How Taiwan became the indispensable economy
Fearing a potential conflict in Asia, Western companies are looking to move production out of Taiwan. But severing ties with the self-ruled island will come at a high price for manufacturers.
LAULY LI and CHENG TING-FANG
MAY 31, 2023
In the days after then-U.S. House Speaker Nancy Pelosi visited Taiwan last year, Taiwanese suppliers to U.S. tech giants including Apple, Google, Meta and Amazon were inundated with requests from their customers. Could they produce from outside Taiwan to secure supplies, in case Beijing went to war over the island?
Pelosi’s visit had sparked more than a diplomatic spat between Washington and Beijing, which responded to her trip with unprecedented military exercises around Taiwan. It triggered a tech industry crisis, which might now threaten the global electronics supply chain.
“If anyone hits Taiwan, or there is a serious disruption … the tech and electronics industry worldwide is basically screwed,” said Hsieh Yong-fen, founder of chip and material testing provider MA-tek.
Apple declined to comment. Meta, Google and Amazon did not respond to requests for comment.
Taiwan is best known for making cutting-edge semiconductors. But its companies also turn out other crucial components from printed circuit boards to advanced camera lenses, and they run huge device assembly operations in China.
This has created a triangle of critical interdependence between Taiwan, China and the U.S. that has deepened even as tensions between Beijing, Washington and Taipei have risen.
To understand why, take a look inside the ubiquitous iPhone.
It is one of the most successful consumer devices of all time: 2.4 billion units sold since launch in 2007, racking up over $1 trillion in revenue for Apple in 15 years.
Its success rests on a sprawling Asian supply chain producing chips, displays, speakers and more on an almost unimaginable scale. At its heart lie both mainland China and Taiwan.
The iPhone’s components reveal just how tightly bound the supply chains of the U.S., China and Taiwan have become. Each iPhone needs some 1,500 components.
Nearly 70% of Apple’s top suppliers, making everything from processors to casings, are headquartered in either China (26%), Taiwan (23%) or the U.S. (18%). Japan (17%) and South Korea (7%) round out the top five.
The most valuable components — including core processors, 5G modems, Wi-Fi chips and premium camera lenses — are made in Taiwan by Taiwanese companies. All told, the island’s suppliers account for nearly $200, or 36%, of the total materials bill for each iPhone.
These chips, however, are designed by Apple, or other U.S., Japanese or European chip developers, such as Qualcomm, Sony and Bosch. High performance materials are also provided by American makers, such as display glass from Corning and adhesive from 3M.
Chinese suppliers are concentrated in less technologically demanding areas, like product assembly and mechanical parts. The number of China-based suppliers has overtaken all other countries and regions to become the largest supplying source by number of companies over the past few years. They have also started to move up the supply chain.
China’s Luxshare Precision Industry, originally a component supplier to Apple, started to build iPhones in 2021. Its display champion, BOE Technology Group, now makes some of the advanced OLED screens for iPhones, previously the exclusive domains of South Korean manufacturers. Chinese camera lens maker Sunny Optical Technology appeared for the first time in the 2023 supplier list, eating into a market that formerly belonged only to Taiwanese players.
China is also where 95% of all iPhones are assembled, a figure that has changed little since its launch. The country is a major market for Apple, too, providing around a fifth of its total annual revenue.
Complicating the picture is the fact that many Taiwanese and U.S. suppliers serve Apple from hundreds of facilities in mainland China.
Without any of these components, an iPhone would not be an iPhone. But a formula that has worked for a decade and a half is being put to the test as geopolitical tensions rewrite the rules of tech manufacturing.
G7 leaders meeting in Japan this month vowed to “reduce excessive dependencies in our critical supply chains. Washington is determined to claw back advanced chip production from Asia, while Beijing is racing to establish its own tech supremacy. Taiwan is caught in the middle of this contest.
Made in America
In early December, standing under the blinding Arizona sun, Apple CEO Tim Cook took the stage with U.S. President Joe Biden to celebrate a milestone: Taiwan Semiconductor Manufacturing Co. was moving equipment into its new $40 billion chip plant in Phoenix — the Taiwanese contract chipmaker’s first plant in the U.S. in more than 20 years.
