Taiwan makes 65 percent of the world’s semiconductors and roughly 90 percent of the world’s most advanced computer chips — employing 2.5 percent of the local workforce and accounting for a staggering 15 percent of the island nation’s GDP in the process.

Dispatch from Taiwan,” a podcast by USIP and Taiwan-based Ghost Island Media, delves into the policy debates within Taiwan that could have implications for the region and beyond. Each episode features Taiwanese local experts and voices weighing in on social, economic and defense issues and discusses how Taiwanese society is responding to these challenges. 

Taiwan’s semiconductor industry is so dominant that some think it might help deter a Chinese invasion. The thinking is that any attack on Taiwan would disrupt the global tech supply chain, so the world has a stake in peace across the Taiwan Strait.

In this episode of "Dispatch from Taiwan," we look at what’s known as the “silicon shield,” its history, its substance, and how Taiwanese citizens view this critical industry. Most importantly, what’s the next big thing?

This episode includes views from Jeremy Huai-Che Chiang from Foundation for Future Generations, Paul Huang from LoFTechnology, Daniel Lin from Creative Ventures, Tina Cheng from Cherubic Ventures, and Taipei-based accountant Julia Pan and software engineer Lance Chang.

Correction: An earlier version of this episode incorrectly stated that around 300,000 people in Taiwan work at TSMC. A corrected version of the episode is now posted without the erroneous line.

Transcript

Narrator: It's 8:30 p.m., January 13. Vice President William Lai Ching-te began his first address as president-elect of Taiwan.

In the past several months, Taiwan saw a highly contested election with global attention. In the end, all three political parties gained some and lost some. The Democratic Progressive Party, DPP, won an unprecedented third term as president. The Nationalist Party, KMT, now holds the most seats in the legislature. And the third party, Taiwan People’s Party, TPP, is the new king-maker.

At 8:39 p.m., the microphone was handed to the press. The first question went to a journalist from Bloomberg Television, Hong Kong. It was about semiconductors.

For an island nation the size of the Netherlands, Taiwan punches well above its weight. Taiwan makes 65 percent of the world’s semiconductors. Roughly 90 percent of the world’s most advanced chips, used to power everything from cars to supercomputers, are Taiwan-made. Chips from Taiwan keep the world running, and they also power Taiwan’s economy. It accounts for 15% of Taiwan’s GDP.

One company is arguably the most important of them all. TSMC -- Taiwan Semiconductor Manufacturing Company -- founded about 40 years ago and is now the nation’s largest company. It has facilities in Taiwan and China, and it’s planning for more fabs (manufacturing plants) in Japan, the U.S. and Germany.

The dominance of Taiwan’s industry is so crucial that came this idea that this unique position may help deter against a Chinese invasion. In this scenario, any attack on Taiwan would disrupt the global tech supply chain. So the world has a stake in peace across the Taiwan Strait. This is what’s known today as the "silicon shield".

Today, does the Silicon Shield exist? What is it made of? And if it does exist, how might Taiwan continue to refine the shield?

This is “Dispatch from Taiwan”, a podcast series where we take a deep dive into debates that influence Taiwan’s policies that can shape the region. My name is Emily Y. Wu, and I’m your host. Welcome to episode three.

Narrator: The semiconductor industry of Taiwan -- what began as economic growth and technology prowess -- it’s now stacked with the question of national and global security. That term, the silicon shield.

Jeremy Chiang: The term was coined in the late 1990s and early 2000s by Craig Addison. He was an Australian journalist. I've read the original manuscript.

Narrator: That’s Jeremy Chiang, a foreign policy and technology researcher. He’s now at the Foundation for Future Generations Taiwan.

Jeremy Chiang: Silicon shield. The silicon that the book was talking about was not TSMC, was not semiconductor manufacturing, it was talking more about Taiwan’s place in the world as the Republic of Computers. It was talking about how Taiwan was a very prominent player in electronic manufacturing. And it had this position not because of its technological leadership. It had this position because of its sheer market share in these industries. If there was an invasion of Taiwan by adversaries, it will cause massive rupture towards the industry, and also towards the global economy.

Narrator: Let’s take a quick look at how Taiwan got here in the first place.

