The semiconductor industry occupies a decisive share in Taiwan’s total output value, exports, and investment. Data show that in 2021, the total output value of Taiwan’s semiconductor industry will be about US$100 billion, accounting for about 20% of the total output value of Taiwan’s manufacturing industry. From January to July 2022, the total output value of Taiwan’s semiconductor industry is approximately US$64 billion, a year-on-year increase of 32%. In 2021, Taiwan is already the second largest exporter of integrated circuits in the world, accounting for 15.2% of global integrated circuit exports. From January to August 2022, Taiwan’s integrated circuit exports amounted to US$124 billion, and integrated circuits accounted for about 40% of Taiwan’s total exports. In 2020, the semiconductor-based electronic components industry will account for about 60% of Taiwan’s total manufacturing investment. The high proportion of semiconductors in Taiwan’s investment and exports makes this industry decisive for Taiwan’s growth.
The semiconductor industry chain includes design, manufacturing, software and equipment. Taiwan’s main advantage in this industrial chain lies in the manufacturing link. Chip manufacturing requires high investment costs, highly specialized manufacturing, and various labor requirements. However, Taiwan has a long-term accumulation in chip manufacturing, forming a strong competitive advantage and occupying the largest share of semiconductor manufacturing, that is, the wafer foundry market. According to data from market research institutions, Taiwan will account for about two-thirds of the global foundry market in 2021. From January to August 2022, the output value of wafer foundry will account for more than 68% of Taiwan’s semiconductor output value.
The market plays a decisive role in technological progress and enterprise advantages. The development of Taiwan’s semiconductor industry is a good example to illustrate this economic law. Taiwan’s dominant position in the semiconductor manufacturing sector is mainly due to the broad market for its products, among which the mainland is the most important sales market for Taiwan’s semiconductors.
There is a huge demand in the semiconductor market, and products such as smartphones, automobiles, computers, and telecommunications infrastructure all need to use chips. The mainland has strong manufacturing capabilities and is the largest market for chip consumer goods and capital goods, and the demand for semiconductors is very large. For example, China accounts for 70% of global mobile phone production, 30% of global automobile production, and 80% of global computer production. From January to August 2022, among the export markets of Taiwan’s integrated circuits, the mainland and Hong Kong account for about 60% of the total.
Chip manufacturers need to obtain feedback on chip quality from the market during the process of using chips in products. Taiwanese chips are sold to the mainland market, and the market evaluation and screening mechanism can help manufacturers improve chip performance and find new market directions on the basis of existing ones. This process is also an important reason why Taiwanese chipmakers have gained their current dominant position. If Taiwan’s chip exports to the mainland continue to decline, the risk of Taiwanese manufacturers losing market and innovation opportunities will rise significantly.
From the perspective of capital and technology, the production cost of advanced process chips is high, and the research and development of high-end technology also requires a lot of capital investment. Taiwan’s semiconductor manufacturers have a large sales volume of mature process products and accumulate enough profits to continue to conduct research and development of advanced technologies and obtain a leading position in semiconductor manufacturing.
When Taiwan reduces chip exports to the mainland, the mainland may expand other sources of imports, which will also enhance chip R&D and manufacturing capabilities. In this case, the market served by Taiwan may be dominated by the United States. Considering the existing advantages of the United States in the semiconductor industry, the development prospects of Taiwan’s semiconductor industry are not optimistic.
To sum up, from the downstream perspective, the mainland market plays a decisive role in obtaining and maintaining advantages for Taiwanese semiconductor companies. From an upstream perspective, Taiwanese semiconductor companies have to import equipment, materials and software from overseas, and have a high degree of dependence on imports. In 2020, Taiwan’s semiconductor equipment imports totaled US$23 billion, and the main import sources were Japan (accounting for 23.7%), the United States (22.2%), and the Netherlands (21.7%). American companies account for more than 85% of semiconductor design software. When the U.S. imposes export controls on equipment, materials, and software, semiconductor manufacturing in Taiwan will be affected. Taiwan’s semiconductor industry needs to carefully assess the value of the mainland market and actively seek ways to safeguard corporate interests.