Or, Who Knew TSMC Had Us All By The Short And Curlies? And how do Taiwan’s claim to independence, and political tensions between the US and China, make us all less secure?

Heard of TSMC? You probably haven’t. But you need it every day. Quite a lot of every day. You use its products frequently, especially if you’re anything like me and you’re “always on your phone.”

TSMC is the Taiwan Semiconductor Manufacturing Company. Using those rare metals we discussed in a previous article, it makes the chips that power nearly everything that you use every day. Computer chips, also called semiconductors, are the “brains” of electronics, and these days, the entire world runs on them. There would be no iPhone, Amazon Webstore, or online messaging apps without them. Temperature sensors in air conditioners are powered by tiny microchips. The chip inside pacemakers sends electrical pulses to the heart to keep it beating regularly. From flying across oceans to hailing a ride on our smartphones when we land; streaming movies to buying stuff online; from checking out groceries to paying for dinner with your credit card: every modern system runs on chips.

Moreover, it’s not just what we think of as “electronics” that uses chips. The latest washing machines, ovens, and refrigerators are all made “smart” by semiconductors. In 2019 300 billion computer chips were sold, roughly 40 for every man, woman, and child in the world. And chip companies raked in $450 billion. Virtually all of human progress over the past sixty years has been driven by computer chips becoming more powerful. Remember that chips are the brains of computers, and the more “brain cells” (transistors) a chip has, the faster it is.

To put this into perspective, the NASA supercomputer that sent Neil Armstrong to the moon in 1969 had 2,000 transistors. But there are 11.8 billion transistors (brain cells) on the chip inside the new iPhone, and remember, modern chips are no larger than your thumbnail. So, all the technological progress in our lifetime has come from chipmakers figuring out how to cram more transistors onto these microchips. It’s how we can do things on our pocket-sized smartphones that IBM mainframes larger than a double-decker bus never could.

In short, semiconductors are the most important goods the world has ever known. They are the “fuel” powering every modern technology, and will power every future technology too. Self-driving cars, artificial intelligence, computer vision, space tourism, genomic medicine will all need smarter, better and faster chips.

If you have a laptop, you may already be familiar with the chip giant, Nvidia. (NVDA) In fact, as I sit here, typing on my laptop, a little green and black sticker informs me that it uses Nvidia GEFORCE GTX. Nvidia, Qualcomm, and AMD are often called “chipmakers,” but these companies don’t actually make semiconductors. Instead, they create blueprints and intricate designs for the chips, so that they can design them to power the items they want to power. When it comes to physically manufacturing the chips, they send their designs to the Taiwan Semiconductor Manufacturing Company.

TSMC is the world’s largest semiconductor manufacturer, producing roughly 70% of top-shelf chips. It’s made the chips inside every Apple iPhone and Mac since 2014. It’s produced Nvidia’s chips since the ‘90s. Giants like Qualcomm, Google, and AMD pay TSMC billions of dollars a year.

Most people have never heard of TSMC because it doesn’t design any chips of its own. It’s a dedicated manufacturer, only producing chips for the tech giants everyone has heard of. Most of TSMC’s factories are on the island of Taiwan, and according to one visitor, its plant in Hsinchu is “the most incredible building he’s ever set foot inside”: once you pass through security, you have to throw on a protective cover-all suit with masks and gloves. Then you walk into an “air shower,” a special chamber that blasts you with filtered air to remove any particles, like dust or hair.

That’s because the semiconductors TSMC makes are so fine, a single speck of dust can ruin them. Its so-called “cleanroom” must be thousands of times more purified than outside, with completely sterile, dry air. The factory uses robots:“A monorail-like track bolted to the ceiling loops around the factory. The shuttles zooming around above your head are carrying partly-finished chips, some worth more than solid diamonds. These robots travel 400,000 km a day, combined, making the chips for which the world has a seemingly inexhaustible appetite.

It’s only recently that TSMC stole Intel’s crown as the world’s leading chip manufacturer. All tech progress has been fuelled by chipmakers cramming more transistors onto these tiny silicon wafers, so that now, the chip inside Apple’s new iPhone has a transistor etched into it every 5 nanometres. That’s five billionths of a meter, or 1,000X smaller than a red blood cell.

Chipmakers refer to the task of producing ever faster chips as “recipes.” Intel pioneered chipmaking back in 1968, and until recently, it always “cooked” the recipe correctly before anyone else, which allowed it to keep producing the world’s fastest chips. But Intel was four years late to the latest chip innovation, allowing TSMC to leapfrog it for the first time ever. TSMC is now the only chipmaker in the world capable of producing leading-edge chips. And that’s transformed it into the world’s most important tech company.

