Lauren McKinley:
Hello everyone and welcome to our Situation Brief: Scenario Planning for Taiwan presented by Everstream Analytics. My name is Lauren McKinley. Today I’m joined by our presenters, Josiah Ponnudurai and Jeremy Koh. Josiah is a senior analyst on our intelligence solutions team and Jeremy is a manager on our intelligence solutions team, both supporting the APAC region. Today during the brief we will take you through the agenda, why Taiwan matters, followed by the impact on supply chain industries, an update about the election and possible scenarios. And with that I will turn it over to Jeremy.
Jeremy Koh:
Thanks, Lauren. So basically we are here today to understand the Taiwan and China so-called relations with each other and why Taiwan matters. So basically in the last few years we can see that there have been a lot of, so-called increased tensions between the two countries and it all started when first US Speaker of the House, Nancy Pelosi, visiting on August 2nd, 2022. President Tsai Ing-wen as well had a visit with the US Speaker of the House, Kevin McCarthy on March 4th, 2023, and VP William Lai visits to New York and San Francisco on August 12th and 16th in 2023. All of these were met with a lot of military drills in around Taiwan by China because they kind of oppose such visits.
And in the current scenario today, a lot of tensions, so-called a lot of views have been of Taiwan-China conflict has taken the backseat into somewhat because of the Israel and Hamas conflict that’s ongoing. So we wanted to present this to provide a shift into a perspective as to why the Taiwan and China issue should be important as well. Because most important is that Taiwan is the largest producer of semiconductors in the world and any implications to the semiconductor industry can affect multiple sectors including tech, automotive, electronics, et cetera. Next slide please.
All right, so where are we at in terms of what’s happening now in 2023? I mean, according to surveys shown by Bloomberg, most Taiwanese people identify themselves as Taiwanese and support maintaining the status quo. In the Bloomberg survey, 63% of respondents identified themselves as Taiwanese. So there is this trend of growing national identity in Taiwan and it kind of makes it harder to some respect of reunification efforts back with China. And also on top of that, China considers Taiwan a breakaway province while Taiwan maintains its own government and military.
However, economic ties are strong between China and Taiwan as China is Taiwan’s largest trading partner. At this current juncture, the situation remains tense between both parties. However, we must take note that both sides seem to prefer avoiding direct conflict with one another. On top of that, there’s also the idea of the US deterrent as well. The US plays a crucial role in deterring China, but its commitment to Taiwan remains ambiguous. The US has always maintained this so-called strategic ambiguity towards Taiwan. It has applied Taiwan with arms and engaged in unofficial relations with it, but has not explicitly committed to defending it. So this is where we are in 2023. I will now hand over the time to Josiah who will provide you with more details on the various industries in Taiwan.
Josiah Ponnudurai:
Thanks so much, Jeremy. So good morning and afternoon to everyone calling in. Today I’ll be talking a little bit about Taiwan’s role in global supply chains, both from the perspective of manufacturing operations within Taiwan and then secondly companies that are headquartered in Taiwan but also have significant manufacturing operations overseas. So let’s first take a look at Taiwan’s largest and perhaps its most well-known industry, its electronics and semiconductor manufacturing sector. Now as you can see from the two images here on this slide, Taiwan was the world’s second-largest exporter of electrical machinery and electronics in 2021, accounting for around 7.9% of the 3.06 trillion US dollar electronics export market. Now this trend also held true in 2022 with Taiwan exporting around 247 billion US dollars in electronics, which accounted for more than half of the territory’s total export revenues.
So now if we drill down into the trade data a little bit more, what we’ll find is that integrated circuits or semiconductors actually make up the bulk of Taiwan’s electronics exports. So as you can see from the second image on the right, we actually see that the island of Taiwan alone manufactured more than a fifth of all the integrated circuits used globally in 2021. And if we actually look at numbers, we’ll see that around 60 to 70% of all the value of Taiwan’s electronics exports actually come from exports of semiconductors. Now if we move on to the next slide.
So now moving on, we can see this image here that provides a general breakdown of fabrication production capacity globally. From this image we see that the island of Taiwan’s dominance in the semiconductor sector really comes down to the share of fabrication capacity that it has for advanced and intermediate logic chips. Now logic semiconductor chips account for around 42% of total semiconductor industry revenue and are used in literally every single electronic component that requires some processing ability. So these chips are used in everything from home appliances to consumer electronics, automotive components and medical devices. And what we can see basically is that Taiwan nearly has a monopoly on all fabs that are able to produce the most advanced kinds of logic chips smaller than 10 nanometers that are used in advanced computing applications. And is also the largest or the second-largest producer for all other kinds of logic chips, meaning that the semiconductor industry will likely remain heavily reliant on semiconductor fabs located within Taiwan, at least for the short to medium term. If we can go to the next slide.
