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Published Date: 2022-09-28
By Kristy Tsun Tzu
Hsu
September 2022
Semiconductors are
critical for industries in the 21st century. They also play a key role in
defining economic competitiveness and national security, the worldwide
shortages of semiconductor chips in the past years resulting from supply chains
disruption and the COVID pandemic demonstrates the challenge to accessing
semiconductors in global markets. As a result, the United States, Europe, and
Japan have made securing semiconductor supplies as part of their national security
strategy.
The United States
has long felt the side effects of offshoring critical industries to Asia. Since
President Barack Obama’s Reindustrialization Program, both President Donald
Trump and President Joe Biden. continued
to address the supply chains issues while trying to promote manufacturing
industries back to the United States
On February 24,
2021, President Biden signed an Executive Order (E.O. 14017) for a
comprehensive approach to assessing vulnerabilities in, and strengthening the
resilience of, critical supply chains. The Biden administration also took steps
to address supply chain vulnerabilities.1 While the structural weaknesses in
supply chains threatens the U.S. economic and national security, the United
States is nonetheless well-positioned to maintain and strengthen its innovative
leadership and rebuild productive capacity in key sectors and value-chains.
Meanwhile,
President Biden also proposed the Indo Pacific Economic Framework, or IPEF, as
the centerpiece of his economic strategy toward the critical region. The IPEF
consists of four “pillars” of work: (1) fair and resilient trade; (2) supply
chain resilience; (3) infrastructure, clean energy, and decarbonization; and
(4) tax and anti-corruption. The issue of supply chain resilience, both at
domestic and global level, will be reviewed from the Indo Pacific regional
strategic perspective and concrete initiatives and programs are being
discussed.
Taiwan too can
play a key role in the U.S. strategy to reassessing its supply chains. U.S.
initiatives, including IPEEF, the CHIPs and Science Act and other new
initiatives have attracted new investments to reshore industries to the United
States, greater efforts and financial resources are needed to prevent the
current phenomena from becoming short lived. Yet there is a gap between the
U.S. strategy and the business perspectives, with scope for U.S. policy makers
to improve their policy designs to make the semiconductor supply chains more
resilient, stable, and most of all, commercially viable, for U.S. national
interests.
Geographic Specialization and Regionalized
Semiconductor Supply Chains Structure
The semiconductor
industry is technology- and capital- intensive. After more than three decades
of collaboration among countries with their comparative advantages, the global
structure of semiconductor industry today reflects the results of
specialization in various activities in the supply chains. The high degree of
specialization has also led to geographical concentration, making it difficult
for newcomers.
Over 75 percent of
semiconductors in the world are manufactured, or fabricated, in East Asia. The
United States and Europe account for only 13 percent and 8 percent
respectively.2 Guaranteed access to chips, especially advanced semiconductor
chips is becoming a key policy goal when assessing national security and
economic competitiveness to counteract sudden disruptions to supplies.
In the past
decades, typhoon, earthquakes, infrastructure shutdown due to power shortage or
fires at the manufacturing sites, were the major causes for supply disruption.3
While in recent years, escalating geopolitical tensions and governments’
counter-measures, including potential military conflicts, trade sanctions and
stringent export control mechanisms, may threaten supply chains more than
traditional risks.4
Yet an over
simplified approach to examine who needs what in the complicated semiconductor
world overlooks business reality of the trillions dollar supply chains and the
deep interdependence between players in the eco-system. There are different
layers (sub-sectors) of the semiconductor supply chains, including IC design,
materials, equipment and tools, and manufacturing, the latter includes wafer
fabrication, assembly, packaging and testing (APT).5 The United States, Europe
and Japan dominate IC design, materials, equipment and tools, while East Asia,
mainly Taiwan, South Korea and China, take the lion’s share of manufacturing.
In the interdependence relations, IC design houses and Integrated Device Manufacturers
(IDMs)6 in the United States and Europe contract manufacturing to specialized
manufacturers, including fabrications (Fabs), Outsourced Assembly and Test
(OSAT), in East Asia for mass production. On the other hand, East Asia depends
on R&D, IP, equipment and tools provided by the United States and Europe
for their manufacturing activities, they also need Japan and a handful of other
countries to provide critical materials such as photoresist, specialty
chemicals and the materials needed for manufacturing. For example, in the
aftermath of Russian invasion in Ukraine in February 2022, possible supply
disruption of Neon from Ukraine threatens the semiconductor industry.7
Geographical
specialization is key to technological advancement and cost efficiency which
have enabled strong growth of the semiconductor industry for two decades. The
clustering effects also led to over concentration of the supply chains, in
particular the manufacturing activities, in only a few countries. According to
Semiconductor Industry Association (SIA), in 2019, not only more than 75
percent of chips were manufactured in East Asia, more than 82 percent of them
were assembled, packaged and tested in the same region, too. Around three
quarters of semiconductor manufacturing capacity is located in China, Taiwan,
South Korea, and some in Singapore and Malaysia. However, what was regarded as
the most cost effective business models was re-assessed in the aftermath of the
semiconductor shortages since 2020. The overdependence on East Asia becomes a
dangerous sign to national security as geopolitical tension in East Asia
continues to escalate.
Furthermore,
according to SIA, for all of the world’s manufacturing capacity of chips in
nodes below 10 nanometers (10 nm), currently the most advanced technology, 92
percent is located in Taiwan, while 2 percent is located South Korea. Although
only 2 percent of the global capacity is on nodes below 10 nm today, these advanced
chips are widely used and will have the fastest growth. It will impact almost
all strategic technology industries if supply disruption happens.
Figure 1: Sub-sectors of semiconductor industry by
region (2019
Among the
different layers or sub-sectors of manufacturing of semiconductor, the wafer
fabrication (front-end manufacturing) is the most technology- and capital-
intensive, making it very difficult, and expensive, to have new competitors in
the short term. It also requires strong supports from the public and private
sector to share capital expenditure and R&D costs. And while the stage of
APT (back-end manufacturing) requires much less technology and capital
intensity than the wafer fabrication, it nevertheless is still highly
specialized. As fabrication technology improves, advanced packaging and testing
also becomes more technology-intensive.
