Resilience, Opportunity and Risk in Taiwan

I returned from a week meeting innovators, tech juggernauts and the most senior leadership in government and politics. It was eye opening at every level. My take aways here:

Blessed Hualien, by Hsin-yueh Lin - 2010

The word “resilience” is often in the eye of the beholder – and in geopolitics and global trade one nation’s “resilience” may be another’s provocation. It was this word and balance that was front in center in an extraordinary week I spent in Taiwan last month.

I was hosted with a small delegation led by The German Marshall Fund and the dynamic leader of its Indo-Pacific program, Bonnie Glaser. For anyone familiar with China and the region, she is something of a legend. One indication of her decades long and often courageous analysis is that when she raised her hand to ask a question, pretty much everyone from Taiwan smiled and said, “Uh oh, here comes a hard one.”

And perhaps it is only her credibility that had us in front of the most senior leadership of the current and former governments, defense and national security, and business and economic juggernauts and innovators from TSMC to a host of leading tech innovators and American business representatives.

The takeaways are legion, but four themes really stuck with me.

1)      Our proclivity to think of today’s hotspots individually – War in Ukraine there, War in the Middle East over there, tension with China way over there and more – miss the essential intersection and interconnectedness of it all.

Our delegation had senior, experienced figures from national security in Europe, and it was clear that they and our hosts could not get enough of each other in discussing the shared learning and similarities between the situation in Ukraine and Taiwan. In fact, people were uniform from both the public and private sector that the more interaction and integration with friendly democratic countries ensured greater stability in the region.

Both the Europeans and the Taiwan leaders believe they are fighting for shared values of democracy, rule of law and respect for global institutions. Both are worried about military asset constraints and their ability to have access to the stingers, drones and other weapons they may require. Both are pushing to be leaders in the newest technologies of defense. Both understand that information war as part of the essence of war is a new reality. In fact, we met with experts on how AI is changing the dynamics of fake news at a scale and inability to detect that make both Taiwan and Ukraine at the front lines of this innovation. One tech executive told us that “Cyber security IS national security.”

And events in the region more broadly – recent tensions with the Philippines, a US alliance partner with obligations for us to come to their defense – cannot be understood without the context of what is happening in Taiwan.

The differences in the circumstances are stark. Obviously, Taiwan is not at war. China is not Russia, and the conflicts are decidedly different. The distinctions strategically and tactically of an Island versus a physical border nation are significant. The global stakes are much different economically – Taiwan is the 9^th largest trading partner of the US, Ukraine the 67^th. Taiwan’s second top trading partner after America IS China. The global economy is utterly reliant on Taiwan chips and simply cannot diversify fast or extensively as technology is also regularly and rapidly evolving. This may be the most important intersection of all.

2)      Despite significant tension among the two political parties in Taiwan, both repeat their commitment to “never be the provoker nor escalate tensions even optically” with China.

Yet for all the talk that Taiwan will pursue a policy that is “agile, open and pragmatic,” there is no doubt that both China’s military war gaming and info war has set everyone on edge. We were told repeatedly that the essence of the latter is focused on sowing chaos and divisiveness within Taiwan and instilling a sense of psychological despair in Taiwan’s future as an entity both connected and separate from China. One national security leader told us that “Numbness is the first step to the next step.”

And at the same time, the previous leading party, the Kuomintang (KMT), and the current in-power Democratic Progressive Party (DPP) have distinctly different language and approaches – the former wanting to enhance engagement with China and accusing the latter of dangerously inciting cross-Strait tensions. The DPP knows that their efforts towards “resilience” will be viewed as provocative – that both China and the KMT will say they are “preparing for war” – but whether in preparation for defending against future aggression or stronger typhoons their power and electricity grids simply are vulnerable, as are their infrastructure, transportation capabilities and banking systems. This will require greater civilian and military cooperation which in and of itself will be viewed as provocative. For the moment, even with aggressive posturing and language, the DPP assured us they are committed to “No surprises; No provocation.”

3)      A plan for resilience – better late than never?

I was struck that a more concrete, detailed plan of resilience really commenced after the past election in January. This is not to say that there were no defensive activities in place, but the public prioritization with specific themes and priorities is at a heightened place. There is no doubt that critical infrastructure is a central concern, and prioritization over access to power, water, air, telecom and communications (roaming capabilities, data back up and alternatives to Starlink) are front and center.

The government has outlined publicly six priorities, including both military and civil strategies:

1. To increase its defense budget to 3% of its GDP, emphasizing innovation and modernization.

2. To leverage public-private collaboration, especially in tech and military innovation.

3. To expand civil defense, creating greater integration with local planning.

4. To strengthen infrastructure, increasing investment especially in their ports and supply chain.

5. To train for technological defense, focusing on technology-savvy capabilities

   and personnel.

6. To think about civil defense holistically, integrating all sectors of society in their strategy.

All are logical as far as they go, but the devil is in the details and questions linger. How prepared are they should their emergency response capabilities like their 711 number come down?  How much business continuity is in place? Is their partnership and definition of the role of the private sector well defined? Do they have the budget to do what is required? Do they have the manpower? Are there clear metrics and timetables for what they want to achieve? How does one know if they are “resilient?” Is one ever fully resilient? (It made me wonder, are we?)

A new film series has been created there called Zero Day, a 17-minute trailer worth watching here. It is a Netflix-like TV production drama premised on a possible invasion from the PLA in China. The series is due to be released early next year. I’m not sure where it will fall in the navigation of preparedness without provocation. But it is clearly getting significant attention there and will focus people’s attention on what an aggressive scenario may look like and what steps individuals and families could take to prepare.

