Semiconductors Key to Taiwan’s Industrial Transformation

Chipmaking undergirds the Six Core Strategic Industries initiative, particularly in the area of digital and information technology.

The Six Core Strategic Industries policy, which the Tsai Ing-wen administration launched in 2020, builds upon the 5+2 Innovative Industries initiative of Tsai’s first term to capitalize on global supply chain changes and catalyze Taiwan’s industrial transformation. Amid persistent U.S.-China tensions and pandemic-induced disruptions, key technology supply chains are coalescing in market democracies. This paradigm shift has made Taiwan, ascendant since the U.S.-China trade dispute began, more important than ever.

Taiwan’s chipmaking prowess – design, fabrication, and packaging and testing – is driving the island’s rise in global supply chains. Semiconductors account for more than 30% of Taiwan’s exports, which reached a record US$109 billion in the second quarter. Taiwan’s three science parks, home to many chipmaking facilities, posted a record combined revenue of NT$1.7 trillion (US$61.7 billion) from January to June, up 25.2% from a year earlier, according to the Ministry of Science and Technology (MOST).

The Taiwan Semiconductor Manufacturing Co. (TSMC) remained the world’s largest contract chipmaker in the second quarter with a 52.9% share of the global market, according to TrendForce, a Taipei-based research firm. TSMC’s sales hit a record high of NT$148.5 billion in June. August’s sales of NT$137.4 billion are the firm’s second-highest ever.

TSMC’s North America Headquarters in San Jose, California. The chipmaking giant’s US$12 billion investment in Arizona could pave the way for broader international expansion.

While semiconductors are not earmarked as one of the Six Core Strategic Industries, they are integral to its success. In their role as computing brains, chips are the linchpin of the digital and information technology part of the blueprint. They also have applications in other areas of the initiative, such as cybersecurity, precision medicine, and national defense.

In a meeting last year with semiconductor industry leaders, President Tsai said that chips are a vital part of the Six Core Strategic Industries and a top priority for Taiwan’s future development.  She described semiconductors as “lying at the heart of global supply chains.” The government will tap Taiwan’s strength in this sector to develop the island as an advanced manufacturing hub, she said.

“Taiwan will benefit from leveraging its semiconductor technology leadership in enabling other related applications,” says Stephen Su, a vice president of research at the semi-governmental Industrial Technology and Research Institute (ITRI). He notes that such applications include 5G, artificial intelligence (AI), the Internet of Things (IoT), electric vehicles, healthcare, aviation and space, and other digital convergence technologies included within the Six Core Strategic Industries program.

Precision medicine has some promising semiconductor applications. For instance, using TSMC’s semiconductor process, researchers from National Chiao Tung University’s Institute of Electronics and the Linkou Chang Gung Memorial Hospital have developed a prospective miniature system-on-a-chip (SoC) used in the treatment of Parkinson’s disease. Known as an “intelligent adaptive deep brain stimulator,” the device delivers electrical impulses based on the unique pathological signals in the brain of individual Parkinson’s patients to alleviate motor fluctuation caused by the illness. Compared to traditional deep brain stimulation treatment for Parkinson’s, which involves continuous electrical stimulation that can cause problematic side effects, this method developed by Taiwanese researchers is more targeted and less energy-intensive.

Members of a research team from National Chiao Tung University and Linkou Chang Gung Memorial Hospital hold a press conference to unveil its miniature system- on-a-chip used to treat Parkinson’s disease. Photo: CNA

Further, in a press release published on the MOST website, one of the project’s lead researchers, Ker Ming-dou, cited recent reports that “the pathological signals recorded during the deep brain stimulation surgery can predict the long-term effects of the surgery and the subsequent emotional changes of the patients.” He added that “these results contribute to the personalization and precision of deep brain stimulation.”

Compared to earlier stages of Taiwan’s semiconductor industry development, the current phase involves investment in multiple regions of the world, not just Taiwan and China. Both customer needs and geopolitical considerations are behind the shift. TSMC’s decision to build a US$12 billion wafer plant in Arizona – by far its largest investment outside of Taiwan – is a case in point. On the one hand, 70% of TSMC’s business comes from the U.S. On the other, had Washington not been determined to develop a more robust integrated circuit (IC) supply chain onshore, the Arizona fab might never have come about. As a key supplier to the U.S. military, TSMC is among the few foundries the U.S. is working with to develop advanced chips domestically (Intel is another).