Taiwan’s high-tech journey began after World War II, long before PCs were a thing. It began by producing textiles in the 1950s. Plastics in the 1960s -- manufacturing things like, slippers, umbrellas and Barbie. Barbie. Taiwan was a major manufacturing hub for toymaker Mattel for 20 years. At one point, 80 percent of the world’s Barbies were made in Taiwan.

Then things got really exciting. In 1964, an American company called General Instrument opened a factory in Taipei. In just four years, it employed more than 6,000 workers here who assembled parts for television sets. This was the foreign investment that started it all. After their success, others came. Here’s Jeremy Chiang again.

Jeremy Chiang: Foreign investment is actually a very critical part of how Taiwan’s elec-electronics industry took off. It was an American investment that brought the first electronic component assembly and later manufacturing production processes into Taiwan. I, myself, am from Xindian in New Taipei City. There there is a bus station there called [dianzi-gongsi] Electronics Company, which is the home to Taiwan’s first-ever foreign invested electronic company in Taiwan.

So it really tells you how the story of Taiwan’s electronics industry, especially in fusion of domestic ambition, technocrats thinking about Taiwan’s economic future, but at the same time, about also how international investors were thinking how to utilize Taiwan’s resources, especially its abundant human resources, cheap but also skillful labor, to help them compete with other foreign competition.

In the context of the global economy at the time, that was American companies trying to compete with Japanese companies that were also having their shot at electronics at that time.

Narrator: Taiwan’s ability to attract and retain the attention of foreign investors is what made it attractive during this time. A former employee of General Instrument told Taipei Times in 2002 that it was the high education level of the workers here that attracted them to Taiwan.

“People were educated then,” he said. “Every foreman that we hired was an engineering graduate.”

Soon enough, Taiwanese engineers got so good at manufacturing for others that the homegrown industry was now made of what’s known as original equipment manufacturers, OEM, and original design manufacturers, ODM. An entire industry made to support the world’s growing demand in digital products. Television. Computer. Semiconductors.

Jeremy Chiang: Taiwan took that opportunity fully, and also gradually moved up the supply chain. We had foreign companies invest, but we also saw a lot of domestic entrepreneurs taking their shot in establishing their own companies. That's the story of how ASUS and ACER and also a lot of other important companies in Taiwan’s electronic space today, how they came into place.

Narrator: Taiwan’s ability to make things well and on the cheap was key to the rise in hardware exports. The share of domestic firms in IT hardware exports rose from 43 percent in the mid-1980s to 70 percent in the decade after. By the early 2000s, the world’s biggest names in personal computing, brands like Dell, Apple, Gateway, and HP were sourcing between 95 percent-100 percent of their notebook PCs from Taiwanese manufacturers.

Taiwan had transitioned from a labor intensive manufacturer to a global high-tech leader. It’s no wonder then that Craig Addison made that comment about Taiwan and its silicon shield.

But wait, let’s check in here. Rewind to what researcher Jeremy Chiang said about the original meaning of the Shield.

Jeremy Chiang: Silicon shield. The silicon that the book was talking about was not TSMC, was not semiconductor manufacturing, it was talking more about Taiwan’s place in the world as the Republic of Computers.

Narrator: TSMC. Let’s talk about TSMC and how they changed the game. TSMC stands for Taiwan Semiconductor Manufacturing Company. Its story began somewhere between Barbie dolls and the world’s first Apple Computer.

In the 1970s, Taiwan’s state-funded Industrial Technology Research Institute, ITRI, sent a team of engineers to the U.S. to learn all about designing and making semiconductors. In 1987, a joint-venture was created between ITRI and the Dutch electronics giant Philips. It created the world’s first dedicated semiconductor foundry, now known as TSMC. Its idea was to serve the world’s growing demand in chip making. As a manufacturer, it would work with everyone, and compete with no one.

The plan to learn and manufacture was ambitious and audacious –- and it worked. Today, Taiwan companies TSMC, UMC and MediaTek are among the most important semiconductor manufacturers in the world -- which says a lot.

Today, the semiconductor industry makes up 15 percent of Taiwan’s GDP. And the engineers there, an estimated 2.6 percent of Taiwan’s workforce, are the gold standard that represents Taiwan’s dedication to quality and hard work.

Here in Taiwan, TSMC is everyone’s company. Literally. It’s publicly traded, meaning everyone can be a part-owner. Julia Pan is an accountant. She’s 52 years-old, lives in Taipei, and she has stock in TSMC.

