The ongoing trade skirmishes between the United States and China moved beyond the trodden path to an unlikely frontier last week with both vying to gain control over a low-profile chipmaker, threatening to wreak havoc within the complex telecommunications ecosystem. The budding conflict has the potential to snowball into a high-voltage geo-political squabble and derail the efforts by the industry to stage an early revival from the adverse economic impacts from the coronavirus pandemic.
Taiwan Semiconductor: The Kingmaker
After extending the executive order signed last year till May 2021 to prevent U.S. firms from dealing with foreign communication equipment manufacturers like Huawei that were deemed to be harmful to national security interests, the Trump administration unveiled a new set of rules to throttle the China-based telecom firm. The rules mandated any chipmaker using U.S. technology to obtain a government-approved license to trade with Huawei. The ploy led to the imposition of indirect restrictions on Taiwan Semiconductor Manufacturing Co., one of the world's largest contract manufacturer of microchips and a key supplier of finished products to Huawei.
Since its inception more than three decades ago, Taiwan Semiconductor has carved a niche market by manufacturing microchips for leading firms like Apple Inc. AAPL and Qualcomm Incorporated QCOM that didn’t want to construct their own fabrication facility or fab. These firms primarily focused on R&D efforts and chip designs, leaving the manufacturing process to be done by Taiwan Semiconductor. Over the years, Taiwan Semiconductor has evolved as the premier foundry in the world, manufacturing powerful and energy-efficient chips that are now found in most mobile phones, autonomous vehicles and IoT devices.
The Taiwan-based firm even continued to side-step various U.S. restrictions and exploited certain loopholes by manufacturing chips in its overseas production facilities for Huawei. This helped the communist telecom equipment manufacturer sustain the tough U.S. blockade while trying to develop indigenous chips from domestic suppliers.
The U.S. government is now trying to plug this hole by issuing new policy guidelines. Notably, the development follows a report that Taiwan Semiconductor is reportedly in talks with the Trump administration to set up manufacturing plants in Arizona to prevent any supply-chain disruption in the future. The company appears to be the latest pawn in the Sino-U.S. tussle as it is becoming increasingly difficult for it to remain neutral.
Chinese Retaliation in the Cards?
In a likely retaliation, China is reportedly inching closer to a plan to put several U.S. firms on an "unreliable entity list", which would impose various trade restrictions on companies like Apple, The Boeing Company BA and Cisco Systems, Inc. CSCO that largely depend on the communist market. This, in turn, is likely to have a ripple effect across various sectors and hurt the overall economy as a whole, making it counterproductive for the Trump administration.
Although Huawei has reportedly achieved a breakthrough with local mass-scale production of its chipset by Semiconductor Manufacturing International Corp. to reduce dependence on other U.S.-based chipset firms, China appears determined to protect its own trade interests and is not likely to easily cede its dominance.
It remains to be seen how the saga unfolds in the near future. John Neuffer, the CEO of Semiconductor Industry Association, rightly observed, “This rule may create uncertainty and disruption for the global semiconductor supply chain.”
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