Chinese Invasion of Taiwan Could Undermine Global Semiconductor Market | Opinion

Semiconductors are foundational to modern life, enabling everything from our phones to the energy grid. But increased offshore demand for semiconductors, accelerated by the COVID-19 pandemic, has resulted in a global shortage—affecting virtually every industry. Some predict that the chip shortage will continue into 2023. On top of an already stressed supply chain, Russia's invasion of Ukraine has led to new concerns for the semiconductor industry, both because Ukraine produces over half of the world's supply of neon gas—which is used in the production of chips—and because of the precedent that it sets for a potential Chinese invasion of Taiwan.

The Russia-Ukraine conflict has caused understandable concern among residents of Taiwan that China may attempt a similar invasion. The effects would be felt around the world. A successful invasion of Taiwan would give China almost total control over the world's semiconductor supply, with disastrous results for the U.S. economy and national security.

While the U.S. is the global leader in semiconductor design, only around 12 percent of chip manufacturing capacity is domestic—the bulk of that capacity is now in Asia. With more companies going "fabless," meaning that they focus only on designing chips and then outsource the manufacturing to large fabrication facilities called foundries, reliance on foreign suppliers has increased. The leading foundry, TSMC in Taiwan, accounts for over 50 percent of the market share of global chip manufacturing, leading some to call TSMC the firm that makes the world's tech run and the world's most important company.

Taiwan semiconductor manufacturer TSMC
This photo taken on March 25, 2021 shows a factory of Taiwanese semiconductors manufacturer TSMC at Central Taiwan Science Park in Taichung. Sam Yeh / AFP/Getty Images

Chinese control over Taiwan's semiconductor manufacturing capacity would therefore have profound, disastrous impacts on global supply. First, Beijing could simply turn off the spigot of supply for its adversaries. We have already seen a preview of what that could look like, when in 2021 Taiwan suffered a severe drought. Chip manufacturing is a water-intensive process, and TSMC, which consumes 156,000 tons of water a day, was forced to truck in water from other parts of the island to continue operations. Over reliance on one company or geographic location raises the danger of a single point of failure in the supply chain.

Another concern is related to the cybersecurity of the components coming out of Chinese-controlled facilities. For example, one report showed that a tiny chip, the size of a grain of rice, was covertly inserted onto server motherboards in Chinese manufacturing facilities, allowing hackers to stealthily access the compromised machines' networks. Malicious circuitry, known as hardware Trojans, can be inserted into semiconductors to alter or degrade their functionality, grant unauthorized access or siphon off sensitive data.

Efforts to onshore domestic semiconductor manufacturing are underway, but moving slowly. The CHIPS for America Act, which calls for $52 billion to strengthen the nation's semiconductor manufacturing posture, was passed as part of the FY 2021 National Defense Authorization Act, but without funding. The U.S. Senate and House of Representatives both passed their own versions of legislation funding the CHIPS provisions, but they must come to a consensus on joint legislation before it can be signed by President Joe Biden.

A newly introduced bill, the FABS Act, would provide additional tax incentives for domestic semiconductor research and manufacturing. With China-Taiwan tensions growing, it is more important than ever that the U.S. strengthen its semiconductor manufacturing capabilities, before global supply falls into the hands of our adversaries.

Zachary A. Collier, Ph.D., is an Assistant Professor of Management at Radford University. He is a member of the INFORMS Advocacy Governance Committee and is a Visiting Scholar at the Center for Hardware and Embedded Systems Security and Trust (CHEST).

The views expressed in this article are the writer's own.