When Apple and Nvidia need new chips made, it can only be by TSMC. The firms  will spend about $500 million designing the latest chips for their products, and when you invest that kind of money into design, you will only hire the best chipmaker to build them. TSMC is like the sun, sitting at the centre of the tech universe. Every company reliant on faster chips now revolves around it.

As chipmaking gets more complex and expensive, TSMC is leaving its rivals behind. In 2001 there were 30 chipmakers vying for the crown. Today, TSMC is the only chipmaker in the world capable of making leading-edge chips. Intel and Samsung are the only others left standing, and both are 1–2 years behind. TSMC’s only problem is figuring out how to make more chips. Apple, Nvidia, AMD and a handful of others have booked out its entire capacity until the second half of 2021. Semiconductors are the “fuel” of our modern world, with every innovation you can think of relying on faster and faster chips. And as the principal supplier of those chips, TSMC is now the most important tech company in the world.

But all is not coming up roses in the chip manufacturer’s garden.

The world is experiencing a computer chip shortage due to a “perfect storm” of problems including a global pandemic, a trade war, fires, drought and snowstorms. It has coincided with a period of soaring, unprecedented demand – in January this year alone, chip sales reached a record $40 billion. Consumers are facing price rises and shortages of products from TVs and mobile phones to cars and games consoles as a global shortage in semiconductors grows. The shortage in chips has been steadily worsening since last year.

Initially the problem was only a temporary delay in supplies as factories shut down when the coronavirus pandemic first hit. However, although production is back to normal, a new surge in demand driven by changing habits fuelled by the pandemic means that it is now reaching crisis point. The covid-19 pandemic caused a slump in car sales of up to 50% last year, because few people were travelling anywhere and confidence in the economy was low. Car companies reacted by slimming down manufacturing and reducing orders for parts. This included huge numbers of computer chips, because modern cars contain dozens of them to control everything from braking to steering and engine management. According to research firm, HIS Markit, nearly a million fewer vehicles than usual will have been made in the first quarter of 2021 as a result.

At the same time, there was a rush for home office items like laptops and smartphones, vital because many people transitioned to working from home. There was a similar rush for games consoles, so that people had something to do to keep their minds off the global pandemic. The big factories supplying manufacturers switched from making car components to smartphone, laptop and tablet chips instead. In fact, production is going stronger than ever in terms of total sales, and the problem is as much about demand as supply. The Semiconductor Industry Association (SIA) says chip sales in January 2021 hit 40 billion dollars, which is up 13.2 per cent on the same month last year.

Recently, car manufacturers investing in tech-heavy electric vehicles, the boom in sales of TVs and home computers and launch of new games consoles and 5G-enabled mobile phones have all driven demand. “Chips are everything,” says Neil Campling, media and tech analyst at Mirabaud Asset Management. “There is a perfect storm of supply and demand factors going on here. But basically, there is a new level of demand that can’t be kept up with, everyone is in crisis and it is getting worse.”

What is causing the shortages?

Apart from the pandemic, compounding trouble is the trade war between the US and China. US chip firm Xilinx has had to suspend some sales to Chinese consumer electronics company Huawei after then-President Donald Trump put Huawei on a trade blacklist over national security fears. China is now working on building up its own production of chips. The US is doing the same, and getting TSMC to build a $12 billion chip factory on its own shores. Everyone wants to be able to guarantee their own supply of chips, and the current shortage has made it an even higher priority.

As if that wasn’t enough, the weather is also against many chip-makers. The manufacturing process requires lots of water. TSMC makes chips for dozens of companies and churns through 156,000 tonnes of water a day normally. But there are serious droughts in Taiwan at the moment, reservoirs are drying up and the firm is now bringing water to the factory in trucks. And it’s not just in Taiwan. A fire struck a chip factory in Japan in October, while an unseasonably cold snap in Texas also temporarily shut down plants there.

What effect is this having on the world supply of chips?

There aren’t enough!  And that goes right from the top – where the most complex chips are needed – to the bottom.