Julia Pan (Dubbed): I started paying attention to TSMC and MediaTek when I began buying stocks. These are Taiwan’s large-scale indicator stocks. They are the leaders in the leading industries.

Narrator: TSMC is the only one of Taiwan ADRs (American Depositary Receipts) that has been able to breach the $100 trading level. For the year 2022, TSMC’s revenue increased 33.5 percent year-over-year in U.S. dollar terms. Julia is excited by this strength.

Julia Pan (Dubbed): What's really cool is that we can surpass South Korea. It’s not easy being the leader of the world. You have to stay ahead. I think the scope and scale, and the macroview of its leader must be indispensable.

Narrator: But as a stakeholder, she has worries. She’s worried about brain drain and what that might do to the labor force. Brain drain is an anxiety shared by many here, as Taiwan has one of the world’s lowest birth rates. What happens if there’s not enough in the labor force to even enter the technology sector in the future?

Daniel Lin is an investor in what he calls, early stage deep tech startups. He looks at tech solutions for aging populations, labor shortage and climate change. Much of his portfolio companies rely on chips made from the semiconductor industry.

Daniel Lin: It is such a large part of Taiwan's economy that as a society, we sort of understand it and know about it, versus most people around the world probably don't really think about semiconductors, or electronics in general. It’s such an integral part and a large part of our economy, it definitely permeates into our lives, and into public conversation, and comes up in the news a lot.

Narrator: In the 1980s, by the time Dan was 5 or 6 years old, he had a computer in his house. It was a tape drive by Apple.

Daniel Lin: My first computer. I think I was 5, 5 or 6. And I used a tape drive. So to load a program, I would have to let the tape unwind and read everything, and then it would load the program. Literally was like an audio tape drive. So, before disk drives.

Narrator: Today, Daniel thinks back to the culture and the prevalence of computers that kids grew up with in Taiwan.

Daniel Lin: I think a lot of kids, especially in the 80s and 90s, and even now still, they want to become engineers. Having a job at TSMC is like, you know, a dream for a lot of people.

Narrator: A lot of people are living that dream. In a January survey by the job bank Yes123, TSMC is the number one choice for those in the tech industries looking to change companies.

But looking beyond semiconductors. What’s next?

Daniel Lin: Because definitely, the technologies that are integral for the world economy could change. Decade, decade by decade. But for now, it’s working. It is what it is. So what would be the next integral technology that we can monopolize and, and protect ourselves with? I'm not sure, but at least Silicon Shield should last for probably 10 years until new technologies come up, or other people develop better, more efficient ways of manufacturing this. Always possible.

But then, you know, there's other things that we can probably develop, like soft power, better relationships with other countries to protect us. There's, you know, multiple angles, we can go about this.

Narrator: Foreign policy and technology researcher Jeremy Chiang echoes this sentiment. He also thinks Taiwan needs to keep innovating.

Jeremy Chiang: There is no industry in the world that we can remain forever comfortable in. You always have to improve. You always have to move into new places. It's not like we occupy this place, and we're going to sit on this place forever. That's just not going to happen.

Narrator: So maybe the silicon shield isn’t only about semiconductors. It’s about whatever technology advantage Taiwan has to keep its dominance in the global economy. So then the question becomes… what’s the next big thing?

Let’s bring in Paul Huang. He also has a lot of thoughts on this. Huang is a co-founder at LoFTechnology, a software company that’s a spinoff of what was initially created at ITRI, the government research institution that brought the world TSMC. Paul reminds us that Taiwan’s most successful tech company was a company made 40 years ago. Can Taiwan pull off another technological upset and stun itself, and the world?

Paul Huang: What decision are we making today that's going to impact Taiwan 40 years from now? We can't expect TSMC to be our digital shield 40 years from now, right? What are we doing for the next 40 years?

Narrator: In a way, Taiwan has gone so much above and beyond, Paul says it’s now difficult to take risks. Taiwan doesn’t think it can afford to fail.

Paul Huang: I think I'm going to use an example. I play poker. I take a lot more risk when the pot is small. But once my pot gets bigger, I'm a lot more risk averse. And in some ways, I think that's where Taiwan is at this moment. Taiwan is not a poor country, Taiwan is a very rich country. But being rich, we take a lot less risk, we're a lot more risk averse. But, you know, you got to keep that risk taking culture.