“This is an incredibly significant moment. It’s the chance for the United States to usher in a new era in advanced manufacturing,” Cook told the crowd of assembled politicians and tech industry heavyweights. TSMC, the world’s biggest contract chipmaker, plans to make some of its most advanced semiconductors on U.S. soil starting next year.
And as one of the plant’s first customers, Apple will be able to stamp “Made in America” on its core chips for the first time ever.
Left unsaid was that advanced semiconductors like these are only a small part of the electronics supply chain. A single smartphone requires a wide range of chips, including a host of less advanced “companion chips,” over 1,500 components in all — not to mention final assembly, all of which are concentrated in Asia, particularly China and Taiwan.
In one indication of the nervousness, a top U.S. Air Force general recently predicted America and China are likely to go to war over Taiwan in 2025.
“Two years ago due to Trump’s trade war, customers told us they wanted ‘out of China’ production options, so we decided to enlarge manufacturing capacity in Taiwan, our home base,” said an executive with Unimicron Technology, a printed circuit board maker supplying to Apple, Intel and others.
Then, as the company was in the midst of a multibillion-dollar expansion in Taiwan, Pelosi visited Taipei last August. An infuriated Beijing, which considers the island part of its territory, responded by conducting live military drills off Taiwan’s coast — and Unimicron’s clients grew nervous.
“Our customers then said they wanted some production alternatives that are outside of China and also out of Taiwan over fears of a war,” the executive said. “We were stunned and speechless, and so were a lot of our peers. … How can the supply chain be moved out of China and Taiwan? The majority of electronics supply chains are here.”
Since the middle of last year, Intel, AMD, Nvidia, Meta, Google and Amazon have all requested additional production capacity outside of China and Taiwan, several tech executives told Nikkei Asia. HP and Dell — the world’s second and third biggest makers of notebook computers — told their suppliers specifically to start building capacity in Southeast Asia. Dell even aims to phase out made-in-China chips by 2024.
“We have a business contingency plan — the so-called BCP — to prepare for supply chain disruptions, such as a war,” an executive at chip testing equipment maker Advantest of Japan told Nikkei Asia. “But if a military conflict really happens here in the Taiwan Strait, honestly, I think any BCP will be totally useless. It would be doomsday for the chip supply chain, and no one ever wants to imagine that happening.”
AMD said it worked continuously with suppliers to improve business continuity plans, including the “important” goal of geographical diversification. Intel said it had consistently supported its suppliers’ “long standing”efforts toward diversification, which were not related to Pelosi’s Taiwan visit. Nvidia declined to comment.
Dell has said previously that it continuously explores supply chain diversification across the globe. HP has said it has a robust global supply chain.
Even without a full-scale war, disruption from, say, a Chinese blockade of Taiwan could cause serious global turmoil. According to a Semiconductor Industry Association estimate, a disruption in the production of logic chips at contract chipmakers in Taiwan could cause nearly $500 billion in lost revenues for electronic device manufacturers that depend on this supply. A recent estimate by Rhodium Group said a Taiwan conflict would put well over $2 trillion of economic activity at risk.
“People underestimate Taiwan’s position in the supply chain. It’s much more than just about semiconductors. We have a very complete supply chain from chips, components, PCBs [printed circuit boards], casings, lenses to assembly … anything you can think of,” a senior executive at Compal Electronics, a vital product assembler to Dell, HP and Apple said. “If there’s military friction happening to Taiwan, the entire global supply chain will collapse for sure.”
Such a scenario, in other words, would leave Apple with “Made in America” chips and no devices to put them in.
The threat of conflict
At first, fears over a possible conflict came largely from Western clients. But now even Taiwanese companies are getting nervous about developments across the strait.
Beijing concluded another round of military exercises on April 10, encircling Taiwan in protest against Taiwanese President Tsai Ing-wen’s meeting with U.S. House Speaker Kevin McCarthy in California. The three-day drill included 91 incursions in a day.
“We grew in tandem with China’s reform and opening-up in the past several decades, but now the good old days are over. It’s becoming obvious that Beijing puts politics over economic growth,” said an executive at an Apple supplier whose facilities in China employ hundreds of thousands of workers. “Our strategy is to lay low, to accelerate production shifts [to Southeast Asia and India], and divest our money gradually from China in the next few years.”
