The ‘silicon shield’ dilemma

Nam Jeong-ho
The author is a columnist of the JoongAng Ilbo.

Tensions have escalated around the Taiwan Strait after the visit on Aug. 2 to Taipei by U.S. House Speaker Nancy Pelosi enraged China. Beijing carried out full-scale military drills with multiple missile fires as soon as she left the country. But most security analysts did not think that Beijing could start a real war — not just because of the consequential face-off with the U.S., but because of the significance of Taiwan’s semiconductor industry.

The so-called “silicon shield” Taiwan has earned since the late 2000 is the strongest protection for the country against territorial claims and aggression by Beijing, as Taiwan is home to TSMC, which makes most of the advanced chips for global tech companies.

The reasoning behind the theory is that China cannot attack Taiwan due to its strong reliance on TSMC. The U.S. also cannot but interfere, as the country cannot do without chips produced from Taiwan. Taiwanese chipmakers fill 64 percent of global foundry orders. TSMC alone takes 54 percent of the orders. The Taiwanese foundry leader supplies more than 90 percent of advanced chips that go into American and Chinese products.

No global powers can attack — or condone the destruction of — production facilities that directly impact their national interests. When Iraq invaded Kuwait in 1990, the U.S. immediately launched military operations due to the oil riches in the Middle East country. The New York Times predicted that Joe Biden’s administration would not just sit back if China attacks Taiwan, even though the U.S. did not directly get involved in the Ukraine war. Morris Chang, founder of TSMC, defined the company as a “sacred mountain” protecting Taiwan from China. When Taiwan became vulnerable to Chinese attacks from Pelosi’s trip, he threatened to pull the plug on chip factories that had never stopped running for the last 30 years.

Chips are a security pillar for Taiwan. While Taiwan dominates the foundry market, South Korea commands the memory chip sector. In 2020, Korean memory giants made 56.9 percent of chips in the global market, more than double the 28.6 percent of No. 2 Intel.

Samsung Electronics announced a $192.1 plan to build 11 chip factories in the state of Texas over the next 20 years. SK hynix, Korea’s No. 2 memory chipmaker, plans to build a cutting-edge packaging factory in the U.S. with a $22 billion investment. Korea may be yielding one of its key economic — and security — pillars to America.

Strangely, there are no protests at home against the movement. Although thousands of jobs could be lost to the U.S., the general opinion is that the expansion in the U.S. is inevitable to maintain the chip alliance with the U.S., Japan, and Taiwan. For the Korean companies, it made better sense as U.S. subsidies for capex, and tax incentives are deemed more attractive than in Korea.

But joining the U.S.-led chip alliance against China’s rise and moving its next-gen chip base to America are entirely different issues. Korean companies can cooperate with overseas partners even while they are based in Korea. Despite U.S. incentives, labor and construction cost in America are much greater.

In April, Morris Chang said that chip producing cost in the U.S. is 50 percent higher than the cost for Taiwan due to high labor costs. He confessed that TSMC nevertheless was building a $12 billion foundry in the state of Arizona under U.S. pressure.

The CHIPS and Science Act, which recently passed the U.S. Congress and was signed by Biden, is highly restrictive. If foreign companies are awarded with U.S. subsidies and tax incentives for their new investments in America, they cannot invest in China for 10 years.

Simply put, Samsung Electronics and SK hynix,which made huge investments in China, will not be able to build advanced chip lines in the country.

U.S. President Joe Biden meets virtually with a delegation from SK Group led by Chairman Chey Tae-won, to talk about SK’s plans for $22 billion in new investments in America in semiconductors, green energy and bioscience projects, from the Roosevelt Room at the White House, July 26. [REUTERS/YONHAP]

Restoring bilateral ties with America after five years of damaged relations during the Moon Jae-in administration is important. But even among allies, cooperative terms must be mutually benefiting. If the playing field continues to be titled, players inevitably will complain of unfair rules.