Russian Invasion of Ukraine Erodes Taiwan’s Chip Shield

A factory of Taiwanese semiconductors manufacturer TSMC at Central Taiwan Science Park in Taichung, Taiwan, on March 25, 2021. Sam Yeh/AFP via Getty Images

News Analysis

One theory on why the Chinese regime has not invaded Taiwan is that an invasion would interrupt the flow of microchips that are necessary for nearly all forms of technology, including weapons.

Now, the war in Ukraine may disrupt the supply of necessary inputs of microchips, eroding Taiwan’s “chip shield.”

Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest maker of microchips, the brains that enable much of our modern technology. Microchips are a $1 trillion dollar per year industry, but when the value of products made with microchips is considered, the number increases exponentially.

On the one hand, the Chinese Communist Party (CCP) may want to invade Taiwan in order to gain control of the valuable chips. On the other hand, the CCP may be dissuaded from invading over fears that an invasion could disrupt future supply.

The loss of Taiwanese chips would cost electronics firms and auto manufacturers hundreds of billions of dollars and would set back, by many years, China’s ambitions of modernizing its military to compete with the United States. Yet another possibility is that the chips will act as an enticement for the world to defend Taiwan, if China invades.

An issue for the United States is that the U.S. military is also dependent on Taiwanese chips. If the chip factories are taken over by the CCP, then the United States would lose access to them. This would hamper the U.S. ability to go to war, increasing China’s chances of winning.

A recent simulation prepared by a U.S. think tank determined that controlling chipmakers would be so crucial to success in combat, that a dispute over access to chips could be a catalyst for war. The Biden administration has been advised that the best insurance for maintaining national defense capabilities is to geographically diversify Taiwanese chipmakers. Consequently, several bills have been introduced in Congress to approve funding for an increase in U.S.-based chip manufacture.

As the chips are crucial to both sides, Beijing and Washington have been supporting Taiwanese investment in factories in each country. TSMC is increasing its investment in an Arizona location, while U.S. chipmaker Entegris has doubled its Taiwan investment. In total, over the next four years, domestic and international investors are planning $108 billion of investments in Taiwan’s chip industry.

A chip by Taiwan Semiconductor Manufacturing Company (TSMC) is seen at the 2020 World Semiconductor Conference in Nanjing, in China's eastern Jiangsu Province, on Aug. 26, 2020. STR/AFP via Getty Images

At the same time, TSMC is expanding its investment in China. Its factory in Nanjing will only make chips for the auto industry. Taiwan will not be risking its best technology in China, however, as the factory will be building chips that are already several generations old.

So far, universal dependence on chips may have been one of the factors preventing a war for Taiwan. Now, however, the war in Ukraine may be nullifying Taiwan’s safety net. Some critical inputs for chips, palladium, neon, and C4F6 may be threatened by the war. Palladium is necessary for the manufacture of sensors and emerging memory technology. C4F6 is required for advanced node logic device etching, as well as advanced lithography processes that are used in chip production. Neon, a major export of Ukraine, is required for lasers and for lithography. When Russia invaded in 2014, the price of neon increased by 600 percent.

In retaliation for Western sanctions, Russian President Vladimir Putin announced that he is planning to prohibit commodity exports. The details of the ban have yet to be released, but they could further disrupt foreign chip manufacture.

Russia is the world’s largest source of palladium, producing over 45 percent of the global total. Russia is also a key exporter of the rare-earth metal scandium. Several gases necessary for the manufacture of chips are byproducts of Russian steel production, which are then exported to and refined in Ukraine. Regardless of which elements are covered in Putin’s new export ban, this cooperation will most likely cease.

Experts in Taiwan say that TSMC may continue to obtain raw materials, in spite of the conflict, but smaller companies will not be able to. The Taiwanese cabinet released a statement that was more optimistic than the prognosis put forth by many political analysts.

According to a cabinet spokesman, Taiwanese chipmakers use only small amounts of palladium, and the palladium they use is not sourced from Russia or Ukraine. He went on to say that Taiwanese manufacturers have the ability to refine and “remanufacture” palladium.

Domestic chipmakers also maintain local supplies of C4F6, which can mitigate the impact of a supply chain disruption. Additionally, the cabinet spokesperson explained that Taiwan reserves 145 days’ worth of energy supplies, so the factories should be able to maintain operations, regardless of what happens.

It seems that even the most optimistic take on the war claims that Taiwan has workarounds and temporary measures at its disposal to keep the chips coming. It remains to be seen how this plays out in the next few months.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.