“Gradually” is the operative word for many companies looking to diversify their supply chains, whether they want it to be or not.
“It takes at least three years in some countries and even five years [in others] to build a semiconductor plant from start to finish, and then it needs to start operation,” said Benjamin Hein, an executive for China and Southeast Asia at Germany’s Merck, a chemical and material group. “Sometimes there are some misunderstandings that this [supply chain shift] could happen overnight because of some geopolitical issue, [but] it could take us at least five years, and even more than 10 years, to see some more fundamental shift.”
Washington is attempting to speed the process along, with a focus on chips. It is offering incentives to encourage companies like TSMC and Samsung of South Korea to help build up America’s semiconductor industry.
TSMC’s plant in Arizona, which will make ultra-advanced 3-nanometer chips that can be used in supercomputers, smartphones, cars, fighter jets and military equipment, is seen as one of the crowning achievements of this push.
If all currently planned investments go through, from both foreign and domestic players, the U.S. will be making 26% of the world’s advanced chips by 2027, up from 10% currently, according to a Counterpoint projection. Taiwan’s share would slip from 54% to 45% over that same period.
When it comes to technology specifically, the three economies are locked together even more tightly.
This is most obvious in advanced microchips. TSMC and its smaller Taiwanese peers control two-thirds of the world’s market for contract chipmaking, turning the semiconductor designs of Apple, Google and others into physical chips. As global leaders in cutting-edge chip technology, their output is indispensable for the production of everything from Chinese smartphones to American fighter jets.
Taiwan is also the leader in the humbler parts of the tech supply chain. One overlooked element is chip packaging and testing – the last station of semiconductor manufacturing – where Taiwan controls 30% of the global market. Another example is printed circuit boards, the basic material onto which chips are mounted. The island makes just under a third of the world’s supply, much of which is shipped to assemblers in China for final production.
Apple’s “Made in America” chips, mounted on Taiwanese-made printed circuit boards, may well find their way to China before ending up in a smartphone or laptop bound for the U.S.
Even where U.S. companies appear to be making progress in reducing their reliance on China, the situation is less than straightforward.
Apple, for example, has spent years urging its suppliers to build capacity outside of China and has at least some alternative production capacity for all of its main product lines in countries such as India and Vietnam.
But more than 80% of Apple’s top 188 suppliers still have at least one facility serving the company in China, according to a Nikkei Asia-FT analysis of the latest annual list published by Apple in 2023. Many key suppliers, including 3M, On Semiconductor, Foxconn and Luxshare, have three or more production sites in the country.
Number of Apple suppliers in China and Taiwan
Of the 188 suppliers Apple disclosed in 2023, 151 (more than 80 per cent) had production facilities in China, while 41 had facilities in Taiwan (21.8 per cent). In the latest Apple contractor list, facilities in China making parts or producing products for the company increased to a total of 276 from 251 the previous year.
In total, there are more than 270 manufacturing facilities making components or providing manufacturing services to Apple in China, still the largest supply chain hub. In Taiwan, more than 70 sites are serving Apple, mainly making various chips, high-end chip substrates, printed circuit boards and premium camera lenses, as well as providing chip packaging and testing services.
Apple spent more than a decade building the world’s most sophisticated tech supply chain, trading security and resilience for efficiency and low costs. Plenty of other global companies followed suit, putting China and Taiwan at the heart of their manufacturing strategy.
Now that the time has come to rethink this approach, suppliers and their clients are grappling with the complexity and cost of the task before them.
Suppliers who have met with Apple’s procurement team say they have been asked to do the impossible: come up with a way to make parts in other countries at the same price as in China or Taiwan.
“We’re often very puzzled after wrapping up those meetings. We really want to escape them,” an executive close to Foxconn said. “Apple wants the price of components to go into their Indian assembled iPhones to be the same as in China … but how is that going to be possible? You’ll need to hire new people, you may need to build a new factory, or at least ship components from abroad. And then you’ll have additional logistics costs.”
Decoupling from China will not be cheap, but severing ties with Taiwan will come at an even higher price. Will anyone be prepared to pay for it?