Right at the top, Apple, a $2tn company and the world’s biggest buyer of semiconductors, spending $58bn annually, had to delay the launch of its iPhone 12 by two by two months last year due to the shortage. Last month, Sony, which along with other console makers has struggled with stock shortages over the last year, said it might not hit sales targets for the new PS5 this year because of the semiconductor supply issue. Microsoft’s Xbox has said it forecasts supply issues continuing at least until the second half of the year. Samsung, the world’s second-largest buyer of chips for its products after Apple, said earlier this week that it might have to postpone the launch of its latest high end smartphone due to the shortage, despite also being the world’s second-largest producer of chips.

Directors at Samsung said “It is incredible that Samsung, which sells $56bn of semiconductors to others, and consumes $36bn of them itself, finds it may have to delay the launch of one of its own products,” Samsung’s co-chief executive, Koh Dong-Jin, who also heads its mobile business unit, highlighted a significant issue saying that there is a serious imbalance in the pecking order of who is getting the limited supplies of chips.

He should think himself lucky he’s not further down the pecking order. The chip shortage was caused in part as automakers miscalculated demand and pandemic-fuelled sales of smartphones and laptops surged. It forced carmakers including General Motors to cut production, and increased costs for smartphone makers such as Xiaomi Corp.

Then car manufacturers, who cut chip orders as vehicle sales fell last year, found themselves at the back of the queue when they tried to reorder when the market rebounded. The entire global car industry buys about $37bn worth of chips, with the biggest players such as Toyota and Volkswagen spending more than $4bn each, making them relative minnows for semiconductor suppliers. Ford recently cancelled shifts at two car plants and said profits could be hit by up to $2.5bn this year due to chip shortages, while Nissan is idling output at plants in Mexico and the US. General Motors said it could face a $2bn profit hit.

“The worst affected have been autos because they were last to the party. If Apple is spending $58bn a year and growing,  who are you going to keep supplies going to first?” said a representative of the industry speaking to the FT.

Meanwhile, the global shortage of chips that has rattled production lines at car companies and squeezed stockpiles at gadget makers, is now leaving home appliance makers unable to meet demand, according to the president of Whirlpool Corp in China.

The U.S. based company, one of the world’s largest white goods firm, is falling behind on exports to Europe and the United States from China, by as much as 25% on some months, Jason Ai told Reuters in Shanghai. The company has struggled to secure enough microcontrollers, simple processors that power over half of its products including microwaves, refrigerators, and washing machines. And with every company that uses chips in its products panic buying to shore up its stockpile, the shortage has blindsided not just Whirlpool but other appliance makers too. Hangzhou Robam Appliances Co Ltd, a Chinese white goods maker with over 26,000 employees, had to delay the release of a new high-end stove vent by four months because it couldn’t source enough microcontrollers. “Most of our products are already optimised for smart home use, so of course we need a lot of chips,” said Dan Ye, marketing director at Robam. He added that the company had found it easier to source chips from China than overseas, prompting it to re-evaluate future supplies.

How long will it last?

The chip shortage looks set to persist for some time yet. It can take up to two years to get complex semiconductor production factories up and running, Semiconductor factories have limited capacity, and building new factories takes massive investment. Chip-makers also have incentive to focus their efforts on smartphone and tablet chips rather than on the older technology used in cars which has lower profit margins. Meanwhile many companies operate with low stock levels to keep costs down and are now rushing to replenish supplies from the limited sources available. Supply chains are stressed or broken and nobody knows what to expect.

“There is no sign of supply catching up, or demand decreasing, while prices are rising across the chain,” said one industry specialist, speaking to Reuters. “This will cross over to people in the street. Expect cars to cost more, phones to cost more.”

Some analysts believe it will take up to a year for manufacturing to get back on track, and then a further six months for stock levels at various companies to reach normal levels. US chip-maker Broadcom says 90 per cent of its 2021 output is already spoken for.

Other data shows that the chip industry has been edging closer to its full manufacturing capacity for some years now, so in a way this could have been expected and there wasn’t enough of a buffer in place to handle fluctuations in demand. “Chip famines” have happened several times before, often due to disasters, but also sometimes when new technology requires updated factories.

In any case, factories are ramping up capacity now but this will take time to have much of an effect. It can take 26 weeks to create a chip and there are more than 1000 steps in making some products. In February, US president Joe Biden signed an executive order that will see $37 billion spent on bringing manufacturing capacity to the US. Again, this will take time.

Will our chips be more expensive? Yes.

Reuters reports that the company is once again the target of rumours stating that it will increase its wafer prices. Previous rumours speculating the same change had surfaced in late January, in the wake of the ongoing chip crunch that automakers are currently facing. These believed that the manufacturer was aiming for another 15% price increase in response to the increased demand for automotive chips, but as the months passed with the first quarter now at an end, no further details for the specific increase came to light until this week.

