What Happened
A Reddit user’s question about Taiwan’s semiconductor dominance has highlighted one of the most significant economic and geopolitical vulnerabilities in the modern world. Taiwan, officially the Republic of China, produces roughly 90% of the world’s most advanced semiconductors through companies like Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chip manufacturer.
This concentration means that virtually every smartphone, computer, car, and modern electronic device relies on chips manufactured on an island that China claims as its territory. The situation has created what experts call a “single point of failure” in the global economy, where disruption to Taiwan’s production could cripple industries worldwide.
Why It Matters
The semiconductor industry is the backbone of the modern digital economy, with global chip sales exceeding $500 billion annually. These tiny components power everything from smartphones and laptops to military equipment and critical infrastructure systems like power grids and hospitals.
Taiwan’s dominance creates several critical vulnerabilities:
- Economic risk: A disruption in Taiwan could trigger global supply chain collapses similar to but far worse than the chip shortages experienced during COVID-19
- Geopolitical leverage: China’s claims over Taiwan give it potential control over the world’s most critical technology supply chain
- National security concerns: Countries worldwide depend on Taiwan for chips used in defense systems and critical infrastructure
The 2021-2022 global chip shortage, which caused car production delays and electronics price increases, offered a preview of what could happen if Taiwan’s production were seriously disrupted.
Background
Taiwan’s semiconductor dominance didn’t happen overnight—it resulted from strategic decisions made over several decades:
Government Investment (1970s-1980s): Taiwan’s government made semiconductor manufacturing a national priority, providing subsidies and creating research institutes like the Industrial Technology Research Institute (ITRI).
Foundry Model Innovation: In 1987, TSMC pioneered the “foundry” business model, where companies design chips but outsource manufacturing. This allowed smaller companies to access cutting-edge production without building expensive facilities.
Specialized Expertise: Taiwan developed deep expertise in semiconductor manufacturing, creating a skilled workforce and supply chain ecosystem that’s difficult to replicate elsewhere.
Economic Advantages: Lower labor costs compared to the US and Japan, combined with government support, made Taiwan an attractive manufacturing location.
Continuous Innovation: Companies like TSMC invested heavily in research and development, staying ahead in producing the smallest, most advanced chips.
Meanwhile, other countries made different strategic choices:
- United States: Focused on chip design rather than manufacturing, with companies like Intel, AMD, and Nvidia
- Europe: Emphasized automotive and industrial semiconductors rather than cutting-edge processors
- Japan: Lost market share as South Korea and Taiwan gained prominence
- China: Started serious semiconductor investment only recently, still years behind in advanced manufacturing
What’s Next
Recognizing the risks of Taiwan’s dominance, countries are now taking action:
United States: The CHIPS Act, passed in 2022, allocated $52 billion to boost domestic semiconductor manufacturing. TSMC is building facilities in Arizona, though they won’t match Taiwan’s full capabilities initially.
European Union: Launched the European Chips Act with €43 billion in funding to double its global market share by 2030.
China: Despite US restrictions, continues massive investments in domestic chip manufacturing, though it remains years behind in the most advanced processes.
Supply Chain Diversification: Major tech companies are exploring alternative suppliers and designing chips that can be manufactured in multiple locations.
However, building advanced semiconductor manufacturing capabilities takes 5-10 years and tens of billions of dollars. The most advanced chip manufacturing—producing processors for smartphones and high-performance computers—will likely remain concentrated in Taiwan for the foreseeable future.
The geopolitical tensions surrounding Taiwan add urgency to these efforts. While military conflict would be catastrophic for many reasons, the potential disruption to global chip supplies provides an additional incentive for peaceful resolution of cross-strait tensions.