Analysis: Chip industry rethinks Taiwan risk after Pelosi visit, but options are limited

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TAIPEI, Oct 7 (Reuters) – Chinese missiles flying over Taiwan and naval drills in the straits in August that simulated a blockade by China have prompted the semiconductor industry to consider what once seemed a distant possibility: war on the main flea-producing island.

From drafting contingency plans to investigating manufacturing capacity outside of Taiwan, some companies are now considering how to respond if China attacks or restricts access to the democratic island, according to 15 leaders from semiconductors polled by Reuters.

With Taiwan living under Chinese threat for decades, with occasional spikes in tension, the war games in early August after US House Speaker Nancy Pelosi’s visit to Taipei shook nerves, said the executives, who asked for themselves and their companies not to be identified due to concerns over relations with China.

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China claims Taiwan as its own territory. The Taiwan government rejects China’s sovereignty claims.

Taiwan produces the vast majority of the world’s most advanced chips and is home to Taiwan Semiconductor Manufacturing Company Ltd (TSMC) (2330.TW), the world’s largest contract chipmaker and supplier to big companies like Apple Inc, the maker of American chips Nvidia Corp (NVDA.O) and chip designer Qualcomm Inc.

Chips are essential for building everything from iPhones and washing machines to cars and fighter jets.

The executives said it would be difficult to wean the world quickly from its dependence on Taiwan’s high-tech chips, but the geopolitical challenges facing the industry are growing.

“Everyone is talking about business continuity plans right now,” said Terry Tsao, president of industry group SEMI Taiwan. “A small portion of companies have only recently started making these plans. From what I’ve heard, most of them are foreign companies.”

Forty percent of people surveyed by the American Chamber of Commerce in Taiwan the week after Pelosi’s visit said their companies were revising or were about to revise their contingency or business continuity plans in Taiwan.

A chip manager at a large foreign company with operations in Taiwan said his company was asked about its business continuity plans by its customers and in turn asked the same questions of its suppliers in Taiwan.

“Nobody really ever highlighted any type of military action in their business continuity plans and now they do,” he said. Unsettled by the Chinese drills, which showed how easily Taiwan could be blocked, the leadership had launched efforts to plan for supply disruptions and other scenarios, he said: “I don’t think anyone think the political environment will improve.”

Some say the presence of chipmakers provides Taiwan with a “silicon shield” – making China less likely to try to take the island by force and the United States reluctant to let it fall into the hands of the Chinese. While the Taipei government has downplayed this theory, it is keen to avoid any weakening of its economically vital semiconductor sector.

Later in August, officials from the Ministry of Foreign Affairs, Ministry of Economy and Taiwan’s top military think tank pleaded for the island to remain a safe place for chip investments at an AmCham event. in camera.

Sebastian Hou, senior investment analyst at Neuberger Berman in Taipei, said after the start of the US-China trade war, many Taiwanese non-chip tech companies relocated manufacturing or moved overseas. Southeast Asia because their customers had requested them in the United States or Europe. diversify outside of China.

However, after Pelosi’s visit, “customers in the Western world expressed concern that they were too focused on Taiwan,” Hou said: “There is no immediate action requested by their Western customers, but Discussions are already underway.”

ESSENTIAL ISLAND

A foreign chip executive with factories outside Taiwan said more companies contacted him after Pelosi’s visit to discuss options, but those meetings have yet to translate to new orders. He declined to name the companies involved.

“People ask, ‘If I have a choice, where can I go to make sure my device – my supply chain – has alternatives if the missiles start flying?’ says the executive.

These are customers who are looking for chips made with older technology because, when it comes to cutting-edge technology, there is no alternative to TSMC with the production capacity to serve major companies, said the executive.

Executives told Reuters it would be difficult to replicate the efficiency of Taiwan’s semiconductor industry, with the chip giants and hundreds of their suppliers clustered along the island’s west coast, in especially given the higher costs in countries like the United States.

An executive at another major foreign chip company operating in Taiwan said that – while the exercises forced a closer look at the risks of future investments there – the withdrawal was not on the table.

“It’s always the commercial or financial terms that have a lot more say,” he said.

Kung Ming-hsin, minister of Taiwan’s National Development Council, told reporters last month that major chip companies, including foreign ones, would invest around $210 billion in Taiwan over the next five years to manufacture chips. point.

The German chip materials giant Merck is doubling down on its investments.

Last year, Merck announced an investment of 500 million euros in Taiwan over the next five to seven years. John Lee, managing director of Merck Group in Taiwan, told Reuters after Pelosi’s visit that he had no plans to change course as demand for chips is growing exponentially and Taiwan remains the biggest market. world of semiconductor materials.

‘BEYOND OUR CONTROL’

An executive at a major Taiwanese tech company said he started producing daily geopolitical reports following the drills to reassure overseas customers that he was taking the issue seriously – rather than because he was concerned about the risk of war.

“Taiwan is used to this, but if you’re sitting in the C-suite overseas, it’s much more alarming,” the executive said.

A senior executive at another Taiwanese chip company, however, said his company had not yet received significant pressure from overseas customers due to military tensions.

“They understand that no matter how much they twist our arm, there’s not much we can do,” the exec said.

In recent years, Taiwanese chip companies have stepped up overseas investment, but planned capacity is still only a fraction of their overall production, executives and analysts said.

When asked if the cross-Strait tensions will affect his business, Miin Wu, chairman and CEO of Taiwanese chipmaker Macronix International Co Ltd, told reporters last month, “Of course, we are worried about it.” But he added that worrying was useless.

“Instead, we just keep investing and delivering better and better products,” he said.

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Reporting by Sarah Wu; Additional reporting by Ben Blanchard in Taipei and Jane Lanhee Lee in San Francisco; Editing by Daniel Flynn

Our standards: The Thomson Reuters Trust Principles.

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