John Ferguson, chief executive officer of TBM Consulting Group, discusses the importance of Taiwan to global semiconductor production, and tells how the supply chain would be impacted by China invading Taiwan. 

Taiwan is “far and away” the leading global provider of semiconductors, with just two manufacturers responsible for 65% of the chips in use around the world, and 90% of the most advanced versions, Ferguson says. Compare that with OPEC’s “dominance” in global oil production — a 40% share of total capacity — and the scale of the problem becomes painfully evident.

An emphasis on low-cost production caused manufacturers to allow this supply imbalance to take hold. “It was always seen as risk-free,” Ferguson says, but the trade tensions between the U.S. and China that have emerged in recent years, coupled with supply disruptions caused by the COVID-19 pandemic, have forced companies to consider the risks that come with sole sourcing of critical components. 

Given Taiwan’s dominance in semiconductors, what would happen if (or when) China invades, the prospect of which becomes more likely each passing day? “It would, at a minimum, cause a massive disruption in supply in the short term,” says Ferguson, noting that “chips are in almost everything we use that has an on/off switch.” There simply isn’t enough capacity elsewhere in the world to make up for the resulting shortfall, and the disruption would also have a ripple effect throughout almost all goods and services. Transportation networks, too, would be seriously affected by conflict in the seas and airspace around China.

The long-term impact is harder to predict. With China asserting control over the lion’s share of chip production, it could restrict access to allies of Taiwan. But China itself would also be affected, given its reliance on Taiwanese chip production.

To the extent possible, companies should act now to diversify semiconductor sourcing in order to mitigate the risk of future disruption in this critical supply chain, Ferguson says.