By: Andreas Kuehn and Jeffrey Bean
Geopolitical risks are on the rise. Ongoing U.S.-China technology competition is creating significant uncertainty in the short run and new costs in the long run for markets, businesses, and consumers alike. These tensions as well as the targeted decoupling of advanced technologies are driving structurally elevated geopolitical risk. In this new world, companies will have to deal with more, not less, risk as they are adapting to rewired supply chains and seeking to leverage opportunities from new supply and demand markets. Subsequently, businesses, investors, and banks now pay even closer attention to geopolitics. Though rare, unpredictable Black Swan events, such as Russia’s invasion of Ukraine in February 2022 and Hamas’ attack on Israel in October 2023, can be just around the corner and are difficult to anticipate.
Taiwan represents one of the most important geopolitical risks today and is of particular importance for the semiconductor industry. The island produces more than 60 percent of the world's semiconductors and over 90 percent of the cutting-edge chips used for advanced computers, smart phones, and artificial intelligence. Massive capital expenditures to build cutting-edge fabs with price tags of $20 billion and higher and equally significant research and development investments have favored concentration of industry assets in close proximity. Such clusters also promote knowledge sharing and inter-organization learning. Though this form of concentration is economically advantageous, securitization changes the calculus when geopolitical tensions are on the rise.
Potential scenarios being considered by Western strategists include China taking military actions to achieve the country’s reunification. Putting aside the fact that the start of a war that would likely draw in the United States and result in significant global implications, a conservative estimate puts economic costs of such a supply chain breakdown at eight percent of U.S. global domestic product, higher than the negative economic impact of the COVID-19 pandemic. But an invasion or blockade by the People’s Liberation Army is not the only concern. A quarantine of the island by the China Coast Guard would equally result in damaging impacts to the trade of semiconductors and advanced electronics. Natural disasters only further increases the likelihood of a disruption: Taiwan is located along the Ring of Fire, an area with frequent moderate-to-large earthquakes.
Strengthening the semiconductor ecosystem by introducing resilience is the practical response to mitigate the risks of high concentration. Supply chains are strengthened by building up new capacities in the United States or in friendly countries, thus the term “friendshoring” or “right shoring.” Incentivized by governments and nudged by customers, TSMC broke ground for new multibillion dollar chip plants in Germany, Japan, and the United States. Apple as a key buyer welcomed that these most advanced chips are not only, “Designed by Apple in California,” but are made on domestic soil and, “can be proudly stamped Made in America,” as the company’s CEO Tim Cook stated back in 2022.
But reducing vulnerabilities and dependencies in global supply chains must also factor in other vulnerabilities that can be exploited. Governments may end up going down a route of trying to fix everything until an entire supply chain is brought “back home.” This will not happen due to two simple reasons: First, it is too expensive to onshore some of the labor-intensive assembly, the packing and testing of chips, and finished consumer products, often produced well and inexpensively in the Indo-Pacific. Second, U.S. partners will not have it. The recent U.S. turn towards industrial policy, generous grants, and tax incentives have worried U.S. allies and partners as they lessen their own economies’ relative competitiveness and thus make investments in their national semiconductor as well as other industries less favorable.
Reworking supply chains to reduce the risk of centralization comes with their own risks. Through its lifecycle from design, fabrication, and final assembly, testing, and packaging, as well as sourced materials and intellectual property, a chip’s components may travel more than 25,000 miles and cross more than 70 international borders before reaching its ultimate customer. In fact, a 2020 study estimates supply chain disruptions of one to two weeks taking place every two years, and disruptions of more than two months every five years.
Furthermore, as new capacities are being built-up closer to or at home, clusters for these new locations that result in positive spillovers and promote both cooperation and competition have yet fully to emerge and are prone to their own challenges. For example, building new facilities, and training-up a skilled workforce in a new, culturally different environment have reportedly led to lapsed deadlines and delays in TSMC’s $40 billion state-of-the art semiconductor plants in Arizona. Finally, it is estimated that U.S.-made chips in the new TSMC fabs will cost 20-30 percent more than their equivalents made in Taiwan. In summary, the geopolitics-induced shifts in global supply chains to break up concentration and novel sourcing strategies, which range from shifting away from China as a manufacturing hub entirely, to “China Plus One” and “Taiwan Plus One” strategies, come with costs and risks that have yet to be fully understood and taken into account.
Andreas Kuehn is a Senior Fellow for the Cyberspace Cooperation Initiative at ORF America and Jeffrey D. Bean is Program Manager for Technology Policy and Editor at ORF America.