Nancy Pelosi’s Taiwan trip has intensified the US and China’s chips showdown. Now the world’s chipmakers may be forced to pick a side

This week, US House Speaker Nancy Pelosi became the highest-ranking US official to visit Taiwan in 25 years.

Her visit boosted US-Taiwan relations at a time when Washington’s relations with Beijing are deteriorating. Pelosi pledged that the US would defend Taiwan’s democratic self-government. “The United States remains determined to preserve democracy in Taiwan,” she said In a meeting with Taiwan President Tsai Ing-wen on Wednesday.

Pelosi’s Politically Charged Taiwan Tour Beijing’s fury flared. China, which views Taiwan as a breakaway territory, described Pelosi’s visit as “extremely dangerous” to geopolitical stability. After Pelosi’s visit, Beijing hosted it The largest military exercise ever Close to Taiwan, directly surrounding the island Rocket and ballistic-missile fire. On Friday, China announced this Cessation of cooperation and communication with the US On issues ranging from the climate to curbing cross-border crime, it makes clear that Beijing intends to push back against the US for meddling in China’s affairs.

But perhaps most importantly for the business world, recent events have intensified the growing Sino-American showdown in one of the most important areas of the global economy: semiconductor chips. The US-China chip battle, already years in the making, has now reached a critical crossroads, and experts say the world’s chip makers could soon jostle for technological and financial supremacy between the two superpowers, Washington and Beijing.

Race to the top

are confined in Washington and Beijing A terrible race To become a global leader in high-tech industries such as artificial intelligence, biotechnology and semiconductors. Semiconductor Chips, The building blocks It is the primary battlefield, powering everything from smartphones, home appliances, data servers and military equipment. Both countries have framed the race to become a superpower in chips as vital to their national and economic security.

China started it seven years ago ‘Made in China 2025’ Blueprint, which outlines its ambitions to dominate advanced technology—with a goal of producing 70% of the chips it uses at home by 2025 (although the balance too small of this goal).

Last week, Washington took a big step forward in trying to stay competitive. Congress on July 29 CHIPS Act passed—a landmark law reserving $52 billion in subsidies for the U.S. semiconductor sector, signaling his intention to boost its homegrown chip industry. About $39 billion will be allocated to build new chip fabrication plants (known as fabs) on US soil.

Pelosi’s visit to Taiwan could score another point for the American team. Her short journey included an important one A meeting with Mark Liu, CEO of Taiwan Semiconductor Manufacturing Company (TSMC)—the world’s largest and most valuable chipmaker. The firm produces 90% Among the world’s leading-edge chips.

So far, TSMC has avoided taking sides between the two rival countries, as both the US and China are important to its business. But Liu meets with Pelosi indicated a willingness to side with Washington and “any kind [TSMC’s] Neutrality,” Bloomberg Written by Tim Kalpan this week.

The culmination of Pelosi’s trip, as well as the CHIPS Act and previous US export controls that had reduced TSMC’s China revenue, resulted in “an environment where … TSMC’s size and prowess will ensure that it remains everyone’s foundry—except China.” ” he wrote.

‘Businesses have to pick a side’

The culmination of recent events reinforced that businesses may soon be forced to choose a side in the long-running tug-of-war between Washington and Beijing.

Beijing’s response to Pelosi’s visit to Taiwan—including trade restrictions Taiwan—was relatively constrained, Mark Williams, chief Asian economist at research firm Capital Economics, wrote in a note Wednesday. Currently, China is avoiding any major retaliation due to Taiwan’s importance to the Chinese economy. Electronics account for the largest share of Taiwan’s exports to China, and semiconductors are the single largest product. If Beijing imposes sanctions on Taiwanese chip makers, it will “wreak havoc on the Chinese industry [and] “Taiwanese manufacturers can’t hurt,” Williams wrote, given increased demand for the chip worldwide.

Still, China’s military display after the Pelosi visit shows that its security interests may override global cooperation, said Vashishta, founder and CEO of Supply Wisdom, a risk management firm and the US Department of Defense’s Defense Business Board. fortune That means “businesses have to pick a side, especially when it comes to critical supply chains,” he said.

The Taiwan drama warned American businesses—including chip companies and technology companies—that their business relationships with China could be at risk, said Paul Rosenzweig, CEO of Red Branch Consulting and Assistant Secretary of Homeland Security for Policy. fortune

America is thinking now Limiting US chipmaking equipment It would be the first by the US to ban shipments to manufacturers that do not have specific military applications, from exporting to Chinese memory chipmakers. The move will hurt global chip makers like South Korea’s Samsung S.K Hynix, which are Memory chip operations in China.

Yet the world’s largest chipmakers in Taiwan and South Korea lean in favor of America for a few key reasons, John Bathgate, investors At NZS Capital, an investment management firm focused on semiconductors, said fortune

The U.S. lags behind Asia in semiconductor manufacturing, but remains so world leader in Advanced Semiconductor Design and Devices. More than 80% of the world’s chip design equipment, more than 50% of the intellectual property for chip designs and half of the world’s chip manufacturing equipment, According to Boston Consulting Group. This means that chip manufacturing powerhouses in Asia need US designs and hardware to produce high-tech chips. Moreover, most of these chipmakers’ wholesale customers are US-based. For example, the US makes up 64% of TSMC’s sales. Those top customers include the smartphone giant applewhich accounts for a quarter of the Taiwanese firm’s revenue.

“The US has a huge advantage over China when it comes to advocating investment and partnership,” says Bathgate.

Some say the global chip giant is already entering the US market. The CHIPS Act, which would prevent recipients of US government funding from expanding or upgrading their advanced chip capabilities in China, has forced South Korean companies to review their Chinese operations.

They are “acceleration”.[ing] shift from the US to China,” said Kim Young-woo, head of research at SK Securities and a South Korean government adviser on semiconductor policy. Financial Times Report Published earlier this week. “They are rethinking their policies because of the US-China technology war and because of geopolitical risks they are now leaning towards the US.”

South Korean electronics giant Samsung is already producing a $17 billion fab While TSMC is spending $12 billion in Texas – its largest US investment to date – Arizona plants. For global chip makers, the “key driver” to build plants in the US is “continued access to the US market and technology,” Bathgate says.

But choosing a team is not that easy.

China has remained of the world Largest importer of chips And that Biggest buyer Semiconductor manufacturing equipment. By some accounts, China has spent $100 billion On building up its chip industry—and it wants to spend more. Shares of the Chinese chipmaker increased Investors this week interpreted Pelosi’s visit as a boon for China’s chipmakers that would encourage Beijing to plow more money into domestic manufacturers.

And despite U.S. pressure on chipmakers to stop investing in China and provide the country with advanced chip technology, companies like TSMC need both the U.S. and Chinese markets and “will have to work hard not to be forced to choose sides,” said Dexter Roberts, senior fellow at the Atlantic Council. Asia Security Initiative and author The Myth of Chinese Capitalism: Workers, the Factory, and the Future of the World said fortune TSMC CEO Liu noted that the company and China are still interdependent, adding that a CNN the interview this week.

South Korean and Taiwanese companies previously looked to China because the country’s manufacturing was cheaper. These chip giants may be leaning heavily on the CHIPS Act’s subsidies given the high manufacturing costs in the US, but as some experts have noted, the bill’s subsidies have not been passed on to more than $3 billion in subsidies. may be insufficient Galvanizing chipmakers to transform their supply chains in any meaningful way.

Rosenzweig says businesses would face significant costs and disruption from cutting themselves off from China, meaning that “most companies would be very reluctant to consider a complete break with China.”

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