments have made preparations for hostilities.
An invasion would not necessarily hand China’s President Xi Jingpin control of Taiwan’s chip manufacturing capability.
Rather, it would trigger a blueprint to thwart Beijing, drawn up by TSMC and Dutch-owned ASML, which produces the machines that make the chips. They have put mechanisms in place to disable their facilities remotely.
As Chinese troops swarm in, a ‘kill switch’ is flicked from a secret location.
At a stroke, some of the world’s most sophisticated machines — making the silicon chips that power everything from smartphones to electric cars, computers, TVs and microwaves — are disabled.
If all this sounds a bit far-fetched, the stuff of a particularly outlandish James Bond film perhaps, then think again.
Foiling Xi, however, comes at a heavy price. The beating heart of today’s digital world is silenced, with catastrophic financial consequences.
Panic sweeps western capitals, global stock markets slump and billions are wiped off the value of pension funds in Britain and elsewhere.
This is not just idle speculation. The US, which has vowed to defend the island with force in the event of an attack, has warned that China aims to have the capability to invade within three years.
Would Beijing really call the West’s bluff? And if it did, what would happen to investors who have piled into shares such as TSMC and Nvidia, whether directly, or, like millions of UK savers, through their pension or investment funds?
‘Everybody loses’ if China invades, TSMC chairman Mark Liu said in a rare interview in 2022.
If TSMC was taken over by force it would ‘no longer be operable,’ he warned, implying the company would adopt a scorched earth strategy to prevent its factories and technology from falling into China’s hands.
‘Our interruption will create great economic turmoil’ on both sides, Liu added.
It is easy to see why. TSMC bestrides Taiwan’s economy and is the most valuable company in East Asia, worth around £600billion.
Its share price has risen nearly eight-fold in the past decade.
Experts say no company in the world makes microprocessors with such precision as TSMC.
It produces most of the high-end semiconductors used by Nvidia, the AI chip designer that recently became — briefly — the world’s largest company.
TSMC’s most advanced local fabrication plants, or ‘fabs’, carve microscopic mazes of tiny transistors on an unimaginably tiny scale.
The chip industry now produces more transistors than the combined quantity of all goods produced by all other companies, in all other industries, in human history.
‘Nothing else comes close,’ says Chris Miller, author of Chip War.
Miller’s book recounts how this critical technology became concentrated in so few hands — and how it now stands at the centre of an epic geopolitical and economic power struggle between the US and China.
This battle, and who emerges victorious, will define the rest of the century.
From its tech heartland in Silicon Valley, the US has for years been the leader in chip design.
But the actual manufacturing of semiconductors has been done in what the Americans consider to be reliable allied countries, principally Taiwan.
So far, that has worked. But the geopolitical plates have shifted, and the US now faces a mounting threat from China, which lacks access to the latest chip technology because of trade curbs imposed by Washington.
To free itself from this ‘chip choke’, Beijing is pumping billions of dollars into developing its own semiconductor technology.
‘China is spending more on state-subsidised chip investment than any other country,’ says Miller.
Experts say it is only a matter of time before the Chinese succeed.
‘Over time, they’ll work it out,’ says Stephen Yiu at fund manager Blue Whale Growth Fund, whose largest holding is Nvidia, which has made it over £100million.
Some experts believe this Herculean effort to develop its own chip-making capacity makes a Chinese invasion less likely.
US company Nvidia, which designs AI chips, recently became the world’s largest company for a brief period
Foiling an invasion by president Xi Jinping, pictured, could come at a heavy price for the digital world, with catastrophic financial consequences
Xi simply will not need Taiwanese chip assets in a few years time, according to Dr Robyn Klingler-Vidra, a lecturer in political economy at King’s College London.
‘They play the long game,’ she says. ‘China’s move to create more advanced chips is well on track.’
That makes talk of blowing up chip factories and airlifting executives off the island sound like ‘a lot of it is blustering’ and ‘political posturing’, she adds.
For all our sakes let’s hope she’s right.
Even if she is, however, it does not rule out the possibility of military action for other motives.
‘China’s claim on Taiwan is deep-rooted and historic. In that sense it’s got nothing to do with economics,’ said one expert.
‘Xi Jinping has made reuniting Taiwan with the mainland central to his presidency,’ he added. ‘There’s nothing to suggest an invasion is imminent, but there are always skirmishes’ that could escalate, the source continued.
What, then, is the UK and the rest of the Western world doing to secure our chip supplies?
The US, Europe and Japan are frantically trying to expand independent manufacturing capacity so they are no longer over-dependent on Taiwan.
They are also keen to prevent a repeat of the chip shortages that risked paralysing the global economy during the pandemic.
China lacks access to the latest chip technology due to trade curbs imposed by Washington
Both TSMC and former chip leader Intel are building heavily subsidised semiconductor plants in Arizona as part of President Joe Biden's $50billion (£42billion) CHIPS and Science Act.
The EU, home-base for Dutch-owned ASML, has promised to invest 43billion euro (£34billion) in its own manufacturing capacity.
US giant Intel is in talks with a buy-out group about building an $11billion semiconductor factory in Ireland.
All of which makes the UK’s efforts to ensure its own ‘silicon sovereignty’ seem puny in comparison.
The UK Government has earmarked just £1billion over the next decade as part of a national semiconductor strategy.
A decision on where to build a flagship microchip facility has been delayed until after the General Election, amid concerns about a lack of government support and a lack of money.
Britain has a long and proud record of innovative tech pioneers, such as Cambridge-based mobile phone chipmaker Arm Holdings, but it has struggled to nurture and keep its national champions.
Arm was sold to Japan’s SoftBank for $32billion in 2016.
The company recently snubbed a stock market flotation in London for New York, where it is now valued at $169billion.
Chip technology is now at the centre of an epic geopolitical and economic power struggle between the US and China
Newport Wafer Fab, which makes compound semiconductors from the largest chipmaking factory in the UK, was recently taken over by US electronics giant Vishay for $177million(£140million).
The deal came after MPs and ministers raised national security concerns when the silicon chip plant in south Wales was bought in 2021 by Nexperia, a Dutch subsidiary of a Chinese company.
After a review, the UK Government forced Nexperia to sell its controlling stake in the south Wales chipmaker because of its links to China.
Experts fear western governments, including the UK, may have left it too late to build enough capacity of their own to become independent of Taiwan and of China.
‘I think the efforts by Europe, the US and Japan to build more chipmaking capacity onshore are a positive step, but it will take many years to reduce our reliance on chips made in East Asia,’ says Miller.
‘It isn’t only Taiwan we’re reliant on — we’re increasingly and dangerously reliant on China, too,’ he adds.