Another feature is
labor intensity required at the production sites. Taiwanese manufacturers had
been relocating APT capacities to China since the late 1990s to take advantage
of its abundant labor force and low labor cost. Since then, China has emerged
as the world leader with its share in value added in global APT supply rising
to 38 percent, while Taiwan is now ranked second with a share of 33 percent.
Taiwan’s focus is more in advanced packaging.8 Some developing countries are
also participating in the sub-sector, such as Malaysia, Philippines, Thailand
and Vietnam in Southeast Asia. Under the current trends of diversification of
semiconductor supply chains, these countries are competitive in their young
labor force and comparatively lower labour cost than China. When considering
geopolitical tensions in the region, these countries also have lower
geopolitical risks.
The manufacturing
activities, from fabrication to APT, are the United States’ greatest weaknesses
in the whole semiconductor supply chains. In 2019, U.S. share of global
fabrication, and assembly, packaging and testing was 12 percent and 2 percent
respectively. SIA estimates that the country will need to invest an extra total
of $350 to $420 billion in manufacturing capacity in order to establish the
complete semiconductor supply chains in the United States and may be able to
reach the goal of self-sufficiency.
State of Play of in Taiwan’s Semiconductor
Industry
Taiwan started
developing its chip sector in late 1970s, when the government tried to promote
a transformation of vertical integration of its consumer electronics
manufacturing activities so semiconductors could be domestically sourced. The
goal was to localize manufacturing of semiconductors and the equipment and
devices needed in order to support its consumer electronics industry, with the
semiconductor industry in Taiwan becoming a catalyzer to boost electronics
industries, instrumental to Taiwan’s leadership positions in Information,
Communication and Technology (ICT) and electronics industries. Concentrating on
contract manufacturing, or Original Equipment Manufacturing (OEM) and Original
Design Manufacturing (ODM) for international brand clients, Taiwan has been the
world’s largest manufacturer of smartphones, laptop computers, printed circuit
boards, data center servers, and dozens of other products.
The similar ODM
mode was applied when Taiwan started its semiconductor industry. Taiwan
Semiconductor Manufacturing Company Limited (TSMC), the most important and
largest fabrication in Taiwan and in the world, and other fabrications in
Taiwan, adopted the contract manufacturing model to provide manufacturing
services (“foundry”) for the United States and Japanese semiconductor companies
without semiconductor fabrication factories (fabless). Contract manufacturing
allowed the fabless companies concentrate on research and design. Gradually,
Integrated Device Manufacturers (IDMs)9 including Intel and Micron in the
United States, Japan and Europe also began to rely on Taiwan contract
manufacturers for a portion of their manufacturing needs. This business model
has become the backbone of semiconductor manufacturing in Taiwan. It has also
helped develop IC design and back-end (or downstream) manufacturing of APT in
Taiwan.
Table 1: Major Sub-sectors/Layers of Semiconductor
Industry in Taiwan (2021e)
Given its small
domestic market, the industry has targeted international markets since the
beginning. In 1990s and 2000s, Japan, the United States and Europe together
represented around 40 percent of the export market, while since 2000s, exports
to China and Southeast Asia quickly picked up, indicating a shift of the
semiconductor supply chains moving towards Asia.
According to the
Industrial Technology Research Institute (ITRI) of Taiwan, as of 2021, the
United States was Taiwan’s largest client, accounting for 40 percent of total
revenue, followed by China, accounting for 28 percent. By sub-sectors, China
accounted for more than 50 percent of Taiwan’s IC design revenue, while the
United States was the largest client for both wafer fabrication and APT. The
share was 54 percent and 50 percent respectively.10 These figures suggest that
Taiwan has developed separate and different business relations with the United
States and China, its two largest clients. Taiwan serves for IC design firms
and IDMs in the United States by providing manufacturing capacity, while
provides IC design and contract manufacturing to Chinese clients for matured or
commodity chips and commercial end-use applications. These clearly defined
separation systems allow TSMC and other leading companies in the semiconductor
supply chains continue to be their U.S. clients’ trusted partners and
suppliers.
The key to the
success of Taiwan’s semiconductor industry is the ability to manufacture
efficiently and cost-effectively with the highest quality/yields in the world.
According to TSMC, Taiwan has developed a dynamic ecosystem that provides
infrastructure, know-how, human talents, and close relations with both Western
and Asian clients. Most of all, Taiwan is also home to the ICT and electronics
manufacturing activities, where products embedded with the semiconductors are
assembled and shipped to international market. This unique model of vertical
integration of semiconductors and applied industries is the back bone to
Taiwan’s dominant position in both the semiconductor and electronics supply
chains.
East Asia is
currently the largest integrated manufacturing hub for electronic devices,
together manufacturing more than 60 percent of the global supply of consumer
electronics, smartphones, and PCs. The clustering effects increase benefits of
geographical proximity of the hub to Taiwan –as well as within Taiwan- in
shipping components to be assembled into devices. However, to mitigate risks of
geographical concentration, the ICT and electronics supply chains are also
facing pressing needs for diversification.
The Taiwanese
government too has key role in guiding and managing the development of Taiwan’s
core technology in the semiconductor industry in the past 2 decades. As a
result, despite close business ties across the Taiwan Strait, Taiwan’s
semiconductor industry continues to keep its manufacturing facilities and
R&D functions at home. As of 2021, nearly 95 percent of Taiwan’s
manufacturing capacity is located in the island. Only 3.5 percent of capacity
is placed in China and 1.7 percent in other regions. This is partly attributed
by a very stringent outbound investment screening mechanism adopted for China.
Currently only 200 mm (8 inch) and 300 mm (12 inch) wafer fabrications are
allowed for investments in China, meaning all investments of advanced
manufacturing in China are prohibited.11 Furthermore, for national security and
the need to maintain competitiveness, Taiwan recently passed amended National
Security Law to create a new clause to regulate act of economic espionage,
particular the adversary force in China, Hong Kong and Macao.
