6 min read

How Pelosi’s Taiwan Visit Benefits Intel

How Pelosi’s Taiwan Visit Benefits Intel

Pelosi abruptly landed in Taiwan in early August and in response China conducted military exercises around the Taiwanese mainland. While Pelosi’s visit has signalled clear solidarity with Taiwan, it has also showcased a lack of coordination with Biden; Who had only two choices in response – to either endorse Pelosi, or else appear to be giving in to Chinese threats.

Pelosi’s visit has at least signalled a line in the sand. But it has also resulted in an increase in Chinese actions in the grey zone, with larger numbers of warplanes harassing Taiwanese airspace.

So what could be done to defend this pillar of the American-led order?

Overall, increasing actual military capacity would be an effective deterrence

The economist suggests combating corruption among the Taiwanese military leadership, improving coordination between American generals and their counterparts, and improving training and recruitment.

A porcupine strategy of smaller, mobile and concealable weapons would be an effective means for an asymmetric war. But it seems the Taiwanese generals need convincing on this. Taiwan could extend their conscription durations, which is already fairly low standing at only 4 months – as compared to south korea and Singapore’s models of 18months and 24 months respectively. It could also spend more, since it spends only 2% of its GDP on defence, as compared to Israel who spends 5.6%.

America could come in on this to provide incentives for reallocating spending to the more effective porcupine-based equipment. It could also invite Taiwan to observe existing military exercises already long held with the likes of Japan and other allies in the region

On the flip side, Chinese response could be agitated with economic isolation and increased military exercises. A Chinese response could also be drawn out over several years – which plays against the short-term American memory and domestic politics of its election cycles

Semiconductors

Key to this conflict is Taiwan’s semiconductor industry, which is an integral strategic resource that cannot be overcome for at least the immediate future. It is 147bn large, and is equivalent to 15% of GDP, accounting for nearly 40% of its exports. It is also an indispensable part of the global supply chain of advanced hardware. Taiwan is also part of the first island chain – which surrounds the Chinese mainland from Japan to Malaysia.

Key to production is Taiwan Semiconductor Manufacturing Company. It controls 90% of the market for the most advanced chips – which are those smaller than 10 nanometres.

The process of creation involves manipulating subatomic particles to create precise ultraviolet etching light. How this works is closely guarded by many layers of trade secrets.

Only Samsung and intel approach this level of technological competence, but neither are on par with TSMC.

The Chinese response has been to set up a target of producing 70% of its own chips by 2025. It has a 53bn national meminductor fund to expand chip making. It also works to attract workers from Taiwan, whereupon 3000 workers, about 7% of its workforce, moved to China between 2014 and 2019.

National security laws have been enacted by Taiwan in response, requiring govt approval for employees of ‘national core technology’ to move to China. It threatens up to 12years of prison for economic espionage or the betrayal of trade secrets. Yet such poaching might be proving ineffective, as Taiwanese workers, now dumped by China, tend to be branded as traitors.

But for all this pressure, it looks unlikely that there will be a Chinese breakthrough to overcome TSMC in the short term. Instead, Chinese pressure is a strong motivator for TSMC to maintain its technological edge. Supporting this is both the strategic need for the Taiwanese government to maintain its superiority, as well as American interests in maintaining supply chains.

In response to the Chinese, what is America doing?

Chiefly, it has the CHIPS for America Act. This involves 52bn to spur chip manufacturing on American soil.

Key to this is Intel, who has been part of the trend for ‘fabless’ approaches. This involves designing chips rather than actually manufacturing them, and outsourcing the actual manufacturing to the likes of TSMC.

So at this point it is important to remember that while America has good reasons to support Taiwan and TSMC, it has no incentive to just leave the monopoly of production to TSMC. To that end, Intel is planning a 100bn megafab in Ohio – which is boosted in part by the CHIPS subsidies. It is the centrepiece to catchup and regain manufacturing capabilities.

Yet this effort will at best, take years – it plans to upgrade manufacturing five times in the next four years – which is already a breakneck pace. This uncertain path to ascendancy is somewhat bolstered by the re-entry of Intel’s new chief executive, Pat Geisinger. He was CTO in 2001, but left in 2009. On his re-entry, he is a technically oriented CEO, focused on hard data backed judgements, and a commitment to a tech-first recovery. His pledges include matching TSMC and Samsung by 2024, and to surpass them by 2025

Evidence of his focus on manufacturing capabilities are seen in this quote:

"As I was interviewing for the job, I wrote a strategy paper for the board," Gelsinger says. "I demanded unity so every one of them had to say they were hiring me and agreeing with the strategy."

