- - Taiwan’s £7.5tn secret weapon is disintegrating

Allegra MendelsonJanuary 2, 2026 at 1:00 AM

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Taiwan's secret weapon

Behind the nondescript grey buildings that line the streets of Hsinchu lies one of the most important pieces of technology in the world.

Whirring away inside are rows of white machines that are so advanced – and so secretive – that a select few are allowed inside.

This is Taiwan’s “Silicon Valley” and these facilities produce the majority of the world’s semiconductors – small chips that power virtually every electronic device in use today, from coffee machines to fighter jets.

Every country in the world relies on these chips, including China, which despite threatening to “reunify” Taiwan by force, imports nearly half of the island’s semiconductors.

Economists warn that an invasion of Taiwan would cost the world’s economy £7.5tn – far more than the cost of the Russian invasion of Ukraine or the Covid-19 pandemic.

Analysts argue that this very fact would act as a key deterrence against Beijing following through on its threats, as China knows if it does invade, its economy would take a direct hit from the fallout.

Known as the “silicon shield”, the theory argues that Taiwan’s semiconductor industry offers it a de facto security blanket, which would stop China from invading – both because of its own dependency on the chips and the US’s, which could come to Taiwan’s defence.

Tsai Ing-wen, Taiwan’s former president, popularised the theory in 2021 when she wrote that the silicon shield “allows Taiwan to protect itself and others from aggressive attempts by authoritarian regimes to disrupt global supply chains”.

However, leading Taiwan companies within the semiconductor industry have been moving production sites abroad to countries such as China and the US.

Experts have warned that this is effectively disintegrating Taipei’s valuable economic deterrence, making it more likely that Beijing would attack Taiwan.

A lab technician holds a semiconductor wafer, which is used in the manufacturing process - PonyWang/E+The monopoly

Taiwan produces approximately 60 to 70 per cent of all the world’s semiconductors and more than 95 per cent of the advanced chips.

While thousands of companies are involved in semiconductor production, in Taiwan the industry is synonymous with one name – Taiwan’s Semiconductor Manufacturing Company (TSMC).

Founded in 1987, the company has grown over the years to make up more than 60 per cent of the global market share and 9 per cent of Taiwan’s GDP. It is the most important company to the country’s economy and, in many ways, its national security.

It is one of more than 400 companies based in the Hsinchu Science Park, a concentrated industrial zone in central Taiwan often compared to Silicon Valley in the US.

The park’s unique “ecosystem” is one of many reasons that Taiwan has become a global leader in the semiconductor industry, according to Alisa Huang, who has spent over 25 years working as a senior manager at TSMC.

Ms Huang, who now works as an independent consultant, told The Telegraph: “We call it a cluster effect because we have spare parts, equipment, material, design, software, [integrated circuit] manufacturing and assembly tests all in one place. We have a complete supply chain, a complete ecosystem.”

TSMC’s monopoly over the industry in Taiwan and around the world is often connected to its unprecedented structure as a foundry model. This means it manufactures chips for other companies but is not responsible for the designs. Instead, companies like Apple and Nvidia come to TSMC with orders for products they want to build.

“By choosing not to design, manufacture or market any semiconductor products under its own name, the company ensures that it never competes with its customers,” TSMC claims on its website.

The wake-up call

While most of TSMC’s production is based in Taiwan, the company has gradually been opening fabrication plants, factories where semiconductor chips are made, in China, the US and Japan.

There is one under construction in Germany, which is set to begin operations by the end of 2027. TSMC announced in March that it plans to invest an additional $100bn (£75bn) to grow its US manufacturing operations.

Some experts believe that TSMC and other companies involved in the supply chain are moving production out of Taiwan in response to the growing threat from China.

One of Taiwan’s semiconductor factories in North Phoenix, Arizona - Alamy

Beijing’s increasingly hostile rhetoric towards Taiwan and its routine show of force towards the island has spooked foreign governments and semiconductor customers.