The United States Needs a Longer Term Supply
Chains Strategy
To respond to U.S.
government’s call to increase self- sufficiency of strategic products and to
benefit from a series of U.S. investment incentives, the semiconductor industry
has recently announced approximate $80 billion new investments in the United
States during 2021 through 2025, according to SIA. These investments will not
only create tens of thousands of good paying jobs in the United States, but
will also secure U.S. role in the global semiconductor supply chains.12
In 2021, the
global semiconductor market reached $430 billion, and is estimated to increase
to $772.03 billion by 2030 at a compound annual growth rate (CAGR) of 6.6
percent from 2021 to 2030.13
Since Congress
passed the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for
America Act in January 2021, foreign corporate interest to invest in chips has
expanded as well. TSMC announced a $12 billion project, Samsung will invest $17
billion factory in Texas, and SK Group will develop a R&D center. In
addition, ASML of the Netherlands will spend $200 million to expand its
facility in Wilton, Connecticut. The project aims to support fabrication of
advanced chips in the United States
U.S. companies too
are also getting ready to reshore manufacturing. Intel plans to invest $20
billion facility in Ohio, Texas Instrument will spend $30 billion in Texas,
Cree is planning a $1 billion expansion of its factory in North Carolina, and
Micron plans to expand U.S. production too.14
Investing in new foundries
is critical to enhance long-term resilience of the semiconductor supply chains
in the United States However, shifting or relocating supply chains may reduce
productivity and decrease profitability. It may also lead to overcapacity in
chip making. So while new investments could reduce supply chain bottlenecks,
the White House needs to develop a longer term supply chain strategy that is
flexible and commercially viable.
In fact, Asia is
increasingly worried of a possible slowdown in the semiconductor industry,
including overinvestment in fabrication. A downturn is already being felt in
Taiwan and South Korea, and if global demand continues to weaken, further
worsened by growing inflation in almost all major economies, investors may
reconsider and postpone their investment plans. This will post uncertainty to
the development of supply chains in the United States
Meanwhile, state
subsidies and other government initiatives have their limits. The CHIPS and
Science Act establishes investments and incentives to support U.S.
semiconductor manufacturing, research and development, and supply chain
security. The Act will provide $52 billion to manufacturers in the
semiconductor industry located in the United States and an income tax credit of
25 percent. It will also subsidize semiconductor equipment, materials or other
manufacturing facility investment through 2026.
The SIA estimates
that the $50 billion incentive program would enable the construction of around
19 fabrications in the United States, and that the cost for building an
advanced fabrication in the United States ranges from $10 billion to $20
billion. Considering it would cost at least $10 billion to build the factory in
Taiwan, the cost in the United States may even double or triple, taking into account
the high inflation and difficulty to source necessary materials locally. Thus,
the state subsidies under the CHIPS and Science Act may only partially cover
the investors’ capital expenditures. The U.S. government will need to consider
any other subsequent funds to support continuous investments if the money runs
out. The government will also need to address decades of underinvestment in the
country’s infrastructure, workforce, small businesses and rural economies.
Large companies
such as TSMC may be able to self-fund fab construction through the equity and
debt markets, but small business and startups will need financial support from
the government and private sector.
Workforce
development is another challenge. TSMC has expressed concerns about recruiting
talent including operators, technicians and engineers in the United States. It
should be noted that the corporate culture of Taiwan and South Korea require
full commitment and rigid discipline at the workplace. For instance, most
Taiwan semiconductor companies very often arrange two shifts of workers a day
to fully utilize their manufacturing capacities. Such practices at workplace is
not usual in the United States.
At the same time,
even in an industry that is automated over 99 percent, highly educated staff
are needed to handle the complexity of advanced technology, and a large talent
pool of different education levels. Yet the United States has had a talent
shortfall partly because of decades-long under-investment in university
programs.15 The fight for talents will soon arise if the United States, Japan,
South Korea, and Taiwan fail to well prepare themselves for developing a new
generation of talents in technology industries.
The
Science/Research Act will allocate around a total of US $250 billion in the
R&D and talents development, which will provide a significant boost to US
industry. U.S. educators will need to promote awareness and interests in the
manufacturing activities given U.S. university graduates still tend to focus on
the IC design and startups in the industry rather than working in factories.
Failure to address the challenges of creating sufficient, skilled human talent
in the United States will undermine the highly expected job-creation function
of the semiconductor industry in the country.
A recent survey of
the non-government semiconductor association SEMI of U.S. member companies indicates that more than 5 percent
of engineering positions are presently unfilled. This suggests that that the
U.S. higher education system currently does not supply enough fresh talent to the semiconductor industry.
SEMI estimated that the U.S. microelectronics workforce development (WFD) needs
will more than double as CHIPS Act programs create tens of thousands of new
jobs.16 The need for highly skilled engineers and technicians in the next few
years will be a challenging issue for both the investors and the state
governments hosting the investments.
Taiwan’s Response to U.S. Supply Chains
Resilience Initiatives
Taiwan is a
leading investor in manufacturing industries in East Asia with footprints
across China, Southeast and South Asia. Since U.S. - China trade frictions
escalated in 2017, Taiwan has adopted strategies to mitigate increasing risks
of its investments in China. Taipei has adopted a series of investment
incentives to encourage reshoring back to Taiwan or diversification of
investments away from China. Programs include the “Return to Taiwan” package17
and the New Southbound Policy (NSP) for promoting closed economic ties with
selected Southeast or South Asian countries.18 Taiwanese companies have looked
to relocate or expand facilities in neighboring Asian countries, most notably
Vietnam and India. Some are also considering reshoring to the United States or
nearshoring to Mexico and other Latin American countries. Taiwanese investments
in Vietnam, India, the United States and Mexico have increased considerably
over the past several years.
The 2020 New
Southbound Policy has promoted further business ties between Taiwan and main
Southeast Asian partners, including Vietnam, Thailand, Malaysia, Philippines,
Indonesia and Myanmar, in the aftermath of U.S.-China trade conflicts and
COIVD-19 pandemic. Vietnam, Thailand, Indonesia, and Malaysia have become
particularly attractive for consumer electronics supply chains. Vietnam,
Taiwan’s largest FDI destination in Southeast Asia, has benefitted from
relocation of the Apple supply chains, thanks to increasing Taiwan contract
manufacturers of Apple products investing in north Vietnam. According to the
Taiwan Representative Office in Vietnam, accumulated FDI from Taiwan in Vietnam
amounted to $80 billion to $100 billion, creating 1.5 million jobs in the
emerging Asian factory.