Some analysts have downgraded their forecasts for Intel, but I think that is a misunderstanding of what is really going on. There are good strategic reasons for Intel’s new focus. And I think that immediate gratification like quarterly results will now take a backseat.

Cutting expectations on the basis of ballooning expenses misses the forest for the trees. To what end are these expenses put towards? It is American strategic dominance. It is expenditure backed and in fact almost mandated by the state. It is not just a matter of corporate profits – it is a matter of geopolitical power

Another quote from Gelsinger highlights this understanding: Gelsinger told the board that Intel is done with stock buybacks, a financial move in which a company uses its cash to buy stock and thereby increase its price.

"We're investing in factories," he told me. "That's going to be the use of our cash."

And now we can begin to see that intel is at the centre of America’s side of the competition with China. AMD, Qualcomm, and NVIDIA do not manufacture their chips – so they are somewhat out of this conversation. And while Texas Instruments and Micron Tech do manufacture their chips, they are not at the forefront of this charge as Intel is

Wrap Up and Conclusions

Samsung, on the other hand, might have some plans to fight as well, and certainly the South Korean government would be incentivised to champion their domestic firm for the same strategic needs. But Samsung focuses on commodity memory chips and consumer focused applications, which are not nearly as important. And in our lens of analysis, South Korea is simply not a great power

The real players, for now, are China and the US.

It is China and the United States that has the capacity for large, overwhelming, commitment to the development of their strategic capabilities through industrial policy. So in this great power competition, we see China and America racing to develop their technologies, which means great support for their respective domestic champions – which in America’s case is Intel

Yes, TSMC looks likely to retain its dominance over advanced semiconductor manufacturing, but they are a part of the Taiwanese economy and state. Which has long been threatened by China for the reasons we all know – both historical and strategic

In which case, Taiwan has an incentive to support its edge, but it is also dependent on America for support in matters of defence.

And this is why Intel looks set to grow: America is not only shovelling money to Intel, but it also retains favourable relationships with Taiwan on the basis of their ability to aid Taiwan militarily – which is why we mentioned the first island chain earlier on.

So while TSMC would want to remain dominant, it is also indirectly beholden to America – and this opens up a possible pipeline of cooperation, not that trade secrets would be given up, but that it is surely much more friendly than any possible relationship with their Chinese equivalents.

Again, it is American naval power that undergirds Taiwan and the entire Indo-pacific against China. And it is Taiwan that is sorely lacking in defence at the moment, and currently under pressure.

So, for these reasons:

First, that domestic manufacturing of advanced semiconductors is necessarily part of both American and Chinese competition.

Second, that Intel is at the heart of the current push on the American side for said manufacturing, over other competitors both domestic and foreign.

And third, that TSMC for all its advantages is indirectly beholden to the Taiwanese state, which is dependent in some form on American support.

I think that Intel has a positive outlook over the next few years of tension, and that current analysis that is bearish, is mistakenly applying a short-term business lens to what is now really a geopolitical and political economy issue.

Sources:

https://www.economist.com/leaders/2022/04/23/how-to-deter-china-from-attacking-taiwan
https://www.economist.com/asia/2022/05/26/taiwan-is-worried-about-the-security-of-its-chip-industry
https://www.cnet.com/tech/computing/qualcomm-amazon-boost-intel-plan-to-leapfrog-chipmaking-rivals-by-2025/
https://www.cnet.com/tech/computing/features/intels-chip-recovery-plan-could-restore-us-manufacturing-prowess/
https://www.cnet.com/tech/computing/intels-100b-ohio-megafab-could-become-worlds-largest-chip-plant/
https://www.vox.com/recode/23048906/chip-shortage-manufacturing-america-biden
https://www.bloomberg.com/news/features/2021-01-25/the-world-is-dangerously-dependent-on-taiwan-for-semiconductors
https://www.cnbc.com/2022/07/18/us-chip-industry-split-over-chips-act-benefits-to-intel.html

Note:

Sorry for the late post - I was caught up formatting it.