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Semiconductors

The $490bn question: Can the world afford its Taiwan chip dependence?

Biden looks to make supply chains more resilient, but it will not be cost-free

U.S. President Joe Biden holds a silicon wafer during a virtual summit Monday with business leaders about semiconductor supply chains.   © AP

TOKYO/WASHINGTON -- President Joe Biden laid out a bold vision of a reinvigorated American semiconductor industry at a virtual summit Monday with leaders of companies disrupted by the current chip shortage, an event that has illustrated how much global chip production has become centered on Taiwan.

During the summit, Biden urged Congress to pass his plan to invest $50 billion in the U.S. semiconductor industry, noting that it has bipartisan support. By expanding the American presence in the chip industry, Biden hopes to make global supply chains more resilient to disruptions.

The U.S. is "going to lead the world again," the president said.

But weaning the industry away from dependence on Taiwan will require sacrifices.

The magnitude of the problem resulting from reliance on Taiwan was calculated in stark terms this month by the U.S.-based Semiconductor Industry Association. An SIA report cited the "extreme hypothetical scenario" of semiconductor production in Taiwan being shut down completely for one year, causing a $490 billion hit to annual revenue for electronic device makers worldwide.

That figure is equivalent to about 20% of last year's total sales of $2.4 trillion, based on U.K. research firm Omdia's estimate of the size of the electronics market.

The increasing importance of Taiwan can be seen in the growth of semiconductor foundries that supply chips to big tech companies such as Apple. Taiwanese players control about 64% of the foundry market, with Taiwan Semiconductor Manufacturing Co. alone holding more than half, according to TrendForce, a Taiwan-based market researcher.

TSMC and its peers have enabled the rise of "fabless" chip companies like Qualcomm that focus on development and design while outsourcing production. Other companies use foundries without relying on them completely, such as Japan's Renesas Electronics, which outsources about 30% of its semiconductor production to manufacturers in Taiwan and elsewhere.

This means that any disruption in Taiwan -- such as mainland China forcing the island under its umbrella -- would send shock waves through global supply chains.

Many semiconductor companies have come to rely on foundries, mainly in Taiwan, to handle production for them.

Asia has become the heart of global semiconductor production as the industry has grown, thanks partly to the international division of labor between design and manufacturing. Taiwan and South Korea together account for about 43% of semiconductor production capacity worldwide, according to a Boston Consulting Group report. The U.S. has dropped 7 percentage points over the past two decades to 12%, and has been surpassed by China at 15%.

The greater concentration of production has boosted efficiency, but companies have neglected to prepare for the increased political and disaster-related risks that come with it. The current global shortage has forced American and Japanese automakers to scale back production.

Efforts to bring supply chains closer to home will not be cost-free, however.

The Semiconductor Industry Association says the U.S. would need to spend $350 billion to $420 billion upfront to build a self-sufficient semiconductor supply chain, while China would need to invest between $175 billion and $250 billion. If these costs were fully passed on to customers, chip prices would rise by an average of 35% to 65%.

The industry also could face a supply glut when elevated demand subsides to normal levels.

These costs and risks have the potential to cause even greater damage than the current shortage. How to maintain and coordinate cross-border cooperation likely will be crucial to resolving the supply chain dilemma.

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