Another reason for
Taiwan’s continuous investments in the region is the accelerating economic
integration in the regional and with global markets, most notably the CPTPP.
Integrated market opportunities and preferential treatments these mega FTAs
provide keep attracting Taiwan investments.
Taiwan’s
investment in the United States showed strong growth momentum. In 2020,
registered Taiwan capital outflows to the United States amounted to $4 billion,
making the United States the second largest destination for Taiwan capital
outflows, only next to China.19 The changing pattern of investment decisions of
Taiwan companies reflects a growing interest in relocating supply chains
directly in the destination markets, bringing potential paradigm shift in
Taiwan-U.S. economic relations.
U.S. technology
companies are also expanding their operations in Taiwan since 2015. Google,
Yahoo, Micron, Applied Materials, Microsoft, Facebook, and Apple have
established data centers, R&D centers, and AI centers in Taiwan. Micron and
Applied Materials also continue to expand manufacturing facilities in Taiwan.
Given US-Taiwan
economic partnership being highlighted by both governments, there is ample
potentials for the two sides to work together on semiconductor supply chains in
the U.S. TSMC’s $12 billion project in Arizona is one such case. In May 2020,
TSMC announced its intention to build an advanced semiconductor fab in Arizona.
The facility will utilize TSMC’s 5 nm technology for semiconductor wafer
fabrication, with a 20,000 semiconductor wafer per month capacity, and create
over 1,600 high-tech professional jobs. Construction started in 2021 with
production expected to begin in early 2024.
TSMC’s total
capital expenditure approximately reached $12 billion from 2021 to 2029. The
reasons for the investment are to better support U.S. customers and partners
and to attract global talents. TSMC also has a fab in Camas, Washington and
design centers in both Austin, Texas and San Jose, California. The Arizona
facility is TSMC’s second manufacturing site in the United States20
What is no less
noteworthy is the recent investment project of GlobalWafers to build a
state-of-the-art 300-millimeter silicon wafer factory in Sherman, Texas.21
GlobalWafers is Taiwan’s largest and world’s third-largest wafer manufacturer
providing wafers as materials for fabrication. According to the company, the
3.2 million-square-foot factory will support around 1,500 jobs with production
volumes reaching 1.2 million wafers per month, estimated to start in early 2025.
The new factory is
the largest advanced silicon wafer manufacturing facility in the United States
over two decades. According to GlobalWafers USA (GWA), the production will
support advanced fabrications in the U.S. GWA’s factory signals the beginning
of 300-millimeter silicon wafer fabrication in the United States, filling
another “gap” of U.S. efforts to develop a complete semiconductor eco-system in
the country.
Meanwhile,
MediaTek, the world’s 2nd largest IC design company based in Taiwan, signed
into an MOU with Purdue University in June 2022. The University’s College of
Engineering will open MediaTek’s first semiconductor chip design center to
research on next-generation computing and communications chip design. In May,
the university also announced the launch of its Semiconductor Degrees Program,
a comprehensive set of innovative, interdisciplinary degrees and credentials in
semiconductors and microelectronics. MediaTek has been working with U.S.
universities for more than a decade. The project will also include a new
MediaTek design team right on campus.
These three
projects reflect Taiwan’s commitment to work together with the United States
across the semiconductor supply chains. If these investments are implemented
smoothly, they will bring a new era of Taiwan-U.S. strategic economic
partnership stronger than ever for jointly tackling challenges in current
global economic context.
It should be
noted, though, that Taiwan’s success in key manufacturing industries, including
semiconductors, is the ability to create an ecosystem with integrated
manufacturing activities from upstream (such as materials, equipment, R&D)
to middle and downstream (such as components, assembly), making the most of the
clustering effects. Therefore, TSMC’s success in Arizona will lie in the
clustering effects it can bring to support fabrication. One challenge is that
TSMC needs strong supports of its key suppliers to provide on-site
construction, logistics, components, materials and all critical services.
However, as most of the key suppliers are small and medium sized companies in
Taiwan, they are not eligible to state subsidies under the CHIPs Act or other related
programs. Some of them are already having difficulties setting up U.S.
subsidiaries or recruiting local skilled workers. Biden administration should
come up with programs to assist these smaller key suppliers if the United
States wishes to maximize the clustering effects of TSMC’s project.22
The Limits of the State Subsidies
The U.S.-led IPEF
trade framework highlights the need to establish a resilient supply chain that
goes beyond relocation of supply chains and attracting investments to the
United States, including having a skilled workforce, improved infrastructure,
logistical efficiency, healthy business environment and support from both the
public and private sectors.
Supply chain
disruptions have been a major challenge to both Trump and Biden administrations.
The current disruptions challenge initially referred to the disorders in global
supply since President Trump first imposed 301 tariffs on Chinese imports in
July 2020. The disruption was further broadened during the COVID-19 pandemic,
and came to hit the U.S. economy most when the global shortage of chips started
to affect global production and sales of automobiles and other sectors and
stressed U.S. imports, exports, and the movement of goods nationwide.
To address the
supply chains vulnerability issues, Biden administration had passed
legislations include Defense Production Act, the U.S. Innovation and
Competition Act (USICA) and the CHIPS for America Act. The Defense Production
Act allows the U.S. Department of Defense use authorities to strengthen supply
chains for key defense-related semiconductors, while the USICA mandates full
funding to catalyze more private-sector investments and continued American
technological leadership.
To address the
semiconductor supply chains resilience, there are currently various mechanisms
in Biden administration, such as the U.S.-EU Trade and Technology Council
(TTC), the U.S.- Japan initiative, IPEF, and some other initiatives already
proposed or in shaping.
The Trade and
Technology Council was launched at the U.S.-EU Summit in June 2021. The United
States and EU intend to enhance cooperation on measures to advance transparency
and communication in the semiconductor supply chain and identify gaps, shared
vulnerabilities, and opportunities to strengthen their domestic semiconductor
R&D and manufacturing ecosystems to improve resilience in the supply chain.
