Why Taiwan’s tech sector is beyond Beijing’s reach

The recent meeting between Taiwan’s President, Tsai Ing-wen, and House Speaker Kevin McCarthy (R-Calif.) brought predictable threats of “consequences” from Beijing, as China launched military drills off Taiwan’s East coast. A visit last year by then-Speaker Nancy Pelosi (D-Calif.) led to China conducting naval exercises that simulated a blockade of the island state. China’s leader, Xi Jinping, has pledged the “reunification of the motherland,” and the only debate now is whether this will be attempted through military force or bloodless coercion.

If China could acquire and operate Taiwan’s thriving technology sector, including TSMC’s chip fabrication facilities, it would achieve the dominance in advanced chips that has eluded it for so many years.

But if Xi thinks seizing the factories that make 90 percent of the world’s high-end chips means he would control that piece of the supply chain, he does not understand the nature of free-market ecosystems. TSMC is not like a gold mine, where possession of the real estate delivers value to its owner. Rather, TSMC’s factories only have their exceptional value when they are part of a global marketplace of competing, trusting, cooperating companies.

In other words, China could never take the world’s greatest chip-manufacturing company; it could only break it.

TSMC is the leader in an industry that is the ultimate example of trust-based globalization, where factories can only operate with the continued participation — and confidence — of partners throughout Europe, Asia, India, and the Americas. TSMC’s remarkable domination of the chip market requires the company to manage a complex network of vendors, partners, employees, customers, and even competitors. Each of these contributors collaborates with others to deliver meticulously specified inputs to the fabrication process.

If the facilities were taken by the Chinese Communist Party and control of the process shifted to the hands of Xi’s bureaucrats, that trust would evaporate, and this delicate ecosystem would collapse.  

TSMC’s network includes the suppliers of machines that build the chips, like Dutch giant ASML, which builds the photolithography systems that can etch a chip not much thicker than a strand of DNA. These are some of the most complex pieces of machinery ever designed, massive $200 million devices that need constant care to continue operating as required and that are rendered obsolete in a few years unless the vendors deliver the needed updates.

ASML’s photolithography systems do their work on wafers supplied by partners like Germany’s Siltronic, which delivers “blanks” made through extraordinarily complex materials processing, constantly working with TSMC to understand current and future requirements of the process. Then there are companies like Intel, Qualcomm, and Apple, who manufacture few of their own chips, instead submitting their proprietary designs to the factory for production.

Though many of these companies compete fiercely with each other, they trust that TSMC’s shared operations will proceed with the utmost integrity, securing their IP and honoring signed contracts. Participants in this ecosystem understand that TSMC will not try to reverse engineer their products, share information with competitors, or steal their trade secrets. They also assume that the partners in the arrangement observe the law scrupulously and would not serve as Trojan Horses for their home country’s intelligence services. This is what business means in the world of free countries — even among competitors.

Any violation of this fundamental trust would throw gravel in the gears of the most well-oiled, delicate manufacturing process the world has ever seen.

Even if China seized the island bloodlessly, Taiwan would lose its role as a global technology partner and vendor. Rather than China controlling the chip industry, fabrication would come to a halt as companies around the world contemplated the idea of sending their most valuable IP to a country that has a long record of using its corporate champions to siphon proprietary knowledge from unwitting partners.

The world — including China — would have no ready alternative to the supply of chips. If China took Taiwan, the impact on the world’s economy would be catastrophic.

Concern over the factories falling into China’s hands recently led former U.S. National Security Advisor Robert O’Brien to imply that the U.S. might “scuttle” the factories in the face of capture by China. Such a move would be superfluous.

As important as it is for the world to protect the chip-making facilities in Taiwan, this is not an asset that can be conquered and acquired. It could only be destroyed.

Jon Pelson is an adjunct fellow at the Foundation for the Defense of Democracies and the author of “Wireless Wars, China’s Dangerous Domination of 5G and How We’re Fighting Back.”