The semiconductor industry’s concentration at home provides it with some insulation from the direct effects of the U.S.-China trade war.
Taiwan’s crucial semiconductor industry is set to grow 5% in 2020 onthe back of rising demand for artificial intelligence applications and 5Gtelecommunications infrastructure. Overall industry output value is expected toreach NT$2.8 trillion (US$87 billion), up from NT$2.6 trillion in 2019,according to the semi-governmental Industrial Technology Research Institute(ITRI).
The local IC sector’s projected growth largely mirrors that of theindustry worldwide. Research firm IHS Markit estimates that globalsemiconductor revenue will rise to US$448 billion in 2020, up 5.9% from $423billion this year.
Taiwan’s chipmakers are an outlier in the local tech sector in termsof their modest China exposure. As a result, the U.S.-China trade war has notdisrupted their businesses to the extent it has other Taiwanese manufacturers.Reshoring is not an issue because most of the production capacity never leftTaiwan.
Peng Mao-jung, manager of ITRI’s Industry Science and TechnologyInternational Strategy Center, notes that only about 10% of Taiwan’ssemiconductor production capacity is located in China, and it’s there primarilyto serve local customers. In contrast, the semiconductors that Taiwanesecompanies export to the U.S. are made here, with the result that the increasedAmerican tariffs “have had no direct impact on Taiwan’s semiconductor industry,”he says.
Yet Taiwanese chipmakers are not immune to the tensions caused bythe trade war, especially as their clients include both major U.S. and Chinesecompanies. Adroit strategies will be required to avoid upsetting the applecart.
Media reports in October and November suggested that TaiwanSemiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker,had been pressured by the U.S. government to halt chip sales to Chinesetelecoms giant Huawei. Washington has blacklisted Huawei and considers it to bea major security threat. The Taiwan government has denied the reports.
HiSilicon Technologies, a Huawei subsidiary, is TSMC’ssecond-largest customer after U.S. tech giant Apple. HiSilicon generated 8% ofTSMC’s revenue in 2018 and 11% in the first half of this year, according to theChinese-language Commonwealth News.
Amid the trade tensions with the U.S., Huawei is moving to reduceits reliance on U.S. suppliers and is establishing an Asian supply chain withpartners from Korea, Japan, and Taiwan, says Eddie Han, a senior industryanalyst at Taiwan’s Market Intelligence & Consulting Institute. “This isexpected to benefit Taiwan’s IT industry,” he says.
A perennial challenge for Taiwanese IC makers is staying two stepsahead of China’s own innovation plans. Beijing has made plain its intentions todevelop self-sufficiency in semiconductors. Yet five years after it announcedthat goal, foreign suppliers still provide China with 86% of its ICs, just a 4percentage-point increase from 2014. Last year, China imported US$312 billionworth of semiconductors.
Slow progress hasn’t prevented Beijing from doubling down. InOctober, China announced it had established a new US$29 billion semiconductorfund, $9 billion larger than the first fund set up in 2014. The initiative isbound to irk Washington, one of whose stated objectives for the trade war is tochange China’s many unfair trade practices. Foremost among these are technologyimport substitution and the heavy state subsidies to designated “national champions.”
For Taiwanese IC makers, China continues to offer opportunities inthe short term, especially in the premium market. “China is highly dependent onTaiwanese foundries and OSAT [outsourced semiconductor assembly and testing]for high-end ICs,” says Chris Hsu, an analyst at Taipei-based marketintelligence firm TrendForce. “It is difficult in the short run for Chinesemanufacturers to fulfill China’s domestic demand for high-end ICs.”
With their focus on AI applications, Chinese IC firms are expectedto continue to rely heavily on Taiwanese manufacturers, which excel in relevantadvanced wafer manufacturing and packaging processes, Hsu says. For thatreason, TrendForce sees the premium IC market as remaining favorable toTaiwanese suppliers in 2020.
In the low- and mid-range IC segments, the market will be tougherfor the Taiwanese. Hsu expects that Chinese manufacturers will increasingly aimto produce ICs for home appliances or electric vehicles. Although EV demand iscurrently weak in China, “this may give Chinese IC companies some room toimprove their manufacturing technology to catch up, since all the supplierssuffer from the same adverse effect,” he says.
SEMI, the electronics industry supply chain association, forecast inSeptember that China would overtake Taiwan next year to become the world’slargest semiconductor equipment market. By raising its IC equipment investment21% in 2020 to more than US$14 billion, China would surpass Taiwan (US$11.6billion) and South Korea (US$10.5 billion), SEMI said.