They also agreed to enhance cooperation on issues related to investment
screening and export controls. 23
Biden
administration and Japanese government launched a U.S.-Japan Competitiveness
and Resilience (CoRe) Partnership in April 2021. Both agreed to enhanced
cooperation on semiconductor manufacturing capacity, diversification,
next-generation semiconductor research and development, and responding to supply
shortages. Further collaborations were announced after Prime Minister Kishida
Fumio of Japan took office, which included joint action to develop, among
others, 2 nm advanced chips under bilateral efforts.
Another new
mechanism is the U.S. led CHIP 4, or Fab 4 initiative, which is proposed by the
United States, reportedly as a working level platform for exchanging market
information and handling operational issues. The CHIP 4 initiative will include
the United States, Japan, South Korea and Taiwan. However, according to Korean
media, South Korea expressed concerns that the group may develop into an
anti-China mechanism, which may threaten Samsung’s and SK’s huge investments in
China. The initiative also raises questions such as its overlapping purpose and
functions, and how it may fit into the supply chains strategy. South Korea’s
concerns reflect its difficult situation, so are some other Asian countries, in
not supporting economic decoupling and taking sides between the world’s two
largest economies.
Besides
collaboration with Europe and Asia, President Biden also announced the launch
of the Americas Partnership for Economic Prosperity in early June, a historic
new agreement when Biden hosted the Summit of the Americas on June 8th, where
he also prioritized collaboration with the Latin American and the Caribbean
nations on making more resilient supply chains.24
The aforementioned
supply chains mechanisms, large or small, has different membership but similar
purpose. However, the fragmented and overlapping mechanisms and varying working
agendas with different countries or partners make them confusing and may hinder
the U.S.’s efforts to develop a holistic and cross-cutting strategy and develop
concrete work programs.
For example, the
EU dominates supply of semiconductor equipment and tools for manufacturing, but
none of the existing semiconductor initiatives invite both EU and Asian
partners. Moreover, though President Biden’s Indo Pacific Strategy released in
February include Latin America countries such as Mexico, Chile and Peru, but
none of them were invited to the IPEF. Instead, President Biden launched the
Americas Partnership for Economic Prosperity to address supply chains solely
with the Latin American countries.
Last but not
least, Taiwan was also not invited to the IPEF or other existing semiconductor
supply chains initiatives, except for the CHIP 4. This further sends a
confusing message to Taiwan and the world.25 Though Biden administration
launched a bilateral initiative – the Taiwan-U.S. Initiative on 21st Century
Trade - after IPEF was launched, Taiwan is still denied from access to
information sharing with other stakeholders in the semiconductor supply chains
and engagement with them. Keeping important players or potential new comers away
from the semiconductor supply chains initiatives may hinder the efforts to
integrate the whole supply chains and handle common concerns and interests,
such as investment policy and international standard setting issues.
Risks of State Subsidy Competition
On August 9,
President Biden signed into law the CHIPS and Science Act, which will provide
$52 billion to catalyze investments in semiconductor industry in the United
States The passage of the Act demonstrated bipartisan support for reengaging
semiconductor supply chains in the United States to address chip shortage,
create good-paying jobs and maintain leadership in technology. Among the $52
billion, $39 billion will be used to fund manufacturing facilities either by
foreign or U.S. companies. The Biden administration expects the funding can
attract leaders in the supply chains to set up new investment or expand
existing ones in the country.
Because costs to
manufacture advanced semiconductors are much greater in the United States,
Europe and Japan than in Taiwan or other Southeast Asia, governments have to
provide subsidies to attract leading companies to build manufacturing
facilities in their countries. Huge state subsidies from wealthy countries have
already triggered a race for subsidies and competing for potential investors.
This may further contribute to inflation.
For example, the
EU plays a key role in advanced IP design, key semiconductor equipment and
tools and wafer raw materials, but it lacks semiconductor manufacturing, same
as the United States, and has little capacity for APT. In December 2020, the EU
released a Joint Declaration on Processors and Semiconductor Technologies with
an aim to bolster Europe’s electronics and embedded systems of value chains.
The EU Commission President Ursula von der Leyen also introduced the European
Chip Act, with a goal to double its share of global semiconductor production
from currently around 9 percent to 20 percent by 2030, and to 25 percent beyond
2030. EU governments and the private sector will invest more than 43 billion
euros to develop semiconductor supply chains. More than two-thirds of the
budget will be in the form of state grants to encourage manufacturers to build
new cutting-edge wafer factories or mega fabrications.
According to a
chips survey in EU released in February 2022, chip demand is expected to double
between 2022 and 2030, with significant growth in the future for leading-edge
semiconductor technologies. It also found companies establishing new chip
fabrication facilities consider finding qualified labour and compliance with
government regulations key issues when they select manufacturing locations.
In Asia, Japan
also announced in mid-2021 that it will provide $8 billion in state funds to
supplement its semiconductor industry. In July 2022, Japanese Diet passed the
legislation to provide subsidies to private sector investment in semiconductor
industry. TSMC became the first foreign investor to be granted with $3.5
billion to subsidize its fabrication factory in Kumamoto which will produce 28
nm chips for its client Sony company. In May 2021, South Korea also announced a
policy to support semiconductor industry with $450 billion in tax credits
through 2030 for private domestic companies to invest in R&D and
manufacturing.
The United States,
Europe, Japan and South Korea, and a number of other countries, all set up
their government policy to establish self-sufficient semiconductor supply
chains and are ready to provide generous state subsidies to attract
investments. According to SEMI, there will be more than 30 wafer fabrications
to be built worldwide between 2022 to 2024, which means an extra amount of more
than 30 percent of manufacturing capacity will be added to global supply.
However, these
programs and state subsidies may create risks of over-capacity, as increasing
worries in the global market are already observed for potential market
protectionism and geo economic-political conflicts that will add to business
operation costs and create unexpected loss.