Narrator: Unfortunately, Taiwan’s drive for excellence also means it’s a society that doesn’t tend to regard mistakes in a positive way. And that, according to Pul Huang, could be a problem.

Paul Huang: I don't think we can afford not to make mistakes. That's the key is if you don't pivot, if you don't change, you can’t go to the next big market. Earlier we were talking about going from umbrella to Barbie dolls to PCs to semiconductor, if you look, the pivot is really based on the profit margin. Each new move has a larger profit margin.

So if you look at where Taiwan's market or the manufacturers are trying to go to is, what is the next big profit margin? Those with lower profit margin actually gets shipped to other places like Vietnam. Okay, Malaysia, Thailand. We need to focus on what will get us the larger profit margin.

Narrator: Jeremy Chiang.

Jeremy Chiang: Look at our past 50 years of industry history. We struck gold on semiconductors and electronics in general. Outside of that, not a lot of success stories. Failed in software. Failed in automotive manufacturing. Failed in the service transition. Failed in a lot of things. And I think how these Taiwanese semiconductor firms continue to build on their successes and evolve as the industry evolves.

Narrator: Lance Chang is a software engineer in artificial intelligence here in Taiwan. He’s worried that the semiconductor industry is taking away talent from other areas that have potential. This could prevent other industries to grow.

Lance Chang (Dubbed): Of course, the semiconductor industry is absolutely important to Taiwan, but we still have to consider our limited resources. For example, in terms of talent, there are masters graduates with backgrounds like applied sciences, general sciences, mechanical engineering, chemical engineering, materials engineering and chemistry. They all see TSMC as a viable employment option.

As a result, those who have been trained in other types of scientific research will now leave these fields and industries. I think that’s quite a pity. How can we maintain our advantages in the semiconductor industry, but at the same time develop other industries in a balanced way? I think this will be quite important.

Narrator: So in what direction would Taiwan tech need to go in order to find the “next big thing” and to stay relevant to global tech in the process? The jury is still out.

Tina Cheng is a partner at venture capital firm Cherubic Ventures. They invest in software firms from pre-startup to pre-IPO. She talks about the ecosystem of startups and VCs, and the support from the government.

Tina Cheng: Software technology and startup ecosystem, they're definitely very eager and want to figure out how to create more unicorns, more success stories for Taiwan. For example, Singapore there is a government fund, GIC. We have Taiwania, right, which is, a VC fund that's investing semi- like, on behalf of the government, and globally, right. They have offices in the U.S.

Narrator: But how does one create a unicorn? Here’s Paul Huang.

Paul Huang: That's a million dollar question. If I know that, I'll be rich. One of the things that is being talked about today among entrepreneurs versus before was, there was a lot of government incentives for investors before. That's all gone. Because you need to allow the investors to take higher risks. Okay, if you're not willing to take larger risks, then that's part of the ammunition for the entrepreneurs.

Narrator: Huang raises up the example of Japanese firm Softbank. Softbank is known for its strong funding support to its portfolio companies.

Paul Huang: Softbank’s Vision Fund, what they did was, hey I'm going to give you $100 million dollars. You're going to have 10 times more ammunition than your competitor. That gives you an edge. I’m not saying Taiwan needs to do that, but given that type of competition, you know, we need a little bit more ammunition as well. So that's where I think the government can come in and help. If you lower the risk for the investors, you know, you're actually giving more ammunition to the entrepreneurs.

Narrator: The government has tried. Funds had been poured in to research labs, incubation projects, spaces, schemes that would attract and retain talent, and funds for startups. But it’s hard.

Paul Huang: There's a lot more complexity in today's startups compared to before. One of the reasons is because people are getting better at starting up. Right? So as you get better, you're going to compete against even better people. So starting up is a lot harder.

Narrator: There’s also the complication that the type of government involvement that went into kickstarting Taiwan’s semiconductor industry, maybe just isn’t possible anymore. We’re back to Jeremy.

Jeremy Chiang: We should not fall for huge government projects. We tried that before. My thinking is this. It’s that before democratization, of course, a lot of social forces were within the hands of the government. They directed resources. And as a developing country, you are catching up. You know the roadmap of development when you look at other countries.

