As more countries look to diversify their supply chains, Taiwan has a chance to strengthen its position in the global economy. But is its infrastructure robust enough to support expanded business?
Over the past few years, the U.S. and Taiwan have intensified their efforts to reduce reliance on China in their supply chains as a way to increase resilience. First came the U.S.-China trade dispute, in which American companies were encouraged to leave or decrease operations in China, followed by the Tsai Ing-wen administration’s reshoring initiative to bring investment from China back to Taiwan.
At the onset of the global pandemic, the flow of critical products halted, global supply chains were disrupted, and supply chain resilience became a priority for all industries. Then, just as commerce began to bounce back, Russia launched an attack on Ukraine, giving rise to new worries of geopolitically induced shortages and inflationary effects.
Meanwhile, China is pushing to indigenize its supply chains, most notably with its Made in China 2025 plan, which aims to upgrade Chinese industries’ manufacturing capabilities into more technology-intensive powerhouses and achieve independence from foreign suppliers.
Although the U.S. and Taiwan are not decoupling from China, they have significantly changed the flow of goods and investments, says Rupert Hammond-Chambers, managing director of BowerGroupAsia, a consultancy.
“Instead of 10 dollars flowing into China, you’re seeing five going to China and the other five to the Southeast Asia region, or even Taiwan,” he says. However, there is no certainty that Taiwan will gain some of China’s lost business. Rather, achieving that goal will require significant policy changes and government efforts.
For Taiwan, strengthening its role in global supply chains is more than an effort to ensure economic stability – it also has political and security implications. Hammond-Chambers sees Taiwan’s role in the semiconductor industry in particular as a “geostrategic lever that focuses other countries on the importance of Taiwan and peace and security in the Taiwan Strait.”
Taiwan accounts for over 60% of the global chip foundry market, and the island plays a pivotal role in many high-tech industries, a trend expected to continue despite pushes from the U.S. and EU to revitalize their semiconductor industries.
In fact, says Joanne Chiao, senior analyst at Taiwanese market research firm TrendForce, her organization “expects Taiwan’s market share [in the chip foundry sector] will further increase to 66% in 2022,” as some of the newly added capacity will enter mass production by the end of 2022.
Although Taiwan leads in semiconductors, domestic expansion has its limits. During a discussion on Taiwan’s role in global supply chains organized by Washington, D.C.-based public policy organization The Brookings Institution, Taiwan Semiconductor Manufacturing Co. (TSMC) Vice President of Global Government Affairs Peter Cleveland noted that the company operates “at such a massive scale that it’s mind-blowing to people. [Production] takes over 4 million gallons of water per day, the power requirements are enormous, and STEM talent is critical.”
Cleveland said he sees geographic dispersion as an advantage for the company, and the expansion of Taiwan semiconductor operations in the U.S. as a way to strengthen supply chains while alleviating chip manufacturing’s strain on Taiwan’s resources. TSMC is constructing a US$12 billion fab in Phoenix, Arizona, which is scheduled to start producing chips in 2024. It is also building a plant in Japan and is in early discussions regarding a possible fab in Germany.
Apart from expanding manufacturing abroad, Taiwan also needs to implement policies that strengthen its infrastructure, according to BowerGroupAsia’s Hammond-Chambers. Of what has been termed the island’s “five shortages” (land, power, water, labor, and talent), he refers to labor, talent, and electricity as the most critical areas for government scrutiny of existing policies.
“The energy policy of Taiwan is just not working at the moment,” he says, adding that “there’s no time to waste” when it comes to improving the power grid. “It’s a strategic issue, military issue, social issue, and economic issue – it ticks every single major box.”
Jason Hsu, a former Taiwan legislator and currently senior research fellow at the Harvard Kennedy School, stressed at the Brookings seminar that the shortage of semiconductor talent is already noticeable in both the U.S. and Taiwan. The island’s recent establishment of a Semiconductor Research Institute is a step in the right direction, but not enough to fill the gap, he said.
“There needs to be a comprehensive program that links U.S. and Taiwan talent development and ensures that Taiwan can continue to develop its manufacturing capability and talent,” with innovation shared between the U.S. and Taiwan, Hsu noted.
Taiwan has relaxed immigration laws to attract foreign talent, particularly from Southeast Asia, and developed work and study programs for university students, said Minister Without Portfolio John Deng during the Brookings event.
But considering that the island is on track to become a super-aged society, Taiwan could and should implement a much more robust and open immigration policy that attracts more people to make up for the shrinking labor pool. The island’s decreasing population could pose an existential threat to Taiwan if not managed, says Hammond-Chambers.
Meanwhile, Taiwan could take advantage of what some scholars have dubbed “brain circulation” to strengthen economic ties with the U.S., according to Michael Nelson, senior fellow in the Carnegie Endowment For International Peace’s Technology and International Affairs Program.
“A lot of people from Taiwan have studied overseas, and some of them bring that knowledge back to Taiwan and start companies or teach the next generation,” he says, citing the founders of TSMC and the Industrial Technology Research Institute (ITRI) as two examples. “But a lot of them are still working overseas, and they’re part of this diaspora that forms a built-in advantage for Taiwan.”
