Tensions with Beijing throw spotlight on Taiwan's unique role in global tech

Taipei, Taiwan(CNN Business) Taiwan plays a crucial role in making sure the world gets its cutting-edge technology devices, from laptops to advanced weapons, on time. That's because the self-governed democratic island of 24 million people is a global leader in the supply of semiconductor chips.

But as tensions escalate between Taipei and Beijing, the fate of that industry has become a global concern. Experts have warned that any disruption to Taiwan's chip supply could paralyze production of key equipment, impacting almost everyone in the world.

The island has been facing growing military aggression from China in recent months. In response, Taiwan has stepped up its own military training, and committed a record amount of defense spending this year.

The advanced chips Taiwan makes are an indispensable part of everything from smartphones to washing machines.

If conflict were to happen on the Taiwan Strait, "it will be disastrous not only for Taiwan, not only for China, but also for the US, EU, and everyone else," said Roy Lee, a deputy executive director at Taiwan's Chung-hua Institution for Economic Research.

The chaos in global automaking triggered by a pandemic-related shortage of chips over the past year gives a sense of just how bad it could get.

"With the auto shortage, now you have to wait for six months for European made cars," he added. "If Taiwan stopped supplying chips for other products, then probably you have to wait for over 12 months for a new mobile phone, or even longer for a laptop."

Taiwan's 'sacred mountain'

One Taiwanese company in particular — Taiwan Semiconductor Manufacturing Company (TSMC) — is the world's largest contract manufacturer of chips and plays a critical role in powering products designed by tech companies like Apple, Qualcomm and Nvidia.

With a market cap of nearly $500 billion, TSMC is one of Asia's most valuable companies, and accounts for 90% of the world's super-advanced chips, Reuters said in a recent report citing industry estimates.

The firm — widely dubbed in Taiwan as its "sacred mountain" — is so important to the island that its employees can apply to be exempted from military reservist training — even if they are called upon, the defense ministry has said.

The company did not respond to a request for comment by CNN Business.

Super-advanced semiconductor chips — like the ones produced by TSMC — are difficult to make because of the high cost of development and the level of knowledge required, meaning much of the production is concentrated in just a handful of suppliers.

The global semiconductor industry has already been under pressure because of a growing supply shortage, with many technology companies reporting delays in securing chips for their production activities. This makes Taiwan even more important, especially as the United States and China engage in a bitter rivalry over developing advanced technologies of the future, such as artificial intelligence and 5G.

If Taiwan were to fall to the Communist authorities in Beijing, Western nations could potentially lose access to the island's valuable semiconductor chips.

Growing concerns

Russia's invasion of Ukraine has heightened concerns about the risk that China could increase its military force against Taiwan. The Communist leadership in Beijing has long claimed the island as part of its territory, despite having never ruled over it.

In recent months, China has stepped up its military pressure on Taiwan, including sending a record number of warplanes near it last October. Chinese President Xi Jinping has refused to rule out the use of force to achieve what he called "national reunification."

But as comparisons are being drawn between Kyiv and Taipei, the Taiwanese government has repeatedly emphasized the strategic role of its semiconductor industry.

"Taiwan and Ukraine are fundamentally different in geopolitics, geography and the importance to international supply chains," President Tsai Ing-wen said as she condemned Russia's invasion of Ukraine last month.

Last month, Taiwan announced it had begun imposing economic sanctions against Russia. Authorities said major Taiwanese chipmakers, which account for more than half of the world's output of semiconductor chips, have all pledged to comply with the move.

When asked about the differences between Taiwan and Ukraine, J. Michael Cole, a Taipei-based senior fellow with Global Taiwan Institute said that the island's indispensable role in global supply chains, "changes how countries — the international community — will calculate their response to the threat of, or the invasion against Taiwan."

China's Taiwan Affairs Office did not respond to a request for comment.

Challenges ahead

While Taiwan's role as a leading semiconductor hub may be indispensable to the world right now, experts believe there are challenges for the island to keep up its advantage.

The global supply shortage of chips has already prompted many countries to take steps to break their dependency on Taiwan.

Last week, the US Senate passed a $52 billion plan to invest in the research, design and manufacturing of semiconductor chips in the United States.

China's largest chip maker Semiconductor Manufacturing International Corp (SMIC) has pledged to invest $5 billion in extra capacity this year.

"Right now, China, US and the European Union are all pursuing the so-called next generation semiconductor technologies," Lee said.

"We understand the challenges are coming, and we need to keep our leadership in semiconductors through research and development, and most importantly, cultivating qualified talents that support Taiwan's success," he added.

In response to the challenges, Taiwan recently committed $300 million to chip-focused graduate programs to train the next generation of semiconductor engineers. Last month, it also passed new legislation that requires those working in key tech roles to seek permission from authorities before visiting mainland China.

As discussions about the future of Taiwan grow, Lee believes the best way to keep the island safe is via powering a combination of military and economic strength.

"That strength comes not only from military strength, but also economic strength."

— Will Ripley and Wayne Chang contributed reporting from Taipei, Taiwan.