TSMC manufactures semiconductors in two wafer sizes, namely the 12-inch and 9-inch wafers. Out of these, chips that are generally used in consumer electronics are manufactured on 12-inch silicon wafers, which are the subject of the reported price increase. The details suggest that by the end of his year, TSMC will have increased its 12-inch wafer prices by $400 for a 25% year-over-year increase – resulting in all-time record high prices. The company’s 7 nanometre process line is its bread and butter for the time being as it looks to scale up production for the more advanced 5 nanometre line this year and bring the leading-edge 3 nanometre process to mass production in the second of 2022, reports Reuters.

Whispers from the Taiwanese chip sector also suggest that the discounts TSMC’s major customers negotiated for 2021 have been withdrawn owing to the uptick in chip demand. Not only is the automotive sector desperate to get its hands on silicon for its products, but a shift in global work and entertainment patterns due to the ongoing pandemic has increased the demand for consumer electronics such as smartphones and notebooks.

For its part, TSMC has also made statements to the press in response to queries for the price hike rumours. The company’s statement basically reaffirms its commitment to providing its customers with value and as is often the case refrains from commenting on pricing.

And as it deals with an auto chip shortage, a demand increase and an ongoing water crisis, word from Taiwanese social media suggests that while the company is making its employees work beyond office hours, the extra time is not being logged inside TSMC’s systems as overtime. The company’s procedures require worker supervisors to agree to overtime after determining the reasons behind a worker’s need to work beyond the allotted hours, which according to the social media post now deleted were not being followed.

Meanwhile, TSMC’s share price fell in Taiwan last week as U.S. chip giant Intel Corporation unveiled a $20 billion plan to enter the contract chip manufacturing space. Since then, the stock has stabilized as investors believe TSMC’s technology advantages will enable it to maintain an edge in the market.

But . . .

Is TSMC secure? Is the political situation in Taiwan secure?

No, most definitely not. China claims the island of Taiwan. The political and economic environment is complicated by the potential for military conflict should Taiwan declare de jure independence. It is the official PRC policy to force unification if peaceful unification is no longer possible, as stated in its anti-secession law, and for this reason there is a substantial military presence on the Fujian coast. The US is, of course involved up to the hilt.

In 1979, the US severed ties with Taiwan in favour of Beijing, rejecting the island’s claim to be independent of China. However, in the last few years amid growing tensions with China, the US has increased its activities with democratically-ruled Taipei, a move which has irked Beijing. The FT reported a day ago that the Biden administration is preparing to issue guidelines that would make it easier for US diplomats to meet Taiwanese, in a move China is likely to see as a provocation. In one of his final acts in office, Trump significantly loosened constraints that had made it difficult for US diplomats to hold such meetings. Experts were waiting to see if Joe Biden would reverse course. But the Biden administration has decided to keep many of the Trump changes in place, according to people briefed on the policy. The limits on contacts between American diplomats and Taiwanese officials had been in effect for decades until Trump loosened them. One person familiar with the guidelines said they would focus on encouraging US officials to meet Taiwanese counterparts rather than imposing limits on contact. A second person said most of the restrictions on interactions “between US and Taiwanese diplomats . . . will disappear”. The show of support for Taiwanese officials was the latest manifestation of Biden’s increasingly tough stance towards China. A senior official last week told the Financial Times that his administration was concerned China was flirting with seizing control of Taiwan.

And following that, also a day ago, China has warned the US against crossing its “red line” after an American ambassador visited Taiwan at the weekend, making it the first such official visit in the last 42 years. John Hennessey-Niland, the US ambassador to the pacific island nation of Palau, was part of the delegation that came with Palauan president Surangel Whipps for a five-day trip.

Is this a potential flashpoint?

Yes. China continually shows its strength over the island. The Guardian reported four days ago that  twenty Chinese military aircraft entered Taiwan’s air defence identification zone on Friday in the largest incursion yet reported by the island’s defence ministry, marking a dramatic escalation in tensions across the Taiwan Strait.

The ministry said the air force deployed missiles to “monitor” the incursion into the south-western part of its air defence identification zone. It also said its planes warned the Chinese aircraft, including by radio.

It was the largest incursion by the Chinese air force since Taiwan’s defence ministry began disclosing almost daily Chinese military flights over the waters between the southern part of Taiwan and the Taiwan-controlled Pratas Islands in the South China Sea last year.

