Despite Chinese Market Controls, Taiwan’s Semiconductor Supply Chain Remains Secure

Despite Chinese Market Controls, Taiwan’s Semiconductor Supply Chain Remains Secure

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Despite Chinese Market Controls, Taiwan’s Semiconductor Supply Chain Remains Secure

The security of the semiconductor supply chain vaulted into the awareness of the American public and political class when pandemic-related disruptions to chip deliveries slowed the production of important consumer products like motor vehicles in 2020 and 2021. Many Americans learned then that while the United States is home to Silicon Valley, it no longer leads in manufacturing the chips that made the region world-famous. As Americans are now fully aware, the industry’s most important manufacturing nodes are concentrated on the island of Taiwan.

Taiwan’s most successful industrial enterprise, Taiwan Semiconductor Manufacturing Company (TSMC, 台灣積體電路製造股份有限公司), produces an estimated 90 percent of the world’s leading-edge chips, which enable the functioning of a huge variety of electronic goods, ranging from vehicles to smartphones to missile defense systems. As Global Taiwan Institute Adjunct Fellow Christina Lin wrote in March 2023, “given TSMC’s near monopolistic position in production of advanced semiconductors, Taiwan is a linchpin in supply chain security for the United States.”

While the pandemic tripped the alarm, more fundamental, lasting threats to the semiconductor supply chain emanate from the geopolitical designs of the People’s Republic of China (PRC). Fear of destabilizing PRC cross-Strait action disrupting chip production and export motivated Congress to pass the 2022 CHIPS and Science Act, a law that funds US-based semiconductor manufacturing and innovation.

President Biden, upon signing the plan, stated that it “supercharges our efforts to make semiconductors here in America, those tiny computer chips smaller than a fingertip that are the building blocks for our modern economy, powering everything from smartphones, to dishwashers, to automobiles.” He further noted that “The United States must lead the world in the production of these advanced chips. This law will do exactly that.” TSMC officials, including Chairman Mark Liu (劉德音), toasted to the CHIPS Act with American politicians, but have communicated that TSMC’s expansion of overseas chip manufacturing sites is part of the company’s common sense approach to supply chain resilience rather than an effort to bolster US production. In response to a shareholder question about overseas fab construction, Liu stated that “Satisfying customers’ demand is our main consideration when building an overseas fab,” and went on to explain that that justification underlies the company’s choice of the United States and Japan over Europe as targets for investment.

Despite the American political spotlight being shined upon the risks to the production and export of chips from Taiwan, less attention has been devoted to TSMC’s own supply chain—i.e., the pathways through which it procures the materials it needs in order to produce those chips. With the most advanced chip production guaranteed to continue to take place on the island for the foreseeable future—despite the United States’ (and other world governments’) attempts to “onshore”—how TSMC procures its materials will remain a globally significant economic question of the highest order.

In 2023, that supply chain came under increased pressure when, in July, the PRC announced a new set of export controls on Chinese companies. The rules, which came into effect on August 1, require exporters of gallium and germanium, two elements that are essential for the production of certain chip variations, to obtain special licenses before selling abroad on ostensible national security grounds. For the semiconductor supply chain, gallium is the more crucial and the more vulnerable of the two. Gallium is a key input for new, advanced chip designs—and the PRC produces 98 percent of the world’s supply of the element at this time.

Gas Guzzlers Are Out, Gallium Is In

Just as the automotive industry was put under supply chain stress by pandemic-era delivery slowdowns, it again finds its plans jeopardized by instability in the semiconductor sector. Among other defense and commercial goods, the PRC’s new gallium export policy will have substantial impacts on the production of electric vehicles, which S&P Global Mobility forecasts will constitute more than a quarter of vehicle production by 2030.

While all modern cars are highly sophisticated “computers on wheels,” electric vehicles (EVs) are particularly dependent upon semiconductors to regulate the supply of power to and from their batteries. Accordingly, new chips are being designed to accommodate these requirements and to produce better EVs. Gallium-nitride (GaN) chips are considered a leading candidate to make these valuable upgrades for vehicle chargers, inverters, and converters.

According to the US Department of Energy, gallium—a wide bandgap semiconductor material—will “allow power electronic components to be smaller, faster, more reliable, and more efficient than their silicon (Si)-based counterparts,” which will in turn “accelerate widespread use of electric vehicles and fuel cells.” While still just a small part of the total semiconductor volume used in cars, GaN chips are growing in importance.

In its most recent annual report—released in March 2023—TSMC touted its new process to produce gallium chips for electric vehicles, reporting that “6-inch gallium nitride (GaN) on silicon technology successfully passed customer product quality and reliability qualification. In 2022, this technology was widely adopted in power supplies for various consumer electronic devices featuring high power efficiency and small footprint. 8-inch GaN on Silicon technology development is on track and is expected to be ready in 2025 to further support automotive applications.”