Very few U.S. chip
manufacturing investments are in the assembly, packaging and testing
sub-sector. Korea’s NAND Flash SK Hynex is one of the few that recently
announced its investment plan to build an advanced testing and packaging
factory in the United States, scheduled to start building in early next year
and start quantity production in 2025-2026. The investment projects, amounting
to $22 billion, will include semiconductors, green energy and biotechnology,
with around $15 billion in semiconductors. SK plans to apply for subsidy of the
CHIPs Act, making it one of the few companies already announced to build
testing and packaging capacities in the United States since the CHIPs Act was
introduced.
The relatively
less skill- and capital-intensive nature of packaging and testing was dominated
by East Asia, accounting for more than 80 percent of global supply. China is
building dozens of new factories for advanced packaging and testing in the
aftermath of the COVID-19 pandemic. The United States needs to think hard how
its strategy to encourage relocation of assembly, packaging and testing into
the country.
Why packaging and
testing industry is more difficult than fabrication to relocate in the United
States? The key reason is labor costs and labor issues. For instance, Taiwan
currently has 37 manufacturers in assembly, packaging and testing, altogether
hiring more than 130,000 workers. Comparatively, wafer fabrication in Taiwan
has three times of annual revenues than assembly, packaging and testing, but
hire only around 100,000 workers (including engineers and operators). Taiwanese
companies had since the 1990s outsourced most of manufacturing to China and
other Southeast Asian countries, contributing to relocation of the
semiconductor supply chains in these countries. As of today, Taiwan continues
to dominate advanced packaging and testing, while has shifted most matured
packaging and testing to China and Southeast Asia.
Most APT companies
would not consider it commercially viable to move APT facilities in the United
States due to difficulty to hire workers and stringent labour laws and
practices. For example, the ASE Technology Holding Co (ASEH) in Taiwan, the
world’s largest packaging and testing company, employs around 80,000 workers in
Taiwan, with around 5 percent foreign workers. Furthermore, workers in the
packaging and testing factory take two shifts, sometimes three shifts, in the
factory. This would be violating labour laws or regulations in many states in
the U.S. It is very likely that in the next few years, after new fabrications
begin operation in the U.S., companies would still need to outsource packaging
and testing to East Asia, and ship the finished products back to the United
States or other destinations for further process. This may appear to hinder the
supply chains resilience as a critical part of the manufacturing does not take
place in the United States, but this may be a more commercially reasonable outcome.
Promoting International Collaboration
The IPEF and other
initiatives highlight the importance to work with like-minded partners to
improve the supply chains resilience. The U.S. strategy has prioritized
transferring of supply chains back to the United States or closer to home, but
when both are not commercially viable, working with like-minded partners
through “friend-shoring” can ensure supply chains will be relocated to trusted
and friendly countries. Under the concept of “friend-shoring”, it is important
to identify who are the friends and what kind of roles these friends could
play. The often mentioned friends are Vietnam, Malaysia, India, Mexico, Cost
Rica and several other Latin American countries. The United States can work
with these countries to establish less technology intensive capacities, such as
APT. However, to enable these potential new comers participate in the
semiconductor industry, some of them are already building small capacity. The
United States needs to provide capacity building and promote international
collaboration with stakeholders in these countries.
Since the 1980s,
Taiwanese companies have established comprehensive business networks and
manufacturing facilities in Southeast and South Asia, ranking among the top
foreign investors, especially in manufacturing sectors, including textile and
garment, footwear, electronics and ICT products.26 Taiwan companies, as
contract manufacturers, U.S. clients or importers, and a Southeast Asian host
country, have developed vital triangular cooperation. For example, U.S. clients
invite contract manufacturers of Taiwan companies to establish facilities in a
Southeast Asian country, Mexico or Honduras, place orders to them to contract
manufacturing Polo shirts, Nike sneakers, or iPads for the U.S. market.
In the past
decades, this triangular partnership has not only boosted U.S.-oriented supply
chains in countries such as Vietnam and Mexico, but also has helped the United
States to diversify import sources. For example, since the U.S.- China trade
conflicts escalated in 2018, Taiwan electronics companies also significantly
expanded manufacturing facilities in Vietnam and Mexico, exporting from these
two countries assembled products to the U.S. market to avoid the 301 tariffs
imposed on Chinese products and further geopolitical tensions. Taiwan-invested
supply chains in Southeast Asia and Latin American countries can further
contribute to the “friend-shoring” or relocation of semiconductor supply chains
in these areas.27
A timely example
is Apple requesting its key suppliers, mostly large Taiwanese electronics
companies, to set up facilities in Vietnam and India to diversify Apple’s
import sourcing. Taiwanese companies have expanded footprints in Vietnam and
India, bringing these two new comers into the Apple supply chains.28 Taiwan is
already among the largest foreign direct investors in Vietnam and Mexico. Total
Taiwan FDI in Vietnam amounts to $50 billion, recent growth focusing in ICT and
electronics industries by large Taiwan companies to serve their U.S. clients.
Vietnam works closely with Taiwan investors in its strategic industrial plans.
Taiwan investment in Mexico also significantly increased in ICT industry.
Taiwan has fabrications in Singapore, has packaging and testing facilities in
Malaysia and Philippines. The semiconductor industry can be another area for
the United States, Taiwan, Vietnam, or Malaysia, or Mexico trilateral
collaboration. Taiwan can bring capacity building in collaboration with the
United States to these countries, share experiences in developing semiconductor
industry and help design training programs.
Conclusion and Policy Implications
Building
manageable, resilient and self-sufficient semiconductor supply chains to reduce
over dependence in East Asia is a priority for the United States IPEF and the
CHIP 4 Alliance reflect U.S. strategy towards establishing resilient
semiconductor supply chains on U.S. soil. The efforts have significantly
progressed with the passage of the CHIP Act and announcement of major
investments in the United States In particular, the announcement of TSMC to
build a fabrication factory on 5 nm in Arizona marks the beginning of reshoring
of the supply chains back to the United States
However, the Biden
administration’s strategy does not address key issues. The emergence of a
subsidies race among industrialized countries to build their own supply chains,
fragmented mechanisms to integrate stakeholders in the supply chains,
difficulties of fabrications to recruit a skilled workforce, the lack of APT
facilities in the United States are but a few of challenges that have been
neglected by the White House to date. At the same time, there is declining
global demand and risks of overcapacity in chip production.