Some of the Chinese aircraft flew in the airspace to the south of Taiwan and passed through the Bashi Channel, which separates the island from the Philippines, the ministry said. A person familiar with Taiwan’s security planning told Reuters that the Chinese military was conducting exercises that would simulate an operation against US warships that sail through the Bashi Channel.

Meanwhile, NBC news reports that

“China’s massive arms build-up has raised doubts about America’s ability to defend Taiwan if a war broke out, reflecting a shifting balance of power in the Pacific where American forces once dominated, U.S. officials and experts say.

In simulated combat in which China attempts to invade Taiwan, the results are sobering and the United States often loses, said David Ochmanek, a former senior Defence Department official who helps run war games for the Pentagon at the RAND Corp. think tank.

In tabletop exercises with America as the “blue team” facing off against a “red team” resembling China, Taiwan’s air force is wiped out within minutes, U.S. air bases across the Pacific come under attack, and American warships and aircraft are held at bay by the long reach of China’s vast missile arsenal, he said.

“Even when the blue teams in our simulations and war games intervened in a determined way, they don’t always succeed in defeating the invasion,” Ochmanek said.

A war over Taiwan remains a worst-case scenario that officials say is not imminent. But China’s growing military prowess, coupled with its aggressive rhetoric, is turning Taiwan into a potential flashpoint between Beijing and Washington — and a test case for how the U.S. will confront China’s superpower ambitions.”

China is already attempting industrial espionage in Taiwan.

Reuters reports from Taipei, that the China-U.S. trade war is pushing Beijing to step up its efforts to steal technology and poach talent from Taiwan to boost China’s semiconductor industry’s self-sufficiency, the government of the tech-powerhouse island said on Wednesday:

“Washington has taken aim at China’s tech industry during the bitter trade dispute, putting sanctions on firms including telecoms equipment giant Huawei Technologies Ltd, saying they are a threat to national security, angering Beijing. Chinese-claimed Taiwan is home to a thriving and world-leading chip industry, and the government has long worried about China’s efforts to copy that success, through fair means or foul.

Speaking at a parliamentary committee meeting on how to respond to the “red supply chain” – a reference to the colour of China’s ruling Communist Party – Taiwan Economy Minister Wang Mei-hua said the trade war had created new risks.

“Affected by the U.S.-China technology war, the development of mainland China’s semiconductor industry has been obstructed, but they are still committed to the industry’s development,” she said. “In order to achieve self-sufficiency in the supply chain, poaching and infiltration are the quickest way for mainland China to do this,” Wang added.

Taiwan’s chip workers have deep experience and speak the same language, meaning they are a “natural target for poaching China has latched onto”, she added.

Hu Mu-yuan, deputy head of Taiwan’s National Security Bureau, said China’s efforts were a threat to not just Taiwan, but also Japan and South Korea, threatening global trade and fair competition.

“Moreover, the Chinese communists are stealing other countries intellectual property to boost their own power,” he added.

Taiwan has strict laws to try and prevent this from happening, but officials have warned China tries to skirt them by setting up front companies on the island, using Taiwanese head-hunters and other methods.

“Preventing Taiwan’s key technology and high-tech personnel from being infiltrated by the ‘red supply chain’ has become an important task to protect our industry’s competitiveness and ensure our economic security,” Hu said.”

What are we looking at?

When a magician wants to trick an audience they often use misdirection. “Look at my right hand” they say, while the left hand performs the trick. China isn’t tricking anyone, necessarily – at the moment – but it’s possible we are tricking ourselves. The story goes like this. We need semiconductors to lead the lives we currently lead. At the moment, production – production, but not design – is concentrated in factories in an island that is claimed by China, which also relies on it for some semiconductor production. There is a trade war between China and the US, and in the wake of that, the US has made friendly overtures to Taiwan, while China has been making aggressive noises. And there is a global shortage of semiconductors. It’s not difficult to see how, while we focus on the tensions in the Middle East, often thought to be the likeliest flashpoint for conflict, and the global and national issues with the pandemic, and the domestic complexities of Brexit, a nasty little stand off – potentially a military standoff – may be brewing, unnoticed, under our very noses. Let’s hope we are wrong.

Meanwhile, for the foreseeable future, in terms of electronics in our daily lives, we may have had our chips.

“Abstract Computer Chips” by pingnews.com is licensed under CC BY-SA 2.0