An example of a company for which TSMC manufactures gallium chips is GaN Systems, a Canadian firm. GaN Systems is noted for its leading-edge gallium application know-how, and was acquired by Germany’s Infineon Technologies in October 2023, positioning it to be a key automotive industry supplier as GaN technology supersedes traditional silicon chips for certain components.

TSMC’s Gallium Supply

Though TSMC was sanguine in response to the PRC gallium export control announcement—“After evaluation,” the company told Reuters in July, “we do not expect the export restrictions on raw materials gallium and germanium will have any direct impact on TSMC’s production”—the gallium it uses for GaN chips is likely produced largely within the PRC, as is almost all of the global supply. 

Coverage from CommonWealth Magazine in the wake of the export control announcement echoed Reuters’ coverage. CommonWealth’s Elaine Huang (黃亦筠)reported on July 17 that “a high-level executive from an unnamed compound wafer foundry” noted that his firm’s gallium supply chain involved processing raw gallium in South Korea and then in Kaohsiung to a high-purity state before the firm took possession. Stephen Oliver, vice president of Navitas Semiconductor, a GaN chip customer of TSMC, also told IEEE News, “They’ve been using non-Chinese sources for a while, and they’ve confirmed with us that they don’t see an issue in going ahead,”

While the impact to TSMC may not be direct, the ramifications to the global market and the intermediaries through which it procures gallium are unavoidable. If less PRC gallium enters the open global market, the price—all else being equal—that TSMC must pay will rise. Indeed, immediately following the export control announcement, the price of gallium on metals markets jumped 27 percent.

In October, Reuters reported that the gallium price had again risen, though no slowdown in gallium exports from the PRC has yet been observed. Germanium exports, on the other hand, have slowed to a trickle.

PRC Gallium Position

Today, the PRC has the capacity to produce 750,000 kilograms of gallium per year, or 86 percent of global capacity. In 2022, it produced 98 percent of real global raw gallium output. But although gallium is a critical mineral, it is not a rare mineral.

Raw gallium is recovered as a byproduct of processing bauxite to make aluminum. (Zinc processing is another, less productive gallium source.) As recently as 2013, listed countries like Germany, Kazakhstan, and Ukraine right alongside the PRC as “leading producers” of gallium. In the intervening decade, however, the PRC has come to dominate global gallium production through targeted industrial policy. Using significant subsidies and incentives, the PRC increased aluminum production ten-fold. Today, the PRC accounts for more than half of global aluminum smelting capacity. The key to its gallium dominance is Beijing’s mandate that aluminum producers extract gallium from the process. Through this industrial policy, the PRC drove up the global gallium supply and drove down the price, making gallium extraction elsewhere mostly uneconomical. The remaining sliver of global raw gallium production today takes place mainly in Russia, Japan, and South Korea. Outside of China, Japan is the leading processor of gallium into the purified form needed for gallium-based chips. Japan is also noted for its recycling-based gallium recovery.

Trade Weapon Limits

Beijing’s new policy has had a predictable effect: a flurry of new gallium investment interest. Gallium extraction is not a technically difficult industrial process; PRC dominance arises from its own policies. Paradoxically, the PRC’s export controls may actually inhibit its ability to control the global market.

By rattling the trade sabre, the PRC will generate a rebound in global, non-China gallium production. Mytilineos, a Greek conglomerate, said it November that it will be able to scale cost-effective gallium extraction within 18 months. Germany stated prior to the export controls announcements that it was considering restarting gallium production, with global demand expected to boom with the incorporation of more electric power into the energy system. The new policy from Beijing has only made that consideration more salient. By showing its hand, the PRC has elevated awareness in Asia, Europe, and the United States of its dominant gallium position and prompted a political and market response. Also worth noting, Australia—not China—is the global bauxite production leader, meaning that its geoeconomic partners like Japan, Taiwan, and the United States will not lack access to the ore needed for aluminum production, and thus the gallium byproduct. Of course, any revitalization of such industries would come at significant expense.

In the end, TSMC’s sanguine attitude is probably appropriate. The company is renowned for its diversity of suppliers and ability to manage geopolitical tensions and tumult. Extra risk is now priced into the supply chain, but with the flexibility of global commodities markets and the existing know-how for gallium production and refining embedded in many countries outside of the PRC, TSMC and Taiwan manufacturers more generally will likely weather this export control storm.

The main point: The PRC’s gallium export controls provide it a chokepoint from which it could disrupt global supply chains, including for Taiwan’s semiconductor manufacturing, but market dynamics will likely limit the trade weapon’s effectiveness in the long term.