Now shifting focus a little bit from semiconductor manufacturing within the island of Taiwan itself to Taiwanese semiconductor companies, we see that Taiwanese companies don’t just dominate the semiconductor fabrication sector. Now of course we’re all familiar with the major foundry players like TSMC and UMC. However, what might be surprising is that Taiwanese semiconductor companies also play an outsized role at the start and tail end of the semiconductor manufacturing process with around 58% of global market share in the packaging sector and around 20% of market share in the design sector. Now, the most common Taiwanese companies in these sectors would include players like MediaTek and Realtek for IC design and advanced semiconductor engineering and Powertech for packaging and testing operations. If we can go to the next slide.
Now, in addition to the semiconductor sector, we can see that Taiwan is also a major player in other electronic supply chains. So for example, the territory was the world’s largest exporter of printed circuit boards or PCBs in 2021 and the island has around 27 major PCB manufacturers with revenues exceeding 100 million US dollars. Now big names in the PCB industry in Taiwan include Unimicron, Compaq, and AIRPRO technology. And the reason why Taiwan has been able to become such a major player in the electronic supply chain is largely due to the presence of large contract manufacturers and assemblers like Hon Hai Precision Industries or Foxconn, Inventec and Au Optronics, all Taiwanese companies that have created a significant upstream demand for electronic components that go into these large consumer electronic products that these contract manufacturers are making. So if we can move on to the next slide, we can see how Taiwanese semiconductor and electronic companies are also responding to these increased China-Taiwan tensions that Jeremy mentioned earlier.
Now we all know that an increased number of Taiwanese companies are coming under pressure from customers to offshore manufacturing operations from both mainland China and the island of Taiwan due to increased geopolitical tensions. Now in terms of how this offshoring process is currently going, from this chart here we can see that Taiwanese semiconductor companies actually are continuing to invest heavily in Taiwan with around 16 foundry investments announced between now and 2030. In terms of common offshoring trends, we can see that basically the United States is not really a major player in this. So we can basically see that all new foundry investment in the United States has basically come from one investment by TFMC, which has promised a 40 billion US dollars investment to build an advanced foundry in Arizona. However, offshoring is occurring to a larger scale in other parts of Asia, especially in Japan, which has seen the largest amount of investment received by Taiwanese semiconductor companies outside of the island. And we also see investments being built in slightly lower end fabs as well in Malaysia and in Singapore. If we can go to the next slide.
And so we see a similar offshoring trend also occurring for Taiwanese contract manufacturers and other electronic component makers. The most common and popular destinations for offshoring at the moment include southeast Asian countries like Vietnam and Malaysia and as well as India where manufacturers like Foxconn and Pegatron have set up factories to manufacture products for Apple. Similarly, Taiwanese suppliers of electronic components are also diversifying away from the island and from mainland China and are following a lot of these larger contract manufacturers overseas. So for example, a May, 2023 survey of Taiwanese PCB manufacturers revealed that there are currently 17 PCB factories that are being built by Taiwanese companies in Southeast Asia with Thailand emerging as the most popular destination followed by Vietnam and Malaysia. And moving on now to the next slide.
So now moving quickly to other sectors outside of the electronics industry, I also wanted to briefly look at the automotive sector. Now Taiwan exported around $15.8 billion of automotive components in 2023, with most of these exports actually going to the United States, followed by Germany and the Netherlands. And all of these countries are larger export markets for the Taiwanese automotive component sector compared to China. Now while these exports are relatively small compared to Taiwan’s electronic sector, I thought it’d be interesting to reference the automotive sector as there are a few Taiwanese companies that are major suppliers in the automotive and EV supply chains. For example, automotive components manufacturer, Hota Industrial is the actually one of the main suppliers of reduction gears to Tesla. While Foxconn is also poised to enter the EV battery market with new plants planned in Kaohsiung in Taiwan as well as Wisconsin and Ohio in the US. Petrochemicals manufacturers in Taiwan like the Chang Chun group, are also important producers of chemicals and copper foils that are used in lithium ion batteries. And if we can go to the next slide.
