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Taiwan’s chipmakers need to make most of dominance

Government should bolster local supply chain weaknesses and do deals for US investment

A manufacturing process at TSMC foundry. (TSMC photo)

A manufacturing process at TSMC foundry. (TSMC photo)

TAIPEI (Taiwan News) — Taiwan must leverage its chipmaking dominance, and in return for setting up foundries in the U.S., there should be key tech investment in Taiwan, industry analysts based in Taiwan say.

Given that Taiwan Semiconductor Manufacturing Company (TSMC) is setting up a 5 nm process foundry in Arizona, they suggest that Taiwan companies make the most of the opportunity but keep advanced manufacturing technology such as 2 nm and 3 nm chipmaking in Taiwan.

This means Taiwan’s leading chipmakers should take advantage of overseas expansion by cooperating with key U.S. companies in emerging fields such as artificial intelligence (AI). The government should also negotiate with the U.S. for more industry-leading companies in fields like IC design to set up factories and R&D centers in Taiwan.

Liu Pei-chen (劉佩真), a researcher at the Taiwan Institute of Economic Research (台灣經濟研究院), said semiconductor production has over the past decade created a China-based “red supply chain.” The U.S., she believes, needs to break this status quo and regain its previous dominance.

To achieve this, the U.S. will need to work with allies and bolster the non-China supply chain, bringing high-added-value chipmaking production facilities back to the U.S. by asking key companies to invest and set up fabs.Taiwan’s chipmakers need to make most of dominance
The US aims to build a resilient semiconductor supply chain. (Getty Images)

The U.S. dominated the chip manufacturing industry until the late 1980s, when it sought advantages in cost and efficiency in Asia. Taiwan, with affordable labor, policy incentives, and geographical advantages, seized the chance to ensure semiconductor manufacturing took root.

Nowadays, the U.S. accounts for just 12% of the production value of global chipmaking, dropping from 37% within two decades. By contrast, Taiwan has incubated a comprehensive semiconductor industry cluster and now ranks top in both chipmaking, assembly, and testing.

“Taiwan’s companies have been one of the relocation targets as they account for 78% of the global chipmaking market share and take up to 92% of the advanced manufacturing process under 10 nm,” Liu said. She added the fact that wafer fabrication is highly concentrated in Taiwan means there would be a risk of global supply chain malfunction if the island nation had any serious problems.

After many years of asking, TSMC eventually relented and decided to set up a factory in Arizona in May 2020. The decision was not only made due to geopolitical pressure from the U.S. but was also a response to competitor Samsung’s NT$477 billion (US$17 billion) investment plan in the U.S.Taiwan’s chipmakers need to make most of dominance
TSMC applied for more than 1,000 patents during a six-month period. (Facebook, TSMC photo).

Liu Pei-chen said the U.S. does not share the same cost advantages as Taiwan. However, she is bullish about TSMC’s overseas expansion plan, saying Arizona will provide considerable incentives to meet the cost gap.

She added, “The overseas investment could provide opportunities to cooperate with the U.S.’ dominant companies in advanced emerging fields such as AI.”

Wang Jiann-chyuan (王健全), vice president of the Chung-Hua Institution for Economic Research, said the U.S. leads the upstream semiconductor industry with IC design. TSMC's overseas investment provides the opportunity to cooperate with top players like Qualcomm and receive more orders, he said.

He also underlined the fact that Taiwan's tier-2 and tier-3 semiconductor makers can benefit from a restructuring of the supply chain. There are still markets for 6-inch, 8-inch, and 12-inch wafers, he added.

Despite the benefits of setting up foundries abroad, some analysts worry about tech leaks. However, both Liu and Wang believe TSMC can respond by taking measures to protect its intellectual property, with sole proprietorship planned for the fab in Arizona.

Although TSMC is likely to maintain its advantages due to much of its advanced processes and tech remaining in Taiwan, some of its resources will inevitably be dispersed worldwide. Therefore, Liu suggested that Taiwan companies should respond to post-pandemic realities and offshoring pressure with a strategy of "based in Taiwan, eyes on the world."

“The core competitiveness of TSMC is its next-gen 2 nm chip facility in Hsinchu Science Park and the 3 nm process foundry in Southern Taiwan Science Park,” Liu said.Taiwan’s chipmakers need to make most of dominance
TSMC's Fab 18 in Southern Taiwan Science Park, Tainan City. (TSMC photo)

Taiwan’s government should strive for a win-win situation, Liu said. "While Taiwan’s chipmakers are offshore, the authorities ought to negotiate with the U.S. for more semiconductor heavyweights to set up factories and R&D centers in Taiwan, investing upstream and downstream companies to bolster the weakness of local industries in the supply chain.”

Although Taiwan has the largest contract chipmaker, assembly, and test manufacturing companies in the world, a supply chain resilience report released by the U.S. in June reveals that Chinese semiconductor manufacturing is catching up with competitors such as Taiwan and Korea.

In 2020, China replaced Taiwan as the largest semiconductor equipment market in the world, according to Semiconductor Equipment and Materials International (SEMI). This shows China’s ambitions, as it expands its manufacturing capability.

Wang emphasized that the semiconductor industry in Taiwan needs to upgrade in every way rather than just keep a manufacturing advantage. “Taiwan's semiconductor manufacturing equipment should be strengthened, the government should also help semiconductor manufacturers by nurturing their upstream and downstream supplies to build resilience for local industry, as Taiwan still relies heavily on Japan to import various chemicals and materials," Wang said.

Liu strongly agreed and urged the central government to take action and build an even stronger and more resilient supply chain by improving the self-sufficiency rates of chipmaking equipment and semiconductor materials.

“We should expect to take up half of the market share in not only chipmaking, assembly, and testing, but also IC design, memory manufacturing, chemical substances, and materials,” Liu believes.