Taiwan is gearing up for elections on Saturday, and chip company executives are watching closely as millions of voters cast their ballots for the legislature and the presidency.
Over the past decade, Taiwan has become an indispensable part of the global supply chain for microchips that are used in everything from electric cars to smartphones. In particular, Taiwan dominates the production of state-of-the-art chips, accounting for over 90% of the world's production capacity.
However, this comes with a caveat: China views Taiwan as a breakaway province that will eventually return to Beijing's fold. In his New Year's address, Chinese President Xi Jinping said unification with the island was "inevitable".
Saturday's election is unlikely to cause an immediate change in global chip supply. But a victory by pro-independence forces is expected to increase tensions around the island, similar to what happened when former US House Speaker Nancy Pelosi visited Taiwan in August 2022. On the other hand, a more favorable for China, the vote raises questions about the West's strategy to attract Taiwanese chip investment and Washington's efforts to reduce China's access to cutting-edge chip technology.
All of this is a painful reminder to some of Europe's biggest companies that deep-rooted interdependence with and dependence on Taiwan already poses a geopolitical risk.
At the heart of corporate ties between Europe and Taiwan is TSMC, founded in 1987 and one of the few global players that can produce advanced microchips (7 nanometers or less) on a large scale.
TSMC is one of the "key customers" of Europe's highest-rated technology company, Dutch printed microchip supplier ASML, as the latter noted in its latest annual report.
ASML's chip printing machines, which last year became the focus of a trade war between the US and China, are the backbone of Taiwan's chips: Taiwanese customers account for 38% of the company's net sales, and ASML has two factories on the island.
That means ASML would risk being heavily exposed if China were to deploy military forces in response to the outcome of the Taiwan election - something the company has already acknowledged.
“We have geopolitical crisis scenarios,” ASML Chief Financial Officer Roger Dassen told POLITICO in January 2023. “And it makes sense that [in] Taiwan, but also in South Korea, areas where there are geopolitical tensions, we we have scripts for that".
Taiwan risk is actively present in ASML's communication with investors. "Changes in the relationship between Taiwan and the People's Republic of China could result in additional trade restrictions and could affect our employees and our ability to use our manufacturing facilities and supply chain in Taiwan for our global customers, as well as the ability us to serve our customers in Taiwan," the 2022 annual report said.
The Dutch chipmaker is among companies "betting on peace in the Taiwan Strait" by investing heavily in the area, said Mathieu Duchatel, director of international studies at the Montaigne Institute. "If there is a geopolitical crisis in the Taiwan Strait, of course, there will be questions about ASML," he said.
Since 2021, the European Union has pursued a goal of reducing its reliance on chips, both to combat shortages during the pandemic and because it believes its reliance on foreign hubs such as Taiwan poses a political and commercial risk.
Ironically, even the EU's goal of transferring some of its advanced microchip production to the continent hinges on TSMC: the Taiwanese champion announced last August plans to open a multibillion-euro manufacturing facility in Dresden, Germany.
The planned Dresden plant is a joint venture between TSMC and several European super companies, including Germany's Bosch and Infineon and the Netherlands' NXP. For these partners, TSMC mustn't be prevented from trading and investing abroad.
The success of the Dresden factory is also vital for EU policymakers, as it is key to the bloc's goal of acquiring 20% of the global microchip value chain by 2030, up from 9% now.
It is also a sign of closer relations between Taiwan and Berlin. In March last year, German Education and Research Minister Bettina Stark-Wattzinger visited the island to talk with her Taiwanese counterparts - Science Minister Tsung-Tsong Wu and Digital Technology Minister Audrey Tang - about increased cooperation in research and chip handling skills.
The Taiwanese firm is developing an even bigger investment in the US state of Arizona worth up to $40 billion (€36 billion), which despite recent problems is expected to be operational in 2025.
But TSMC's expansion ambitions are not without controversy, even in Taiwan itself.
The chip giant has long been called a virtual "silicon shield" to help deter Beijing's aggression, as China also relies on TSMC for advanced products.
That worries some politicians, who say Taiwan's security depends entirely on the world's dependence on its microchips.
"We are aiming for a very fine balance," said a senior Taiwanese trade official, who spoke on condition of anonymity to share the government's thinking.
"On the one hand, it is about deepening the relationship of the West with the leading Taiwanese company," the official said. "On the other hand, we guarantee that the most modern products will continue to be researched and developed only in Taiwan," he added./BGNES