The Arizona fab could have far-reaching benefits for both TSMC and the U.S., says ITRI’s Su. “Taiwan’s semiconductor industry can better tap into the rest of the innovation ecosystems in the U.S., leveraging a much larger pool of international talent to start advanced R&D centers there,” he says. From Washington’s point of view, “a more localized semiconductor [value chain] will be beneficial to the local economy and job opportunities by building a resilient and secure supply chain at home.”

The advent of the Arizona fab may herald broader international expansion for TSMC. Given the ongoing global semiconductor shortage, governments and firms are eager to secure chip supply. “It is right for TSMC to go abroad and look for outside opportunities if it can guarantee a 50% profit margin with government support,” says Samuel Tuan Wang, California-based research vice president for semiconductor foundries at Gartner, a leading research and consultancy firm. “They can diversify from Taiwan as it is a relatively small island with limited resources.”

A TSMC facility in Japan is one possibility. The contract chipmaking giant will reportedly launch its first fab in Japan in 2023 to supply Sony, its largest customer in the country. The planned fab on the southern island of Kyushu will produce around 40,000 chips per month using TSMC’s 28-nanometer process, according to Nikkei Asia. The applications of chips made on 28nm technology include consumer electronics, image processors, and the microcontroller units used in automobiles.

TSMC can take advantage of Japan’s strength in basic materials research and use its close ties with Sony to develop packaging technology, Wang says.

Germany is another potential location for TSMC expansion as the Taiwanese chipmaker is a major supplier to the country’s automotive industry. “About the German fab, we are seriously looking into it, but it is still in its infancy,” TSMC chairman Mark Liu said at the company’s annual general meeting in July.

In an August interview with Taiwan’s Central News Agency, Frank Bösenberg, managing director of Silicon Saxony, emphasized the Dresden semiconductor cluster’s strengths. Silicon Saxony is a key production base for IC firms such as chipmaker GlobalFoundries Inc, automotive electronics chipmaker Infineon Technologies, and auto parts supplier Robert Bosch.

“In Europe, microcontroller units are in tremendous shortage and TSMC has the best technology by far,” says Gartner’s Wang.

Maintaining an edge

Thanks to the technological acumen of its foundries, Taiwan is likely to maintain a leading position in chip manufacturing for years to come. This advantage will allow Taiwan to gain significant market share in emerging technologies like AI, 5G, IoT, and edge computing. 

As electronic products demand faster data transmission speeds and better performance for the purposes of IoT and 5G applications, the chips contained in these products also need to be much smaller and consume less power, notes Joanne Chiao, a TrendForce analyst. Process technologies must thus evolve to enable the production of increasingly advanced chips. According to TrendForce, TSMC holds a 70% market share in advanced processes below and including the 1Xnm node while South Korea’s Samsung has 30%.

“Not only are Taiwan’s fabless chipmakers able to deliver PPA (performance, power, and area) advantages to their clients through technology scaling and node shrinking, they are also unsurpassed in their comprehensive silicon IP cores and longstanding product development services,” Chiao says. “Other competing foundries are unlikely to make breakthroughs in these fields and catch up to Taiwanese foundries in the short run.”

For the industry’s IC design segment, the outlook is not quite as rosy. Although chip designers MediaTek and Novatek have been thriving – Chinese foundries have switched from U.S. to Taiwanese suppliers as U.S.-China relations have soured – the Taiwanese firms’ dependency on China could prove negative for their long-term prospects. Beijing is working assiduously to develop chipmaking self-sufficiency and has invested US$56 billion thus far in two state-backed semiconductor funds.

“In the short term, Taiwan’s IC design industry seems to benefit from the U.S’s decision to decouple from China,” says Cheng Kai-an, an industry analyst at the semi-governmental Market Intelligence & Consulting Institute (MIC). “But since China is actively developing its own IC design industry, in the long term, Taiwan will face strong competition from China in this area.”

“China opens the door whenever foreign companies have a technology advantage,” says Gartner’s Wang. “They start shutting the door when they can do it themselves.” For instance, once Chinese telecoms giant Huawei’s chip unit HiSilicon’s technology is on par with MediaTek’s, Huawei will likely buy chips from the former rather than the Taiwanese firm, he says.

However, it will take time for China’s semiconductor industry to catch up with Taiwan’s. Taiwan benefits from a technology lead of at least five years, while the U.S.-China technology divide will likely impact Beijing’s ability to develop next-generation technology such as 6G and quantum computing “with lasting effects until 2030,” says ITRI’s Su.

Thus, “it’s unlikely that the competitive landscape will be changed much in the next 10 years,” he concludes.

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