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Two Words, Three Countries

Written for the Open Section.


This article gives us a brief glimpse into TMSC and AI. Read on to learn more.

It may not always be enjoyable to learn about the laws motion or gravity which have been proven and established with scientific prowess and mathematical precision, but it is veritably fascinating to observe ‘laws’ divorced with the sciences which appear accurate. One of them is Murphy’s laws – ‘Anything that can go wrong, will go wrong’; basically, the law of bad luck. Another such law is Moore’s law that laid down, in 1965, that the number of transistors on a chip will double every two years at minimal cost. Resultantly the chips would decrease in size progressively. 60 years from its postulation, the law remains true; although it is believed that the law may be exhausted someday and even Moore himself has admitted that. You may wish to thank Moore’s law for enabling you to read this article on your electronic device (give engineers some credit too).

 

Taiwan Semiconductor Manufacturing Company (TSMC)

While we are talking about chips, an industry closely yoked and undetachable from chips is the semiconductor industry; and while we are talking about semiconductors, the company leading the global market with a share of 60-65% in semiconductor chips and 90% in the most advanced chips – TSMC – must be talked about.


It must be noted that Nvidia is the leading company when it comes to GPUs but even, they manufacture their chips through TSMC. To understand this, the idea behind TSMC is worth knowing. TSMC was set up by Morris Chang who had initially fled from China. He worked at Texas Instruments for a while soon to realise that it was extremely difficult to make chips. He had the epiphany that manufacturing and assembling chips required effort, capital and adequate infrastructure and this job should be sourced out by chip manufacturing industry to companies which specialise in just that. Texas Instruments was not yet prepared to accept the revolutionary idea and thus Mr. Chang went back to Taiwan which accepted his concern as relevant. He then built the successful business that is TSMC today.[1] 


It is tacit that chips are entrenched into machines, devices and our daily lives (figuratively) and thus, TSMC is arguably the world’s ‘most important company’. In fact, the Taiwanese media calls it the ‘sacred mountain’ protecting Taiwan from China! (China cannot use force since it would destroy TSMC’s laboratories as pointed out by Mark Liu, Chair of TSMC).[2] It is certainly impossible to adequately state the importance of chips in today’s world which is heading towards AI-driven…virtually everything? Imagine: one single company at the centre of the massive appetite the world has for chips in a place only 12 nations in the world recognise as a ‘country’ in the context of the China-Taiwan conflict. It is precarious (to say the least).

 

The Threat of China-Taiwan conflict: It Is Bigger Than You Might Imagine!

The basis of China-Taiwan conflict is…you guessed right…China viewing Taiwan as a breakaway province which would eventually be under China’s control, while Taiwan completely disagreeing with that stance. Certain polls have shown that more people now identify as ‘Taiwanese’ as compared to ‘Chinese’.[3] China has, on the other hand, explicitly stated that it is working on “reunification” and is not averse to using physical force to achieve the same. It is tacit that China’s military capabilities are significantly advanced than Taiwan. Thus, Taiwan, in the occasion of an invasion/attack will need the help of other countries; especially the USA.


The US has a perplexing stance on this matter – it does not recognise Taiwan as a nation and only considers Beijing government as the Chinese government under its ‘One China Policy’, but still remains stern that it will militarily defend Taiwan in case of an attack by China.


‘Why?’ you might wonder. The centre of it all lies TSMC. Chips are yoked to data and hardly any country trusts China with its data. Few examples are Latham & Watkins cutting their Hong Kong employees off their international data base,[4] companies requiring their employees to use burner phones when travelling to China[5] and most recently, UK politicians being asked to turn on disappearing messages on their phones.[6] Thus, if China invades or controls Taiwan and resultantly TSMC, the contingencies will all scream “data protection risks”. China could do multiple things among which the most probable is cutting USA off chip supply similar to what USA is doing to China now, or worse, provide chips which cannot be trusted. In fact, the more willing China will be to exporting chips, the less trust sceptical nations would place on them.

Therefore, this is the relatively unspoken truth: China-Taiwan conflict and US’ commitment to help Taiwan is more than just about territory and international relations but more about TSMC and chips in the era of AI and technology.

 

US’ Trade Restrictions: Security Threat or Political Threat?

The Biden administration passed two key legislation in 2022, namely – Inflation Reduction Act and the CHIPS and Science Act. Biden reportedly said he wants the new supply chains to start in the USA itself and this is precisely what these legislations aim to achieve since the current state of supply chains is vulnerable to Chinese involvement.[7] The IRA restricts trade with ‘countries of concern’; rather ambiguous, but it is tacit that China is the biggest ‘concern’ for the USA presently.


The export controls on semiconductor chips, especially state-of-the-art Nvidia chips, which are seminal to developing AI, are significantly tight. This is a sector booming in interest and investment and thus, it is believed that such restrictions mark a ‘new era’ in the Sino-American relations which have security scepticism as well as political interests as underlying considerations. Although USA solely yokes ‘security concerns’ as the justification for restrictions on chips, the vigour with which it is trying to prevent China from matching its capabilities in chips and semiconductor industry insinuates consideration of a political threat by China as well.[8] The latter has, for a long time, been predicted to be the next world leader and a highly developed chips and semiconductor sector, in today’s world, is bound to set you on that path.