Kharis Templeman, a research fellow on Taiwan at the US-based Hoover Institution, explained that the Covid-19 pandemic served as a wake-up call for many companies who were reliant on chips from Taiwan and had to scramble overnight when their supply was interrupted.

It offered an insight into what could happen if China launched an attack against Taiwan, which could result in the supply of chips being permanently cut off.

Mr Templeman said: “Generally the idea of having over-concentration from one supplier located in one location is a big problem for your business model in this new world.

“They want at least some supply or some production that’s closer to the ultimate customers.”

Kowtowing to the US

Pressure from the US government and the Trump administration specifically has also been a factor in moving production out of Taiwan.

Shih-Chang Hung, a professor of technology at Taiwan’s National Tsing Hua University, said: “Trump’s Maga – ‘Make America Great Again’ – they want to bring manufacturing back to the United States. That’s the primary reason for why they want to build their own manufacturing infrastructure in the US.”

But this means that Taiwan could lose an element of its deterrence. If the US is making its own semiconductor chips, rather than relying on Taipei’s, it may be less likely to come to Taiwan’s defence in a war.

The US is Taiwan’s main defence supplier, responsible for equipping the island with virtually all of its military technology. The country also holds a trump card over Taiwan in its ability to make or break a future conflict with China.

War game simulations have shown that the US’ decision to come to Taiwan’s defence could be the difference between the country remaining autonomous and it falling under Chinese control.

Pressure from the US government has also been a major factor in moving production out of Taiwan. Pictured is one of Taipei’s semiconductor factories in Arizona - Alamy

However, TSMC has kept an insurance policy.

The company has made sure that only its mature chips will be manufactured overseas. The production of advanced chips will remain in Taiwan.

In fact, in October, Taiwanese officials criticised a proposal by Howard Lutnick, the US commerce secretary, who said that Washington was talking to Taipei about a “50-50” split in semiconductor manufacturing.

In response, Eric Chu, the then-chairman of Taiwan’s opposition party, said: “No one can sell out Taiwan or TSMC, and no one can undermine Taiwan’s silicon shield”.

Diversification risk

While the diversification of TSMC’s production and the semiconductor industry more generally offers a safety net for other countries, experts are torn on how this affects Taiwan.

Some, such as Ms Huang, believe that increasing the number of TSMC fabrication plants around the world strengthens Taiwan’s ties with other nations.

“When we invest outside Taiwan, either in Europe, in America or in Japan, all these countries become bonded with TSMC,” she explained.

Mr Templeman noted that by opening fabrication plants in other countries it “gives them a stronger incentive to care about what’s happening in the Taiwan industries and the security threats potentially to this Taiwan company than what previously existed.”

In theory, this could support the second branch of the silicon shield argument, which stipulates that the US and allies are more likely to come to Taiwan’s defence in the event of a conflict, thereby deterring China.

However, other experts are concerned that if reliance on Taiwan’s chip production decreases, and China is able to source its semiconductors outside the country, there will be less standing in Beijing’s way.

Earlier this month, Mr Trump gave Nvidia permission to sell its second-most-powerful chip to China, which could signal a drop in Beijing’s dependency on Taiwan.

A Taiwanese semiconductor engineer, who spoke to The Telegraph on the condition of anonymity, said: “If they have no need for Taiwan, there will be less reluctance to invade Taiwan because they won’t hit their major league economy so their costs will be reduced.”

Experts and those within the industry are also worried about Beijing’s habit of stealing innovations from other countries.

“First, they welcome your business. Second, they look at your technology. Third, they build a competitor that can beat you. Then, fourth, they kick you out of the country,” said the engineer.

This article is the second of four pieces that The Telegraph is publishing on Taiwan’s plans to repel a Chinese invasion and Beijing’s efforts to undermine the island’s defences. The first story in the series can be read here.

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