Why we should care about Taiwan

It is no secret that China wants to reunify with Taiwan. Yang Jiechi, the top foreign policy aide for Chinese President Xi Jingping, has said as much. They have a name for it, the “One China” policy, and have deemed this objective (reunifying with Taiwan) unnegotiable.

Given Biden’s recent performance in Afghanistan and his unapologetic role in the elevation of a terrorist organization to a national power as well as his recent speech stating that the US is no longer in the business of nation building, I have diminished hopes that Taiwan will remain free of China’s ambitions. Here is why the world economy has to worry and here’s why I know about this.

Before I wrote a regular column for this paper, well before, I analyzed public equities in the semiconductor and semiconductor manufacturing industries. My job was to stay current on everything I could know about on companies like Applied Materials. ASM Lithography, KLA-Tencor. I also covered companies like Taiwan Semiconductor Manufacturing, United Microelectronics (UMC), and Semiconductor Manufacturing International, the first high profile mainland Chinese foundry. I was one of the analysts on the initial public offering of SMIC. In short, I have followed the semiconductor industry for a long time. I’ve visited their factories, befriended their executives. The semiconductor industry is at stake as a result of the geopolitical threats that now exist.

The first transistor was invented in a room in AT&T’s Bell Labs in New Jersey in 1947. The transistor quickly became the integrated circuit (more transistors, more complexity). It quickly found footing in California in the 1950 with Shockley Semiconductor and Fairchild Semiconductor. Those were the decades when California’s political environment favored manufacturing. These devices are the intelligence behind every technical piece of hardware you, dear reader, are currently touching right now. Even software is written to ultimately give instruction to semiconductors. The semiconductor industry is one of the most significant industries to have come out of the twentieth century. It was decidedly an American industry, invented in America, grown in America.

In the 1990s, a new business model emerged in the semiconductor industry, the foundry/fabless model. As manufacturing became more prohibitive in California (due to onerous regulations), companies with creative/technical brainpower still conceived of and designed the chip in the United States. They just manufactured elsewhere. The go-to partner for a designer of chips is Taiwan Semiconductor Manufacturing. Most of TSMC’s profits, however, are made through the division that makes advanced photomasks. Photomasks are the plates that hold the layer by layer design of a semiconductor at the lithographic step. Photomasks are made and revised and made again in an expensive iterative process until a final semiconductor design can be converted into the millions of little devices that go into the electronics that we all use.

If China takes over Taiwan, this process of semiconductor design and manufacturing will be disrupted. Designs of advanced semiconductor chips will reside in code or physical mask sets at the hands of a Chinese-occupied Taiwan. This will cost progress in the entire electronics industry. It may put manufacturing at a stand-still and cause unforeseen disruptions in products dependent on the semiconductor industry. It will be like a pandemic but for the technology industry.

So, don’t just be afraid that China’s desire for Taiwan will impair Philippine sovereignty, it will also give them string-pulling power over one of the world’s most important industries.

Yikes.

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