And lastly, here we see that Taiwan is also a major exporter of industrial machinery that is used in the metalworking, lathing, drilling, and forging manufacturing processes. For example, Taiwan was the fourth-largest exporter of metal lathing tools and the fifth-largest exporter of metalworking equipment in 2021. Taiwan’s machinery and machine tools industry generated around $33 billion in total exports in 2021 and an estimated $39 billion worth of exports in 2022. And the US is actually the second-largest export market for Taiwanese machine tools after mainland China. Notable machine tools produced in Taiwan include additive manufacturing equipment, automation technology used in CNC equipment, as well as six-axis industrial robots. So basically the summarize everything that I’ve mentioned so far, Taiwan is and will continue to be a major player in global supply chains. The company’s primary importance is and will remain its electronics and semiconductor manufacturing sectors. However, the country is also of secondary importance to other manufacturing sectors, including the automotive and machining industries. And with that overview of Taiwan’s role in global supply chains, I’ll hand it over back to Jeremy who will talk about the upcoming elections.
Jeremy Koh:
Thank you, Josiah. So basically I think the biggest issue or the biggest flashpoint that we might see, or the biggest thing that’s coming up in Taiwan right now will be the presidential elections that’s going to happen next year. So why is the presidential elections important? Basically it’s to maintain peace and stability in the Indo-Pacific region. And also on top of that, whatever the Taiwan elections have or the outcome of the election actually has an effect on the US-China relations. Many experts have said that it might affect the future of sustained democracy, but there’s also another fun fact that Taiwan is the only democratic Chinese-speaking nation in this region. So basically after what Josiah has said, you can see that the Taiwan presidential elections has an effect on supply chain issues as well, especially semiconductors. And in that aspect it also translates to prosperity in the region as a whole. Next slide please.
So where are we at with the presidential elections? That’s an overview. The elections are set to occur on January 13th, 2024. This elections includes the presidential elections as well as the legislative elections, and it’s a three-way election between the Democratic Progressive Party, the Kuomintang and the Taiwan Peoples Party. Why is this important? Is because it’s the first time since 2000, the year 2000, that there has been a competitive three-way election amongst the three parties. I know there was election in 2016 that there was also a three-way, but ultimately the most competitive was in the year 2000. On top of that, what was also interesting was that opposition parties tried to form a coalition for the past six months, but eventually failed and then now it became a split ticket. And on top of that, Terry Gou from CEO of Foxconn declared to be an independent party or run as an independent candidate, but eventually dropped out in November. So this is where we are as an overview of the presidential elections. Next slide please.
So like I said, the last competitive elections was in the year 2000. This is when Democratic Progressive Party, DPP, Chen Shui-bian actually won the elections with against James Soong, who was an independent candidate, and the Kuomintang, Lien Chan. It was very, very close. The DPP won because there was a split ticket between the Kuomintang and independent candidate James Soong at the point of time. And also why is it important? As now currently at this juncture in the year 2023, it has been eight years since the DPP has been in power and they control both the presidential and the legislative brunch. So voters might possibly want to vote for an opposition as they want checks and balances. This is what the current callers or thinkers have actually said at this point in time. And also at the moment, there’s also a lot of flashpoints between the young voters in the sense that they are only worried about domestic issues.
A lot of voters, especially the young ones, do not bother too much about the China-Taiwan relations. Many are focused on domestic issues at this moment such as high housing prices, low wages, and how the country recovers from COVID-19. Voters are also focused on wanting a government that responds to their livelihood issues and they do not want a government just to focus primarily on the China factor. So at this current point in time, there is no clear favorite. We cannot really tell who’s a clear favorite even though as of the recent polls have highlighted that the DPP is in front. But we also have to take things objectively because since the DPP was in power, it has attracted a lot of international media and attention from the US or Western political influence. However, it has not done a good job in terms of issues such as housing and cost and monthly wages.
And on top of that, the DPP has been viewed by some members of the public in Taiwan of having a poor reputation of internal management, such as certain things like the Thailand vote rigging scandal and the Me Too scandal. So, many young voters are kind of swung between not only the DPP but other parties as well. So in that sense, votes of the DPP might get affected. Next slide please. So here we are, here are the presidential candidates of Taiwan. There are three of them. For the DPP, we have William Lai who’s basically the vice president of Taiwan since year 2020. He served as a legislator in the Legislative Yuan from 1999 to 2010 and the mayor of Tainan from 2010 to 2017. His running mate is Hsiao Bi-khim, which served as a Taiwan representative to the US and served as a member of the Legislative Yuan from 2002 to 2008 and again in 2012 to 2020. Then that’s for the DPP.