Furthermore, Taiwan’s
potential role to address the looming supply chain challenges is underrated.
Neither is Taiwan’s participation in the supply chains could hugely contribute
to the U.S. strategy as is expected. The risks of underestimating Taiwan’s role
is considerable, and there are looming risks to Washington’s semiconductor
supply chain resilience strategy as it currently stands.
First of all, the
over politicization of supply chains issues may hinder construction and
operations of the semiconductor supply chains. Certainly, Southeast Asia and
other participating countries have concerns that IPEF may have become overly
politicized.29 Some countries also suggest that the IPEF and CHIP 4 initiative
should be inclusive and welcome all players in the supply chains. Therefore,
inviting Taiwan to join IPEF and other relevant initiatives and alliances can
strengthen supply chains. The United States also needs to demonstrate its
leadership to integrate Indo Pacific like-minded partners, including Taiwan and
Southeast and South Asia, in its supply chains strategy. As the United States
has explicitly demonstrated its commitments to security of Taiwan Strait, it
should also publicly support Taiwan’s economic security by incorporating Taiwan
into its major multilateral economic and industrial strategy, including in the
semiconductor industry.
Second, it is
estimated that 42,000 new jobs will be directly created by CHIPS Act in the
future. The United States should develop joint programs with Taiwan for
training skilled workforce and talents. It is estimated that more than 5
percent of engineering positions are presently unfilled, and that the need for
microelectronics workforce in the United States will double, mostly highly
skilled engineer and technician roles, in the next few years. Taiwan has over
three decades of experiences of cultivating human resources to meet the need of
the semiconductor and electronics industries in Taiwan. The United States and
Taiwan should develop joint programs to improve supply of university graduates
from the U.S. higher education system. The programs should also provide
preparatory and on-site training to workforce in the semiconductor supply
chains located in the United States30
Third, the
semiconductor supply chains encompass IC design, materials, equipment and
tools, fabrication, and APT. The United States is a leader in IC design and
equipment and tools, but lags far behind Asian countries in fabrication and
APT. The CHIPS Act helps attract investments of TSMC, Samsung, SK, Intel, and
other major companies. However, when these fabrications begin operation, the
fabricated chips will need to be shipped back to Asia for assembly, packaging
and testing, due to little APT capacity and no advanced packaging and testing
at all in the United States Taiwan is the world’s largest player in APT,
particular focusing advanced testing. The United States should work with Taiwan
to encourage Taiwan investments of this sub-sector in the United States by
providing assistance to address the need of intensive labor force, and access
to financial and other supports in the United States The United States should
also collaborate with TSMC to solve challenges facing its key suppliers in
supporting TSMC operation in Arizona.
Fourth, the United
States should work with Taiwan to provide capacity building to Southeast Asia
and Latin America countries, including Vietnam, Malaysia, and Mexico. Taiwan
has long developed electronics clusters in those countries. A trilateral
collaboration has existed in these industries for decades, namely Taiwan
contract manufacturers manufacture products in Southeast Asia or Mexico for
exports to the U.S. market. The trilateral collaboration model can be
duplicated or expanded in the semiconductor supply chains in Vietnam or Mexico
through more policy dialogues among three parties, such as through
“friend-shoring” initiatives to outsource APT activities in these countries.
Written by Kristy
Tsun Tzu Hsu
Published in
Wilson Center, Sep 28, 2022
For more
information, please see https://www.wilsoncenter.org/event/taiwans-role-us-semiconductor-supply-chain-network
________________________________
Kristy Tsun Tzu
Hsu is the Director of the Taiwan ASEAN Studies Center (TASC) at Chung Hua
Institution for Economic Research (CIER), Taiwan, and she was a visiting fellow
at the Woodrow Wilson Center in the U.S. in July-August, 2022.
Endnotes
1.
The
Administration released findings from the comprehensive 100-day supply chain
assessments for four critical products (semiconductor manufacturing and
advanced packaging; large capacity batteries; critical minerals and materials;
and pharmaceuticals and active pharmaceutical ingredients).
2.
Boston
Consulting Group, SIA. (2021), Strengthening the global semiconductor supply
chain in an uncertain era.
https://web-assets.bcg.com/9d/64/367c63094411b6e9e1407bec0dcc/bcgxsia-strengthening-the-global-semiconductor-value-chain-april-2021.pdf
3.
For
example, in 1999, a strong earthquake in the center of Taiwan caused a week
long shutdown of the semiconductor companies in Hsinchu Science Park as a
result of power outages. The memory-chip prices soon tripled which impacted the
global market. Many large companies outsourced manufacturing to Taiwan suffered
huge loss.
4.
Before
the U.S.- China rivalry, in 2019, Japan imposed export controls on
semiconductor materials to South Korea, causing huge loss for South Korea. The
sanctions on Russia after its invasion in Ukraine in February 2022 also
threatens disruption of semiconductor materials. Apart from these, increasing
tensions in the Taiwan Strait also raises global concerns on possible disrupted
supply.
5.
According
to SEMI, the semiconductor industry or the supply chains includes integrated
device manufacturers; semiconductor foundries (fabrications); fabless chip or
IC design firms; assembly, testing, and packaging (ATP) service providers.
Sometime it also includes wafer fabrication equipment and metrology tool
vendors; semiconductor wafer and chemical suppliers; electronic design methods
and automation software providers. In the broader microelectronics ecosystem,
it further includes electronics systems companies, researchers, and educators.
6.
According
to definition of SIA, IDMs are vertically integrated across multiple parts of
the value chain, performing design; fabrication; and assembly, packaging and
test activities in house. Some IDMs have hybrid “fablite” models where they
outsource some of their production and assembly.
7.
Semiconductor
production also depends to a substantial extent on neon supplied by Ukraine.
Ukraine supplies more than 90 per cent of US semiconductor-grade neon, critical
for lasers used in chipmaking. Yoon, J. (2022), “The Lex Newsletter: Bright
prospects for neon price dim chip outlook” (Financial Times, 2 March 2022)
8.
The
figures are calculated by semiconductor industry value added by activity and
region, 2019, SIA.
9.