Manufacturers and suppliers like Nvidia have attempted to find loopholes in the restrictive measures but the government has regularly revised its guidelines to curb exports. In November 2023, the Bureau of Industry and Security published two interim rules: ‘Advanced computing chips interim final rule’ and ‘Expansion of export controls on semiconductor manufacturing items interim final rule’.[9] Nvidia, evading the initial rules, created slower and less efficient H800 and A800 chips to export them to China, but even these are banned now.


The US Department of Commerce has further put Chinese entities involved in development of advanced computing chips to the list of companies engaged in activities contrary to US national security; known as the ‘Entity List’.[10] It does not end here, even tools used to make chips are prevented from reaching the Chinese market.[11] Companies wishing to sell advanced chips or machinery to China need to notify the government of their plans and get the appropriate licence. Moreover, there are mechanisms to prevent US chips reaching China via third countries.[12] 


However at the end of the day, the efficacy of these measures raise doubts. How long can US keep China from this technology? The technology is not even monopolised by the US, it is in fact led by TSMC in Taiwan. To what extent is the technology under US’ control? Charles Liu, senior fellow at the Taihe Institute on the Global Times’ Global Arena program, rightly highlighted – “Ultimately, you can’t stop China from advancing technology. If you don’t sell the chips, the Chinese will do it themselves, they have already demonstrated their ability to do so. We have very smart scientists, engineers, and workers.”[13] China now spends more per year importing chips than oil![14]

 

Latest Updates & Conclusion

Taiwan has been generous with sharing its technology and TSMC is set to establish production in Japan, Germany and has already started building its ‘Fab 21’ in Phoenix, USA.[15] This reduces the threat of concentration of chip manufacturing in Taiwan.


The upcoming US elections are going to be a key factor in determining US’ approach on many issues, but both Trump and Biden have shown similar stance towards trade with China. Trump has indicated an inclination towards increasing the percentage point tariff by 10 for all trading partners and by at least 60% with China![16]


China, meanwhile, has also retaliated by curbing exports of germanium and gallium to USA which are important elements in producing chips. It has also forbidden US citizens, residents and green card holders from working in Chinese chip factories.[17] Despite the restrictions, China has increased its chip production and is expected to increase its capacity by 60% over the next 3 years.

All you and I can do for now is wait till we get a notification on our chip-driven phones on who won the AI race (if that is deduced in sometime in the near future) and wonder if the chip in our next phones would be Taiwanese, American, German, Japanese or indeed, Chinese!

 

Sidenote

A question worth considering is – does US having a TSMC laboratory in its territory make Taiwan vulnerable to Chinese invasion/control? Will the US still have the incentive to militarily support Taiwan in case of a crisis?







References

[1] Matt Bevan, Yasmin Parry, ‘Morris Chang Founded TSMC – The World’s Most Important Company. Now Everyone Wants Control of it’ (19 August 2023).

[2] Jason Hsu, ‘What the World’s Most Important Company Must Do’ (15 December, 2022).

[3] BBC, ‘China and Taiwan: A Really Simple Guide’ (8 January 2024).

[4] Chan Ho-him, Kaye Wiggins, Suzi Ring, ‘Latham & Watkins Cuts Off Its Hong Kong Lawyers From International Databases’ (13 February, 2024).

[5] Ruchi Kumari, ‘Why KPMG, Deloitte Ask Staff To Carry Burner Phones in Hong Kong’ (29 November, 2023).

[6] Lucy Fisher, ‘UK Politicians Should Use ‘Disappearing Messages’ On Devices, Says GCHQ’ (26 March, 2024).

[7] Anshu Siripurapa, Noah Berman, ‘The Contentious U.S.-China Trade Relationship’ (26 September, 2023).

[8] Will Henshall, ‘What To Know About the US Curbs on AI Chip Exports to China’ (17 October, 2023).  

[9] Michael J. Walsh, Alicia Rose, Gabriella Leeman, ‘US Clarifies And Strengthens Restrictions On Semiconductor Exports to China’ (14 November, 2023).

[10] Michelle Toh, Kayla Tausche, ‘US Escalates Tech Battle By Cutting China Off From AI Chips’ (18 October, 2023).

[11] Mariko Oi, ‘US-China Chip War: Beijing Unhappy At Latest Wave of US Restrictions’ (18 October, 2023).

[12] Ana Swanson, ‘US Tightens China’s Access To Advanced Chips For Artificial Intelligence’ (17 October, 2023).

[13] Mauro Ramos, ‘Understanding The Latest US Restrictions On Chip Exports To China’ (4 January, 2024).

[14] Michael Bluhm, ‘Biden’s Hugely Consequential High-Tech Export Ban On China, Explained By An Expert’ (5 November, 2022).

[15] Kathrin Hille, ‘TSMC In The US: Can Taiwan’s Chip Giant Overcome A Culture Clash?’ (5 October, 2023).

[16] Soumaya Keynes, ‘A Second Dose of Trump On Trade Would Differ From The First’ (23 February, 2024).

[17] Michael Bluhm, (n14).

 

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