For the Kuomintang you have Hou Yu-ih, which is basically the current mayor of New Taipei since December, 2018. He served as a Director-General for the National Police Agency from 2006 to 2008. And his running mate is Jaw Shaw-kong who served as a single term in the Taipei City Council before being elected to the Legislative Yuan in 1987 to 1991 and 1993 to 1994. The third party in the mix is basically Ko Wen-je, who is actually the mayor of Taipei from 2014 to 2022 and he was the chairman of the TPP since 2019. His running mate is Cynthia Wu, who is actually really new to politics and only was appointed in the Legislative Yuan from 2022. Next slide please.
So as I mentioned earlier, the primary flashpoint in terms of what would determine the outcome of the election would be those voters under 40, they’ll be key. As you can see from the demographic map here of Taiwan, the bulk comes from 40 or 44 and below, they will likely affect how well basically the opposition would do. And majority of these voters are only concerned mostly about domestic issues. So the reason why the young voters are very important is this majority of them have a disdain or so-called view negatively the traditional two party system in Taiwan. And as such many have chose to vote and support the TPP at this current juncture. Next slide please.
So how would this affect cross strait relations? Although substantial number of members focus on daily issues, cross strait relations will become more prominent throughout the election. There will always be a more pro-USA stance vis-a-vis a pro-China stance. And basically cross strait relations has always been a talking point about every Taiwan election since the year 1996. So the question always arises how each party would deal with China and the USA. Basically from the USA’s point of view, how they view the election, Washington has met with basically all three party candidates and informed that they were willing to work with either candidate on the premise that Taiwan remains a stable partner in the region. Basically Taiwan’s behavior has to fit the interest of the US. Whoever gets elected basically must try to maintain the same level of relations with the US currently as now and US has also kind of stated that there is no preference of whoever gets elected. For China’s view on the elections, China has been very, very clear about its dislike towards the DPP because China views the DPP as supporting Taiwan’s independence.
William Lai, basically the VP has for years supported Taiwan’s independence and only when he became vice president he has backed away from his pro-independence views. So needless to say, Taiwan would prefer, I mean, basically China would prefer the Kuomintang or the TPP to actually win the elections. Basically, if the Kuomintang gets elected, the party wants to resume trade and dialogue with China in order to reduce and ease tensions. If the TPP gets elected, the party wants to reform the electoral system to better include other parties and the TPP promises to have dialogue with Beijing.
But on the flip side, the TPP also emphasizes the need to build up Taiwan’s military in order to deter Beijing from a possible attack. So if you look at it on a scale, the DPP is at one hand, the Kuomintang is on the other end, the TPP sits in the middle. And on top of that, the TPP has avoided taking a stance on whether Taiwan is part of the One China Policy. And in that retrospect it can be seen that because of this certain ideology that they push, it’s kind of resonating very well with some of the young voters. Next slide please.
So now we have three parties that’s running for the election. What are the main things? In a DPP victory, it will likely be met with more China aggression. This is a possible scenario due to the DPP’s possibility of having a more pro-independent stance or having a heavier lean towards the US. As such, they will have increased military drills in Taiwan that was met by China’s increased military drills. If the DPP loses, the question will arise, how will Taiwan keep its China’s influence in check? Basically, even if the DPP has a victory, China is also more interested with how the demographics or how the party make up of the Legislative Yuan would be. Because if the DPP doesn’t get the majority in the Legislative Yuan, China can be seen to be able to try to collaborate more with more pro-China members of parliament.
For the Kuomintang, basically if there’s a victory, the Kuomintang will elect to increase trade and dialogue with China. The possibility of increased China influence on Taiwan cannot be ruled out and the Kuomintang sees the island as basically One China. So that is basically the stance. However, we must know that there’s no guarantee that even if the Kuomintang is elected China would not stop its military drills. We do not know that for sure, so we need to keep that as an open mind as well. And ultimately the last one would be for the TPP. If any of them get elected or if the president gets elected, the top of the TPP, the candidate gets elected, it could complicate China’s and US tensions as well in the sense that because it can complicate the relations in the sense that because they still want to build up its military forces.
But on the flip side, it wants to continue having relations with China. So there’s a tension between the US and China relations in that sense it might complicate the matter. So if we were to give a high probable or high possibility due to the three-way election as seen in history and all of that, if there’s ever a three-way election, history has suggested that the DPP stands a very strong chance of winning because it happened in year 2000 and year 2016. So if that happens, we would most likely see increased China aggression in that sense or increased tensions between China and Taiwan. So next slide.
