Semiconductor Standoff: TSMC’s $100bn Leap and the High-Stakes Taiwan Gamble

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Just yesterday, TSMC announced a staggering $100 billion investment into the US—a seismic shift that underscores the evolving global semiconductor landscape. This move is a direct response to years of pressure urging TSMC to diversify its manufacturing base away from Taiwan, thereby keeping the world's most critical electronic manufacturing closer to US control and further from China’s reach.

In the US, it's all too easy to view the world through a US-centric lens. But step into China's shoes and consider the game theory at play. Beijing is actively building global political support for a potential invasion of Taiwan—as a recent Economist article details, China has been busy cozying up with allies in Latin America and the Middle East. Yet, global political backing is just one piece of the puzzle. If China were to seize TSMC, the burning question becomes: could they actually extract any meaningful yield from its factories?

In the short term, the answer appears to be a “no.” An occupied TSMC would be crippled by its reliance on a global network of suppliers—from Japan’s indispensable chemicals to ASML’s precision machinery and US design innovation. It would be like commandeering a Formula 1 car only to find that the fuel tank is empty, the pit crew is missing, and the software remotely locks the engine. However, in the long term, Beijing’s strategy is to eventually turn that “no” into a “yes” by rebuilding the entire supply chain domestically while leveraging its geopolitical clout.

The Global Semiconductor Ecosystem and Why an Occupied TSMC Would Falter

The semiconductor supply chain is a masterpiece of global specialization—and it’s exactly this interdependence that would leave an occupied TSMC gasping for air. No single country can produce every critical component needed for cutting-edge chip manufacturing. Here’s a detailed look at the key dependencies:

• Japan – Materials & Chemicals:
  Advanced chipmaking devours ultra-pure chemicals and high-grade materials, and Japan is the undisputed supplier. Japanese companies produce roughly 90% of the world’s photoresist and fluoropolyimide—critical for etching the intricate patterns on silicon wafers—and supply about 70% of high-purity hydrogen fluoride, an essential etching gas. In addition, major firms like Shin-Etsu and Sumco dominate the global silicon wafer market. TSMC’s production lines rely on just-in-time supply chains with minimal on-site stockpiling. We have a real-world precedent: in 2019 Japan restricted exports of these exact materials to South Korea (over a political dispute), and it nearly crippled Samsung’s and SK Hynix’s production until workarounds were found. In an invasion scenario, Japan—a staunch US ally—would undoubtedly cut off these supplies, leaving a China-controlled TSMC without the “secret sauces” required to fabricate advanced chips.

• Netherlands/EU – Lithography Machines:
  The production of leading-edge chips hinges on one critical asset: ASML’s extreme ultraviolet (EUV) lithography machines. Priced at over $200 million each, these machines are the only devices capable of etching the sub-7nm patterns essential for today’s cutting-edge chips. However, EUV machines don’t operate on autopilot—they demand constant maintenance, calibration, and software updates provided by specialized teams. Key components, such as the ultra-precise optics supplied by companies like Zeiss, further underline this dependency. In an occupied TSMC, all these support services would vanish overnight. With built-in remote kill-switches and strict maintenance protocols, the absence of ASML’s ongoing assistance would reduce these complex machines to nothing more than expensive paperweights, halting advanced chip production almost immediately.

• United States – Fabless Design & IP:
  The US is the creative engine behind modern chip design. American giants such as NVIDIA, AMD, Qualcomm, and Apple drive innovation with their cutting-edge architectures. Over half of the core semiconductor intellectual property—including high-performance designs and essential blueprints from companies like ARM—originates from the US or its close allies. Equally crucial is the Electronic Design Automation (EDA) software, provided almost exclusively by US firms such as Synopsys, Cadence, and Mentor Graphics, which enables engineers to design and refine these chips. Should China seize TSMC, these US-based design houses would promptly withdraw their contracts and technical support. Without continuous access to fresh design blueprints, process design kits, and software updates, TSMC’s product lineup would stagnate.

The Long-Term Outlook: China’s Race Toward Self-Sufficiency

Now, just because China likely can’t keep TSMC running today doesn’t mean it will never be able to. China is playing the long game—and pouring astronomical resources into building an independent semiconductor supply chain. Xi Jinping’s government has openly declared semiconductor self-sufficiency a strategic priority, investing tens of billions in subsidies, research, and talent development. In 2023 alone, Beijing set up a new $40+ billion fund specifically to boost domestic chips and tools. The results so far? A mixed bag—but with notable progress that should not be underestimated.

Domestic Tech Advances:
Under US sanctions and tech embargoes, Chinese firms have been forced to innovate internally. For instance, China’s top chipmaker SMIC shocked many by producing a 7-nanometer chip for Huawei’s Mate 60 Pro smartphone in 2023. This chip, the Kirin 9000S, was manufactured using older deep ultraviolet (DUV) lithography—with clever process tweaks, likely through multi-patterning techniques. Although it’s reportedly not as efficient as a TSMC 7nm chip and SMIC’s historical yield remains low, the milestone shows that Chinese engineers can improvise even when cut off from the latest tools. Additionally, China has rolled out indigenous versions of technology throughout the stack: domestic EDA software, increased production of legacy 28nm and 14nm chips, and rapid progress in memory chips. Just last month, the Financial Times reported that SMIC was getting an impressive 40% yields on their latest 7nm chips:

Crucially, Chinese equipment makers are stepping up. SMEE (Shanghai Micro Electronics Equipment), China’s rising lithography champion, has already built machines capable of 90nm and is on track to deliver its first 28nm immersion lithography machine by the end of 2024. While 28nm is generations behind the cutting edge, it’s sufficient for many “everyday” chips—such as microcontrollers, sensors, and older-generation processors found in cars and appliances. If SMEE masters 28nm, the next logical step would be 14nm, and so on. Some estimate that China is still years away from producing a homegrown EUV system—perhaps by ~2030 if optimism holds—but the gap is steadily closing from the bottom up.

Parallels to the Auto Industry’s Rise:
For those who think “China will never catch up,” consider the evolution of the auto sector. Two decades ago, Chinese cars were seen as inferior—cheap knock-offs with poor safety records. Fast forward to today: China has overtaken Japan as the world’s largest auto exporter, shipping over 5 million cars last year. Chinese automakers like BYD, Geely, and SAIC now dominate the electric vehicle (EV) revolution, with BYD even surpassing Tesla as the world’s #1 EV maker by volume. How did China transform from zero to hero in autos? Through massive investment, joint ventures to absorb technology, relentless iteration, and leveraging its huge domestic market to achieve scale. A similar trajectory in semiconductors is plausible: although China’s cutting-edge chips currently lag several generations behind, each year brings incremental improvements. First, domestic demand for mid-tier chips will be satisfied, and then the technology will climb upward. It might take 5, 10, or even 15 years, but the gap can close—and when it does, the implications for the global tech balance of power will be profound. With every incremental breakthrough in domestic lithography, design software, and chemical production, China's Taiwan invasion becomes an ever-more calculated—and potentially irresistible—bet.

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