Narrator: But there’s still room for initiatives. President-elect William Lai Ching-te has identified a few key areas where his incoming administration might be able to inject a revitalized sense of risk into the tech industry. Among other things, it calls on the tech industry to build on past successes investing in more research and development in the fields that include military, space, and defense. Lai also hopes his administration will be at the forefront of developing artificial intelligence.

But at the end of the day, for Paul Huang development also means taking Taiwan’s skills in manufacturing and channeling those skillsets into an area it needs to develop anyway. He points to one sector in particular, which he thinks could provide a win-win situation for Taiwan and a new market.

Paul Huang: Well someone will have to create a sense of urgency. If you don't have this sense of urgency, then yes, we are in a comfort zone. So what is this urgency? So if you look now in the U.S., there's now a lot of startups in the military sector. Because war has been changing. Is that critical for Taiwan in the future? I'm not so sure. But is it something that we can transform our manufacturing prowess into building things that are beneficial to us and also to our allies?

We can still take advantage of our manufacturing strength. Should we pivot to something that is needed now? I'm sorry, this is a sensitive topic, but I think this is something that we can do. And this is something we're really good at, but will someone that has had the chance to do that?

Narrator: In the meantime, as Tina Cheng points out, Taiwan’s tech entrepreneurs have something important going for them. Their personal strength.

Tina Cheng: In Taiwan, the founder is very resilient. They can survive without, you know, with very little. They're very capital efficient. The funding environment has improved, yes. But if you compare funding a Taiwanese company can receive, a startup can receive, if you compare the number to U.S., to Singapore, to Southeast Asia, it’s a lot less. But then they can survive. They can build something with very limited resources.

So I think, you know, resilience and resourcefulness is one of the strengths. And I think also, very good work ethics, and very high quality tech talents. That’s still what Taiwanese founders are known for.

Narrator: Throughout the reporting for this episode, we spoke to many people, and they all had something to say about what could help innovation. More government initiatives. Less government crutches. More investors. More foreign investments. More startups that have the ambition to grow globally. More mentors that help founders grow.

Many point to the fostering of the environment that encourages innovation.

Jeremy Chiang: That means not only should we encourage startups, not only should we establish institutions, environments, policies that support them, but at a more fundamental level, how can we help young entrepreneurs when they want to create a company, they want to grow the idea, they're less held off by other constraints in their life.

Constraints. I mean more basic things. Housing prices, cost of raising a child, costs of elderly care. Basically it's the entire social environment.

Narrator: But at the end of the day, Jeremy Chiang says it's important to remember not what the silicon shield is, but what it's meant to do.

Jeremy Chiang: When this crisis comes, of course the Taiwan government and Taiwanese people will hope that the silicon shield would be able to exact decisions on part of the foreign governments to Taiwan’s favor. That's the lesson the silicon shield argument tells us. And of course, it also reminds us that if we want to have, continue to have that silicon shield, what are the necessary steps to take?

Narrator: If we want to continue to have that Silicon Shield, what are the necessary steps to take. That was the question.

In Taiwan, this means continuing the country’s leadership in technology for as long as it can, whether this means 10 years, 40 years, or indefinitely. Taiwan needs it for itself, but the world also needs it to keep running and powering our societies. The success of the two are intricately linked, whether this is through the semiconductor industry or through the next big thing.

Let’s end today where we began. Back on January 13 on the night of the election.

It’s 8:42 p.m. President-elect William Lai Ching-te has just been asked how he plans to keep Taiwan’s semiconductor industry at an advantage. Here was his answer:

William Lai Ching-te/Narrator: In an era of smartification around the world, semiconductors is a key industry. Taiwan’s semiconductor industry is an advantage to Taiwan, and it’s also a responsibility to the world. And of course, Taiwan’s semiconductor industry is the world’s common asset. The accomplishment of the semiconductor industry is the result of the division of labor around the world. Taiwan will cherish this. We hope China and the international community can also cherish this industry.

Narrator: You’ve been listening to “Dispatch from Taiwan” from the United States Institute of Peace in Washington, D.C., and Ghost Island Media in Taipei, Taiwan. Thank you to all the guests who took their time to speak to us. We urge you to follow their work, and ours, on all of our websites and social media.

Views in the podcast do not reflect those of the USIP or Ghost Island Media.

Subscribe to the show whatever you get your podcasts. See you next time.


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