Why an EU-Taiwan chip foundry deal may not be such a bad thing for Beijing

Any such deal is still a long way off as Taiwan seeks to rally EU support against threats of military action by Beijing while also avoiding EU autonomy in chipmaking
But for Beijing, which frowns on foreign engagement with Taiwan’s government, it might actually be easier to deal with a Europe less dependent on Taiwanese chips

Emanuele Scimia

Published: 8:15am, 27 Dec 2022

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The European Union wants strategic autonomy on microchips, from design to production. But despite its expressed interest in developing economic and technological ties with Taiwan – as seen in the December 18-21 visit by a delegation from the European Parliament’s international trade committee – a deal to build Taiwanese semiconductor plants in Europe is still a long way off.

At the recent Asia-Pacific Economic Cooperation (Apec) summit in Thailand, Taiwan Semiconductor Manufacturing Company (TSMC) founder Morris Chang said the world’s largest contract chip maker was considering building foundries in countries other than the United States and Japan. He did not elaborate, but Europe is seen to be in line to host Taiwanese semiconductor production.

TSMC is spending US$12 billion on chip factories in the US, plus a further commitment for US$28 billion, while the investment in Japan with the Sony group is worth US$2.1 billion.

In February, the EU Commission launched its European Chips Act, a plan to raise US$45.3 billion in public and private investments to face any future supply chain disruptions. Europe is a powerhouse in microchip design, but is dependent on the import of finished products. In case of a crisis across the Taiwan Strait, it would be vulnerable to a halt in supplies, so it is aiming to diversify its supply chain and secure production at home.

The European bloc has said it is in constant dialogue with like-minded partners, including Taiwan, with which it exchanges views on technological research, industrial policy and the supply chain.

At TSMC’s quarterly earnings conference call on October 13, CEO C.C. Wei said the company was in the preliminary stage of an evaluation on whether to invest in Europe and did not rule out any possibility. TSMC president Mark Liu stressed in June that the company did not yet have enough customers in Europe to justify investments in microchip factories there.

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The problem is as much about business as it is about geopolitics. Taiwan must find a balance between rallying the EU against threats of military action by Beijing, while also avoiding Europe becoming autonomous in the production of microchips. And this is even though Wei is persuaded that building overseas foundries will not threaten Taiwan’s semiconductor edge.

If Europe no longer needs Taiwanese semiconductors, it becomes highly unlikely that it would respond to any military action by Beijing against the island. The risk for Taiwan is real as the EU Commission says that, in the short term, the European Chips Act will “enable the union and member states to understand the dynamics of semiconductor supply chains and to take measures to anticipate and address future chips crises”.

The last EU-Taiwan Trade and Investment Dialogue took place in June and addressed cooperation on semiconductors. But the outcome was below expectations. In its final statement, the European Commission said both parties were ready to work together to monitor the microchip supply chain. It was followed by a technical meeting on microchips on October 3.

Germany remains the EU country best positioned to host TSMC production, particularly at its dynamic tech cluster in Dresden, Saxony. But other countries may be in contention. Last March, a delegation from Taiwan visited the Czech Republic, Lithuania and Slovakia to weigh up the potential of local technology businesses.

The Czech Republic’s foreign ministry has made it clear that Prague is working intensively with Taipei to build cooperation in the field of semiconductors. Several meetings have also taken place, both in the Czech Republic and Taiwan, including with several Taiwanese semiconductor manufacturers.

The Czech Republic wants to play a significant role in the semiconductor supply chain, but its strength is primarily in the area of chip research and development, and chip design. Still, the Czechs can offer their Taiwanese partners solid expertise in the areas of e-mobility and space technologies.

While the Lithuanian Ministry of Economy and Innovation points out that it “is not negotiating with TSMC on the construction of a microchip foundry in Lithuania”, semiconductor cooperation between Vilnius and Taipei is a priority for the Baltic republic. It is worth noting that Taiwan’s Industrial Technology Research Institute will invest US$10.6 million in chip production in Lithuania.

Taiwanese foreign minister Joseph Wu (left) is welcomed by Czech Senate Speaker Milos Vystrcil in Prague on October 27, 2021. Taiwanese ministers visited the Czech capital accompanied by dozens of business and research representatives to boost trade and investment. Photo: AP

Slovakia has also stepped up tech dialogue with Taiwan. During a visit to Taiwan in June, Peter Osuský, chairman of the Slovakia-Taiwan Parliamentary Group, told me that the Slovak Ministry of Economy was ready to support the necessary steps to see the construction of microchip fabs, and that he had the feeling both parties were interested.

Europe understands that, to become a leader of technology in the semiconductor field, it must strengthen the capabilities that would allow it to “move from the lab to the fab” – and Taiwan’s know-how is the missing link.

Usually, the Chinese government lashes out at countries and foreign actors engaging with Taiwanese officials. But, as counterintuitive as it sounds, Beijing would do well to let the EU upgrade its semiconductor capacity with the help of Taiwan’s tech giants. It would be easier for Beijing to deal with a Europe less dependent on Taiwanese microchips.

Emanuele Scimia is an independent journalist and foreign affairs analyst