World’s most important place: Ruchir Sharma analyses the rise of Taiwan

World’s most important place: Ruchir Sharma analyses the rise of Taiwan


The Cold War between the United States and the Soviet Union threatened to spark conflict in nations all over the world, and battles over control of many different natural and industrial resources. The new Cold War, between the United States and China, is increasingly focussed on access to one industry in one place: Computer chips made in Taiwan.
Over the past year, Taiwan has taken a lead in the race to build thinner, faster chips, or semiconductors. It is now the main source for these critical building blocks of digital industries like artificial intelligence and high speed computing, and the coming “internet of things”, in which homes, cars, and even clothes will connect to smartphones and voice activated speakers over 5G networks.

As of today, any country looking to dominate the digital future has to buy these ultrathin chips from either Taiwan or South Korea. And Taiwan has the edge in both technology and market power, putting this island of just 24 million people at the centre of the battle for global technological supremacy. It is the indispensable small economy.

After World War II, only two major emerging economies managed to grow faster than 5% for five decades in a row and to rise from poverty into the ranks of developed economies. One was Taiwan, the other South Korea. They kept advancing up the industrial ladder by investing more heavily in research and development than did any of their emerging world rivals. Now they are among the research leaders of the developed world too.

Competent governments played a major role. South Korea nurtured giant conglomerates like Samsung and Hyundai, which exported consumer products under their own brand names. Taiwan cultivated smaller companies focussed on making parts or assembling finished products for foreign brands, and that nimbleness helps explain its success.

Taiwan always managed to stay near the cutting edge, at first by borrowing technology from Western nations. As early as the 1970s, electronics had replaced textiles as the island’s top manufacturing industry. Through every phase of the computer revolution, from PCs to the mobile internet, Taiwan’s factories managed to retool fast enough to remain important global suppliers.

Inspired by Silicon Valley, Taiwan’s government in 1980 set up the first of its science parks, each with its own tech university, and offered bonuses for Taiwan-born engineers to return home. Mixing overseas experience with local graduates, the science parks became hothouses for entrepreneurial startups.

A few of them grew to global scale. By the 2010s the Taiwan company Foxconn Technology was assembling 40% of the world’s consumer electronic products, using plants in Asia, Europe and Latin America. Today Taiwan is a major supplier of smartphone lenses, e-paper displays and many other computer parts, but it is the essential supplier of chips.

One of the Taiwan government’s early star recruits was Morris Chang, a graduate of the Massachusetts Institute of Technology and a veteran of Texas Instruments. Tasked with building a semiconductor industry, Chang reviewed Taiwan’s strengths and weaknesses, and rejected the idea of trying to go head-to-head with global brands like Intel. Instead, he built the world’s first chip foundry, Taiwan Semiconductor Manufacturing Company, or TSMC.

Much like the Taiwan contract manufacturers that once made toys and textiles, a “pure foundry” like Chang’s stayed in the background, cranking out chips for global brands. Today foundries are a small corner of the $430 billion global chip market, but all of the most advanced chips come from foundries. And two-thirds of foundry production comes out of Taiwan, most of it from TSMC.

Intel, plagued by production delays, fell behind this year, leaving only Samsung and TSMC at the front of the pack. Both introduced five-nanometre chips this year and plan to introduce three-nanometre chips in 2022.

Going forward, many analysts say, Taiwan has the edge, because customers prefer a pure foundry that won’t compete with them to design chips or build devices. That, for example, is a big reason Apple has been switching from Samsung to TSMC for processing chips in the iPhone.

Taiwan has tried to position itself as the “Switzerland” of chips, a neutral supplier, but it increasingly finds itself at the centre of the jousting between China and the United States. US sanctions against China’s leading smartphone maker, Huawei, were designed in part to block Huawei’s access to chips from TSMC. Beijing responded by accelerating a campaign to build advanced chips at home. And the Trump administration countered by inviting TSMC to build new chip fabrication plant in the United States.

It is not clear which superpower has the upper hand. China still relies more heavily on imports and foreign technology, but the US is investing less aggressively in local production. While Taiwan companies have factories worldwide, its chip fabs are concentrated on its home island, just 100 miles off the mainland coast of China. In the event of military conflict, US access to those chip fabrication plants could be vulnerable to missile threat or naval blockade.

Historically, the importance of Taiwan was calculated in geopolitical terms. A small democracy thriving in the shadow of a Communist giant stirred sympathy and support in Washington. Now, as a byproduct of its successful economic model, Taiwan has become a critical link in the global tech supply chain, adding economic weight to the geopolitical calculations. And that weight is likely to increase as the battle for global tech supremacy heats up.

Credit: Stocks-Markets-Economic Times

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