Wargaming Taiwan's chip industry, who's the winner?

Misha Lu, DIGITIMES Asia, Taipei 0


"An opening bombardment destroys most of Taiwan's navy and air force in the first hours of hostilities. Augmented by a powerful rocket force, the Chinese navy encircles Taiwan and interdicts any attempts to get ships and aircraft to the besieged island. Tens of thousands of Chinese soldiers cross the strait in a mix of military amphibious craft and civilian roll-on, roll-off ships, while air assault and airborne troops land behind the beachheads."

So began a wargame conducted by the US-based Center for Strategic & International Studies (CSIS) in January 2023 that sought to answer what would happen if China attempted an amphibious invasion of Taiwan. For those unfamiliar with the widely cited report, you might wonder: what were the results?

According to the CSIS report, Taiwan, together with the US and Japan, jointly defeated a conventional amphibious invasion by China in most scenarios. For the US and Japan, the resounding victory came at the cost of dozens of ships, hundreds of aircraft, and tens of thousands of soldiers. Taiwan's armed forces, meanwhile, emerged triumphant but severely degraded. and were left to defend a damaged economy on an island without electricity and basic services.

Chip war fights on: where is Taiwan's National Security Strategy?

"There's no winner in war, and there's no loser in peace," said Richard Chen, a retired admiral who commanded Taiwan's Navy from August 2013 to January 2015, and now a lawmaker who sits on the Foreign and National Defense Committee of Taiwan's legislature. Chen indicated that the CSIS wargame was based on an inaccurate database and was narrowly focused on the military dimension of Taiwan's security environment, failing to factor in other dimensions such as industry, energy, medicine, society, politics, foreign policy, and economy.

Indeed, the technology industry has been pushed to the forefront of the US-China conflict, and none other but the recent international calls for TSMC to diversify its production amid the narrative to "de-risk" from Taiwan – supposedly a regional powder keg – can better illustrate the tightly-knitted relation between industry and warfare.

With this in mind, together with military experts and professionals familiar with these dimensions, Chen designed and coordinated a tabletop exercise (TTX) in 2023, seeking to provide a Common Operational Picture (COP) of Taiwan's national security environment, and driven by the ultimate goal to find a path that can defuse Taiwan from the risks of armed conflict. Organized by various Taiwan-based think tanks, including the Taiwan Center for Security Studies (TCSS), the TTX, in contrast to traditional wargames, aimed to manage the risks instead of managing the damage.

In March 2024, another tabletop exercise was conducted, and the results were released in a 2024 TTX report on April 15. Ultimately, the goal of the tabletop exercises was neither to count casualties nor to indicate winners and losers. Instead, it aimed to inform the formation of Taiwan's first National Security Strategy that the former navy commander has been pushing for.

RE100: a challenge no less serious for geopolitics

Compared to the 2023 TTX that assumed a Chinese invasion in 2027, the latest tabletop exercise factored in the outcome of Taiwan's recent presidential election and set the timeline of an armed conflict to 2027-2023. Taiwan's semiconductor industry, once again, is under a magnifying lens. As highlighted in the 2024 exercise, Taiwan's semiconductor industry is facing geopolitical and energy/carbon reduction-related pressures.

On the one hand, the island's chip industry is confronted with "Taiwan+1," namely the international trend to build alternative supply chains to Taiwan. On the other hand, the trend of "China+1" leads to the buildup of mature-node capacity in other regions, especially India, that might eat into Taiwan's global market share. Above all, the US sanctions on Chinese chip capability below 14nm are prompting China to accelerate technology breakthroughs.

When it comes to energy policy and carbon emission, the exercise highlighted the green energy shortage confronting Taiwan's semiconductor manufacturing industry as Renewable Energy 100 (RE100) pushes for 100% green energy use before the year 2050. Taiwan. Since the Taiwanese chip industry is at a relative disadvantage when it comes to renewable energy adoption, it is feared that its market share will reduce in the coming ten years.

Favorable energy policies in other countries are also driving Taiwanese manufacturers abroad. Against this backdrop, the TTX report calls for a revision of Taiwan's current energy policy, especially the re-introduction of nuclear power, to keep advanced semiconductor manufacturing in Taiwan, based on an estimation that TSMC's annual cost might increase by NT$21 billion with every NT$1 increase per kWh under the current trend.

Regarding the geopolitical challenge of the chip industry, the TTX report recommended several measures, including accelerating the adoption of Taiwan's own "Chips Act," and legislating to keep advanced chip design and manufacturing in Taiwan. As the report recommended, Taiwan's own Chips Act should encourage chipmakers working on mature nodes to boost R&D and increase their competitiveness through greater differentiation and customization. It also called for the government to protect the necessary talents, intellectual properties, equipment, and materials needed for advanced processes, regarding them as strategic assets.

So, what if there is a military blockade?

In 2023, the TTX reviewed the resilience of Taiwan's chip industry under Chinese military blockade, focusing on three aspects: key semiconductor materials shortage and its impacts on fab operation, challenges to Taiwan's export of chip products, and implications of production halt and damaged fabs. Apart from energy shortages, public disorder, and outright destruction, it was revealed that some chemicals and gases needed for semiconductor production have expiration dates. If the blockade lasted beyond 3 months, fab operations could be halted as well.

When aerial and maritime shipments are impeded, it is estimated that Taiwan's market share in mature processes will especially take a severe blow when customers worldwide often have alternative sources of mature chips than Taiwan. When it comes to advanced nodes where Taiwan's market share surpasses 90%, however, it depends on the progress of TSMC's overseas expansion. As long as TSMC's production capabilities aren't impacted by military conflicts, it is estimated that orders for advanced chips will return to Taiwan when fabs resume operation.

De-risking, the right way?

To brace for the aforementioned scenarios, participants of the TTX proposed several measures. For example, the government should encourage the development and production of key materials in Taiwan and set up mechanisms to ensure the safety of the materials, talents, and equipment key to chip production, so that fabs can resume operations or undergo reconstruction after conflicts.

The National Finance Stabilization Fund should also be leveraged to ensure that Taiwan's fiscal system can support the chipmaking industry's recovery through loans and tax reductions. It was pointed out that the current NT$500 billion fund size is insufficient to address the crisis. Additionally, the government is suggested to enact executive orders or simulate how aerial shipments can sustain chip deliveries to customers worldwide during emergencies to maintain or rebuild the Taiwanese chip industry's post-conflict business reputation.

Finally, the Taiwanese chip industry is suggested to conduct business continuity planning (BCP) and diversify its strategic production capacities abroad to back up during crises. Interestingly, the TTX participants raised the potential to leverage the overseas presence and government relations of Taiwanese chipmakers, turning them into channels that can negotiate with China to shorten the duration of the blockade. Most important of all, as revealed by the exercises, is for the government to avoid a military crisis in the first place.

Perhaps then, amidst the ongoing tension between the US and China, the main challenge of the Taiwanese national security team is to form a credible deterrence against China by crafting a combination of credible threats and credible assurances, and it remains to be seen if the chip industry has a role in it.