4)      Is business voting with its feet?

For this uncertainty one would think that business would be reserved and a bit back on its heels about investing more in Taiwan, but that is not what we heard. The American Chamber of Commerce there noted that the number of foreign business delegations coming through the island this year has been up nearly four-fold. AWS announced a $10 billion investment for data centers here. Google and Microsoft have continued to expand operations, especially in research, Micron with their advanced fab.  “They certainly have scenarios and plans for a Plan B, but they are here and rising,” one executive said to me.

New opportunity in the new environment, according to Taiwanese, are many especially where they support their resilience agenda. In energy, as part of their resilience plans, they welcome businesses that can help them build smaller smart grids, diversify into renewables, explore geothermal opportunities, offshore turbines and more. Considering increased cyber security threats, they seek investment and expertise to strengthen any vulnerability. Defense tech, satellite capabilities, logistics and AI innovation will find increased market demand and structural and tax incentives available. The United States and EU remain recently the largest investors there. But they are welcoming investment from across Asia more broadly, especially Japan, Korea and Australia.

Investment reflects a significant shift in Taiwan’s role in supply chains more broadly. As one long-time investor there explained, “This includes in advanced materials (plastics, chemicals, steel, cement, etc.), machine tools, biotechnology and medical products, ICT products and networking, automotive parts, renewable energy products such as for solar and wind, and more. Also, Taiwan's shipping and transportation industries includes major container and bulk shippers such as Evergreen that are key players.”

The need for US firms to continue to invest in Taiwan is also true for data centers and increasingly AI, as Taiwan firms as OEMs/ODMs for the server industry play a critical role in those supply chains too. However, the issue of sufficient energy will increasingly determine whether they scale up here or not. One executive told me, “The Taiwan government may have to restrict the opening of new data centers in northern Taiwan simply because they consume too much power. The US needs to work with Taiwan on how to find and create more energy, beyond renewables. Increasingly, nuclear may have to be back on the table.”

Other frustrations are also many. Several executives told me that there is heavy bureaucracy to navigate both from government and larger business partners. Risk tolerance is not high, which makes decision making slow and stifles potential entrepreneurial investments. Even tech connectivity and capabilities among other infrastructure concerns remain. The political division and its ramifications for foreign investment is not to be underestimated as well. In a tense political environment budgets get blocked, every issue is debated into the minutiae, execution is slowed. “NONE of this is going away,” one executive told me.

The elephant in the room of business, of course, is TSMC. They clearly remain the significant front runner in innovation and manufacturing, and not only do they have no intention of going anywhere, but they are also doubling down in Taiwan for their greatest innovation. New production from the US, Japan and shortly Dresden will likely not represent more than 15% of output any time soon, and whether they will ever be profitable remains unclear. Challenges with getting the US operations up and running have been a series of eye-opening lessons in how to manage cross culturally better, lessons we were told have been instructive both in their more successful, fast and efficient builds in Japan and Germany. They are very happy with their business with and in China – “they are very good partners” – and have two fabs there. Notwithstanding and subsequent to our trip, TSMC announced that it was stopping production of advanced chips for China. One friend cautioned me that with this, “It throws into question those who believe China is catching up fast; without Taiwan's technologies, maybe it isn't.”

In the end, the two greatest challenges in TSMC’s foreign facilities have been in investing in and training a workforce, starting at the university level, and the building of the supporting ecosystem of suppliers. “If you all consider a Chip Act 2.0,” one executive told me, “Focus less on dollars and more on supply chain – encouraging an ecosystem of parts suppliers and process on the ground that would strengthen the US and have significant operating and cost efficiencies to the entire engagement.” Today, as an example, TSMC will ship chemicals to the US because they are not made here yet – only to ship BACK the chemical waste as there are no facilities in America to process it.

When I pressed several experts whether China may catch up in semiconductors, most in Taiwan seemed confident as too many skeptics underappreciate the sophistication, precision and training required to make chips at scale ever decreasing size, width and technical advances. We were told that China is at least ten years behind; even as they make huge strides and invest significant capital, they will play catch up for the next decade - and the best advances will continue to move ahead of them. China claims significant advances in chips for Huawei phones, but the nature of those advances is unclear. Also, demand for Huawei is so great that it effectively swallows the capacity for its current needs. Ability to leapfrog by the nature of its manufacturing complexity not a scenario. Concerns about IP theft – of Chinese penetrating TMSC or partners in their ecosystem – are real and but we were assured were understood and containable.

While leapfrog in chip manufacturing seemed unconcerning to them specifically, we pushed hard on advances in other areas that may change the requirements and quantity of chip demand over time. When pushed on the ramifications on quantum of AI chips, as examples, - technologies that may require much different capabilities and less chips - they again seemed less concerned. There is a sense that whatever innovation comes they will need the best in chips, and that is and will be TSMC. The founding principle of “never compete with our customers” remains intact. They will believe in any of these structurally they have an embedded cost and expertise advantage at current and predictable requirements.           

For what it is worth, senior hardware executive friends in Silicon Valley and Southeast Asia are much more skeptical of TSMC’s ten-year, ever evolving lead. They note that technologically, China is dedicating a level of talent, money and ecosystem building put on steroids considering The Chips Act and their own strategic imperatives. They add that China is specifically understanding and targeting the key advantages in Taiwan and offer near unlimited subsidies to go at these in particular. That so much will change technologically in and around chip innovation and consumption that they may surprise us with their place in newer innovation.

Here, like in Taiwan geopolitically and as we all await President Trump 2.0, time will tell.