According
to definition of SIA, IDMs are vertically integrated across multiple parts of
the value chain, performing design; fabrication; and assembly, packaging and
test activities in house. Some IDMs have hybrid “fablite” models where they
outsource some of their production and assembly.
10.
IEK, ITRI.
(2022), 2021 Semiconductor Industry Yearbook of Taiwan.
11.
Taiwan
government lifted restrictions of 200 mm wafer fabrication in China in 2006,
and in 2016 approved TSMC’s investment of a 300 mm wafer fabrication in
Nanjing, China.
12.
FACT
SHEET: Biden-Harris Administration Bringing Semiconductor Manufacturing Back to
America | The White House, JANUARY 21, 2022
13.
Semiconductor
Market - Global Industry Analysis, Size, Share, Growth, Trends, Regional
Outlook, and Forecast 2021 - 2030, Precedence Research, 2022. precedenceresearch.com/semiconductor-market
14.
FACT
SHEET: Biden-Harris Administration Bringing Semiconductor Manufacturing Back to
America - The White House.
15.
In the
1980s, the U.S. had more than 200 IDM (as distinguished from Fab-lite and
fabless) semiconductor manufacturers, but many of them were sold, merged
dissolved, or liquidated over the past decades. There were also nearly 180 U.S.
universities and colleges which offered semiconductor programs.
16.
Testimony
of Dr. Tsu-Jae King Liu, Hearing on “Strengthening the U.S. Microelectronics
Workforce,” House Committee on Science, Space, and Technology, Subcommittee on
Research and Technology, February 15, 2022. https://science.
house.gov/hearings/strengthening-the-us-microelectronics-workforce
17.
Taiwan
Ministry of Economic Affairs (MOEA) adopted the “Tai-shang (臺商) Return to Taiwan” Program since 2018 by providing tax
breaks, financial subsidies and assistance in locating lands and recruiting
workforce in Taiwan. As of end of 2021, it was reported that around 1,100
companies were approved under the Program, together attracting $ 1.5 trillion
NT dollars and creating 120,000 jobs.
18.
President
Tsai Ing Wen adopted the New Southbound Policy (NSP) in 2016 and further
released the ‘Invest Taiwan”, or “Taiwan Business Returning Home”, program in
2018, targeting Taiwancompanies in China to remove their operations back home.
Details of the Invest Taiwan program can be found at:
https:://investtaiwan.nat.gov.tw/showPage?lang=eng&search=serviceCenter_07.
Also see Glaser, B. S., Kennedy, S., Mitchell, D., Funaiole, M. P., Center for
Strategic and International Studies (Washington, D.C.). (2018). The new
southbound policy: Deepening Taiwan’s regional integration: a report of the
China Power Project. https://southbound.csis.org/ (last visited April 4, 2022)
19.
Some
of the benchmark projects are Foxconn’s investment in Wisconsin State in 2017
and TSMC’s project in Arizona State.
20.
In
December 2021, TSMC announced a decision to establish a subsidiary in Kumamoto,
Japan in joint venture with Japanese partners. The plan is to build a 12-inch
wafer fabrication with production targeted to begin by the end of 2024.
21.
GlobalWafers,
based in Hsinchu Science and Industrial Park, Taiwan, specializes in 3” to 12”
silicon wafer manufacturing. Its product applications have extended through
power management, automotive, IT and MEMS.
22.
TSMC
has more than 3,000 suppliers from the world. It identifies key suppliers to
provide direct on-site support. These suppliers are not eligible to subsidies
from CHIPs Act, but may be eligible to tax credits from Federal or State
government of Arizona.
23.
FACT
SHEET: U.S.-EU Establish Common Principles to Update the Rules for the 21st
Century Economy at Inaugural Trade and Technology Council Meeting, SEPTEMBER
29, 2021https: //www.whitehouse.gov/briefing-room/statements-releases/2021/09/29/fact-sheet-u-s-eu-establish-common-principles-to-update-the-rules-for-the-21st-century-economy-at-inaugural-trade-and-technology-council-meeting/
24.
FACT
SHEET: President Biden Announces the Americas Partnership for Economic
Prosperity JUNE 08, 2022, https: //
www.whitehouse.gov/briefing-room/statements-releases/2022/06/08/fact-sheet-president-biden-announces-the-americas-partnership-for-economic-prosperity/
25.
Goodman,
Matthew., Reinsch, William. CSIS. (2022). Filling in the Indo-Pacific Economic
Framework. https://www.
csis.org/analysis/filling-indo-pacific-economic-framework?msclkid=c41570d4c62011ec9c4756938a5e21ce
(last visited April 4, 2022)
26.
Taiwan
investments in Southeast Asia highly concentrate in manufacturing sectors,
ranging from labour intensive industries, such as textile and apparel and
footwear, to more technology-intensive industries, mainly Information and
Communication Technology (ICT) and electronics industry.
27.
Hsu,
Kristy T.T. (2022). Taiwan Investment in Southeast Asia: The Choice of Taishang
and Their Response in the Changing Asia. To be published in end of 2022.
28.
Vietnam
has become the fastest growing supplier of ICT and electronics products since
2018, owing to increasing investments from Taiwan into North Vietnam to avoid
the 301 tariffs if they export products directly from China to the U.S. India
has also benefitted from relocation of supply chains of electronics products to
the country. Wistron, a Taiwanese company, was the first foreign manufacturer
to assemble iPhone in India, followed by Foxconn and Pegatron, both Taiwanese
companies. Taiwan’s Pegatron follows Foxconn and Wistron to make iPhones in
India, Taiwan News, July 17, 2020. https:
//www.taiwannews.com.tw/en/news/3968775
29.
Suzuki,
Hiroyuki. (2021). Building Resilient Global Supply Chains in the Geopolitics of
the Indo-Pacific Region. https://
csis-website-prod.s3.amazonaws.com/s3fs-public/publication/210219_Suzuki_Global_Supply.pdf?DJzRt8ACjVJAKaikeMd8mToyxoByQ6B8
(last visited April 12, 2022)
30.
SEMI,
American Semiconductor Academy. (2022). Fuel American Innovation and Growth, A
national Networks for Microelectronics Education and Workforce.