As the world undergoes the Fourth Industrial Revolution, digital supply chain technologies such as artificial intelligence (AI), algorithms, and machine learning can be used to analyze and learn from big data, which powers intelligent automation and provides supply chain managers with real-time insights that can assist quick responses to disruptions.
“When we think about how to boost our competitiveness, it doesn’t all have to be about manufacturing,” said Meriya Solis, Director of the Center for East Asia Policy Studies at Brookings. “We need to be mindful of the fact that we’re moving toward a digital economy.”
But while smart tools will mitigate human error, they pose a supply chain risk if they are not backed up by robust cybersecurity systems. Carnegie’s Nelson says that improving cybersecurity and investing in the Cloud of Things – integrated Internet of Things and Cloud Computing technology – would not only benefit biotech and other high-tech industries, but also create more robust supply chains for traditional industries. “It could help us do a better job of tracking fishing ports, ensuring the quality of food, and making sure cold chains are not broken,” he says.
The current global software infrastructure, notes Nelson, is built on a precarious system. Commercial software products tend to rely on complex open-source software repositories, and vulnerability in a single aspect of these repositories could compromise every commercial product that uses it.
Following an increase in cyberattacks, Taiwan’s government declared cybersecurity to be a national security issue in 2018 and proceeded to implement its Cyber Security Management Act in January 2019. The law stipulates obligations for providers of critical infrastructure, including water, energy, ICT production, and financial and healthcare services. The U.S. and Taiwan held their first joint Cyber Offensive and Defense Exercise (CODE), hosted by the American Institute in Taiwan (AIT) and the Executive Yuan’s Department of Cyber Security, in 2019.
In the past, Chinese tech seemed like it was on a steady path to market domination. But due to a high incidence of poorly written Chinese software and concerns that state actors could impel companies to embed security backdoors into their products, trust in its software is now generally low among global users. Nelson sees a lucrative opportunity for Taiwan to increase its involvement in data supply chains by establishing itself as a trusted source for more secure and better-tested software.
“Through the hardware sector and the semiconductor industry, you have all these links to all the major players,” he says. “By leveraging those links and showing that Taiwan can ensure that the software running on the chips they built is doing the job it’s advertised to do, Taiwan can help integrate different pieces of software from different companies and gain a reputation for being a trusted integrator.”
But to establish such a competitive advantage, Taiwan’s government will need to implement mechanisms that encourage local IT companies to uncover security vulnerabilities and adopt quality verification tools.
“Nobody thinks Taiwan is going to become the only source of systems software, but it can be a hub that works with different players and shows emerging markets in particular how technologies can be better designed,” says Nelson. “And it’s not just in healthcare, the high-tech sector, banking, and e-government applications – it’s also in agriculture, food production, and retail.”
Nelson says that rather than providing a long list of detailed requirements, the government should form a cybersecurity framework that focuses on goals and milestones without stipulating how they should be achieved. “You want to focus on the results, not the mechanism.”
China threat misconception
Supply chain cooperation between the U.S. and Taiwan is vital for the economic security of both, and collaboration has only strengthened with the increased attention to the importance of ICT products and semiconductor chips. The commitment of both sides to cooperate on related issues was reasserted in late 2021 when Taiwan and the U.S. established the Technology Trade and Investment Collaboration (TTIC), a new bilateral cooperation framework meant to develop commercial programs and strengthen critical technology supply chains.
TTIC is the latest addition to the two parties’ already established communication channels on economic issues, which also consist of the Trade and Investment Framework Agreement (TIFA) and the U.S.-Taiwan Economic Prosperity Partnership Dialogue. It is seen as a way for the U.S. to strengthen its role in the semiconductor industry and reiterate the importance of the bilateral U.S.-Taiwan commercial and investment relationship.
Such collaborative activity might not be enough, however. Convincing more American companies to include Taiwan in their supply chains will require creating greater confidence in Taiwan’s production stability and its government’s capability in data management and protection, says Nelson. Companies will also need assurance that they will not be affected by geopolitical maneuvering.
“If companies worry that their supply chain is going to be disrupted for geopolitical reasons, then they’re less inclined to work with companies in those countries.”
Recognizing these concerns, Minister Deng emphasized Taiwan’s trustworthiness and reliability during his opening statement at the U.S.-Taiwan supply chain seminar. Deng declared to the audience that Taiwan is a safe and reliable partner, and that it “actively maintains supply chain security” and has “never coerced any other countries with economic means.”
But to assure businesses that Taiwan will remain a stable partner, the island will need to assuage fears of potential military conflict. Hammond-Chambers notes that although many experts agree that China is unlikely to launch a military attack on Taiwan in the near future, media and think tank preoccupation with possible future scenarios could trickle into boardrooms and influence business decisions.
“They see what’s happening in Ukraine, and it’s easy for people to jump to conclusions about Taiwan,” he says. “Future global supply chains are likely to evolve into a red [Chinese] supply chain and alternate supply chains that include Southeast Asia on a grander scale. Whether companies’ attempts to ‘China-proof’ their businesses will result in an exclusion of Taiwan remains to be seen.”