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U.S.-China tensions are high and Taiwan's chip industry is caught in the middle

A MARTÍNEZ, HOST:

In just a few decades, Taiwan's semiconductor industry grew from nothing into a global power. Its success rested, in part, on its ability to cater to both China and the U.S. But now those two countries are locked in a technological showdown. And as NPR's Emily Feng reports, Taiwan has to pick a side.

EMILY FENG, BYLINE: Robert Tsao remembers that when he was growing up in Taiwan in the 1960s, even a television was considered unbelievably high tech.

ROBERT TSAO: (Through interpreter) It was funny. One family bought a record player, and the entire village came out to ogle at it.

FENG: But now the island makes 65% of the world's semiconductor chips that help power phones, cars and fighter jets. Tsao ended up heading Taiwan's first-ever semiconductor company, producing the microchips at the heart of everything high tech. It was called United Microelectronics Corporation, or UMC. Chipmakers like Tsao eventually made Taiwan a technology powerhouse, and both China and the U.S. are major customers.

Here's Chris Miller, the author of "Chip Wars" (ph), a book on semiconductor development.

CHRIS MILLER: The Taiwan story is - you know, on the one hand, it's a story of the remarkable success of one country, and it's also simultaneously a story of deep integration into international supply chains.

FENG: That integration meant more frequent business with mainland China. Here's Tsao again.

TSAO: (Through interpreter) At the time, we didn't think much of China, just that it was a promising market.

FENG: But by 2005, working with China could be a problem. That was the year Tsao was accused of illegally transferring technology to China. Tsao says he only provided consultation. He ended up paying a fine for not disclosing he had shares in the Chinese company.

TSAO: (Through interpreter) But in the process, I insulted too many people. So I fled to Singapore.

FENG: He also adopted Singaporean nationality and gave up his Taiwanese passport. And shortly after, he retired amid allegations of insider trading. Then, in 2019, came what Tsao describes as a political awakening.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED PROTESTERS: (Chanting in non-English language).

FENG: That was the year anti-Beijing protests in Hong Kong broke out. And how China suppressed the protests, Tsao says, shocked him.

TSAO: (Through interpreter) I thought, how could this be the Hong Kong of the 21st century?

FENG: And it got him thinking, what could China do to Taiwan? And this year, as Taiwan came back into the international spotlight, Tsao decided to leave Singapore and gave a press conference in Taiwan, wearing a bullet-resistant vest, to declare he was applying for Taiwanese citizenship again.

(SOUNDBITE OF ARCHIVED RECORDING)

TSAO: (Speaking Chinese).

FENG: And he would give $100 million to fund defense training for ordinary Taiwanese citizens, should China attack.

The sense of urgency is also felt outside Taiwan. This fall, Washington put strict export controls on China so Beijing cannot get any access to certain kinds of semiconductor technology, and it blacklisted some of China's biggest chipmakers. Commerce Secretary Gina Raimondo explains.

GINA RAIMONDO: We have to protect the American people against China. Period. Full stop.

FENG: These measures are Beijing's worst nightmare. Here's Chinese tech blogger Li Dang.

LI DANG: You know, that Biden sanction will affect not only companies but also research center and factories owned by the state. So as a result, the Xi Jinping's purpose of building up whole made-in-China chain will stop working at this moment.

FENG: Meaning the U.S. could block China's ambitions to create its own advanced semiconductors. That can make China entirely dependent on the U.S. or its allies for some of the most common tech components. And the first people to be affected - Taiwanese engineering talent.

MONIQUE CHU: The Taiwanese talents have become very important pillars in helping China catch up in the semiconductor arena. For example, China's No. 1 chipmaker has been led by various Taiwanese senior engineers and executives over the years.

FENG: This is according to Monique Chu, who researches Taiwan's semiconductor sector at the University of Southampton in England. She says China needs Taiwan. But...

CHU: America has to use its powerful position, as Taiwan's de facto security guarantor and also its advantage in semiconductor technology and equipment, to really exert pressures on Chinese firms.

FENG: The American weaponization of the semiconductor supply chain has sent shock waves through Taiwan. Chip executives are reeling, trying to figure out if they might have to stop working in China entirely.

FRANK HUANG: (Through interpreter) We are caught up in the middle and, in a way, are in the most difficult position. All of our manufactured goods are sold to China, so we can't pick a fight with China.

FENG: That's Frank Huang, the founder and CEO of Powerchip, another major chipmaker in Taiwan.

HUANG: (Through interpreter) None of us were prepared for how things could get this bad. With previous American controls, there was at least a buffer time. This time, the export sanctions are effective immediately. That's a huge problem for engineers working in China with U.S. citizenship.

FENG: It also means a sector that once symbolized the power of globalization is now breaking down along country lines and national security interests. Here's Chris Miller, the chip expert, again.

MILLER: So I think we're looking at a beginning of a reversal of the integration of electronic supply chains between the U.S. and China that started 30 years ago.

FENG: But for UMC's Tsao, things are all clear already. He supports Washington in finally beginning to cut off links with China on technology. So I ask him, you made your fortune, in part, by selling to China. Is it worth decoupling from China entirely now?

TSAO: (Speaking Chinese).

FENG: "Yes, of course," he says. "We can't help China any longer."

TSAO: (Speaking Chinese).

FENG: "If Uncle Sam says to decouple, we have to follow. America is the big boss," he says. And he's made it very clear which side he's choosing.

Emily Feng, NPR News, Taipei, Taiwan.

(SOUNDBITE OF PASCAL'S "STORM") Transcript provided by NPR, Copyright NPR.

Emily Feng is NPR's Beijing correspondent.