So in the event, what are the possible scenarios that could happen in the event if there is something that happens that is not into China’s liking? We could see an increase in trade restrictions. China could impose additional trade restrictions on Taiwanese products or make it difficult for Taiwanese companies to operate. I think in October, 2023, Foxconn faced the tax book in China subjected to things like tax audits and basically there was an onsite investigation by China’s natural resources department and it kind of affected the operations in Foxconn in Henan and Hubei province. And on top of that, the audit came less than three months before Taiwan’s presidential elections. Many can view it as a possible political motivated sort of attempt to kind of disrupt everything because Terry Gou, who was initially the Foxconn CEO kind of indicator is interested to run as an independent candidate.
Moreover, in the Global Times it mentioned that Gou might split the opposition vote, potentially ensuring a victory for vice president William Lai who is already leading the polls. So this is what could happen. And on top of that is likely that silicon wafers or 1/3 of China’s wafer imports come from China could face certain restrictions or certain kinds of disruptions. On top of that we must not take away, we must always remember that China is Taiwan’s largest import and export partner and its semiconductors in Taiwan contributes or accounts for 40 to 55% of Taiwan’s export market. So this might actually affect Taiwan, the economy of Taiwan.
On top of that, China would likely have a blockage on Taiwan such as increased military drills to partially block full access to Taiwan. This could have implications in Taiwan’s energy security because it relies heavily on fossil fuel imports such as coal, LNG, and petroleum for energy generation. The economy will also be adversely affected in the sense that there’ll be port closures, especially the Port of Kaohsiung. During the military drills in the last few years there was a 28% decrease in the number of vessels calling the port at the Port of Kaohsiung. Next slide.
So lastly, what is any supply chain mitigation strategies that one could employ? If there’s military drills, basically a no-go zone in Taiwan straits or no-fly zone in Taiwan’s air space, it’s usually based on the data that we have, it takes about one to seven days in terms of disruption, so one has to likely adjust the level of buffer of inventory that you have or secure some kind of air cargo capacity. In the event of an attempted invasion. That could be like water blockage, damage to port infrastructure, disruptions to airspace, disruption would be one month to one year.
So it’s best to stockpile on critical components as well as build up alternative suppliers in the region and beyond. But I would like to stress, again, there is no direct conflict between China and Taiwan at the moment and there has never been. And I think countries, both territories have kind of said that they do not want to engage in direct conflict. So this is just planning for the worst of the worst case scenario. With that, I would welcome any questions that you guys have and I’m looking forward to everything. I hope you enjoyed the webinar.
Lauren McKinley:
Great, thank you so much to our presenters today. I think we have a couple of questions that are in the chat. We’ll have time for one. If you have any additional questions, please make sure to reach out to us at [email protected]. The question I think we covered briefly, but just to touch on the key points again, what are the political selling points pushed by KMT and TPP to understand the impact if either of them win? I think we did touch on this, but if you wouldn’t mind just doing a quick summary of that potential outcome.
Jeremy Koh:
Okay, so basically if the KMT wins, like I said, it will increase trade and dialogue with China. It kind of eases the tensions a bit. So they’re using that as a potential selling point. People who actually vote for the KMT kind of view themselves as part of China. So that’s usually where most of the support comes from. So in that sense, there will be some kind of [inaudible 00:30:03] in between Taiwan and China in that sense. So that is the main selling point. We’re going to have increased trade, we’re going to have increased dialogue and we’re going to prevent so-called military drills from happening. But like I said, the caveat is there’s no guarantee that China will stop its military drills. At the end of the day, it’s a democratic nation, it’s the only democratic nation. So the USA views it with some form of a strategic partnership.
So in that sense, because of this, so-called ties that Taiwan sits between the periphery of US relations and China relations, the idea of China saying that, okay, we’re not going to stop it entirely and that it’s never going to happen, will never happen. It’s very likely that drills might happen, but it might be on a reduced occurrence. For the TPP, basically they sit on the middle ground. They’re trying to say that we are on top of that are going to increase trade relations to China. We are going to ensure that things within China and Taiwan are better, but at the same time, we cannot discount the fact that there’s a possible invasion, so they’re going to increase their military. So we are not too sure on the aspect that whether China will view it lightly or China will view it in a way that it’s positive. So tensions will continue to be high, but if you were to say in terms of which has the highest chance of deescalating changes, it’ll be the KMT gets elected, followed by the TPP, and lastly, the DPP.
Lauren McKinley:
Great, thank you so much. With that, we will conclude our session. As mentioned, we will send a recording after the session and if you are interested in learning more about how to manage risk in Taiwan or China, please reach out to Everstream.ai. Thank you so much. Have a great day.
