Introduction

Semiconductors form the foundation of modern electronic devices. The term refers to materials whose ability to conduct electricity can be precisely controlled, allowing them to function as tiny electrical switches that turn current on and off at extraordinary speed. Microchips are the most visible and powerful expression of this capability, integrating billions of such switches into compact circuits that drive modern computing.^[1],[2]

Microchips can be thought of as incredibly miniature cities, with billions of tightly connected electronic components—transistors, diodes, and resistors. These components work together to process data, run applications, and control increasingly sophisticated systems. They are in phones, cars, and even bathroom scales.

Figure 1. Moore's Law: No. of Transistors Per Microprocessor (billions)

Source: Our World in Data^[3]

Note: Moore's law is the observation that the number of transistors in an integrated circuit doubles about every two years, owing to improvements in production. It was first described by Gordon E. Moore, the co-founder of Intel, in 1965.

The advancement of microchips rests on increasingly specialised semiconductor materials. In military applications, this dependence becomes especially clear: the F-35’s radar relies on gallium nitride (GaN) semiconductors to deliver higher performance within a smaller footprint, while critical command systems require processors engineered to withstand extreme conditions such as electromagnetic pulses.^[4] This is why advanced semiconductors and microchips have moved beyond commercial importance to become strategic assets.

Microchip efficiency is closely tied to both the semiconductor material and the size of the chip. More advanced semiconductor materials and smaller chip sizes improve efficiency, allowing chips to deliver higher performance while consuming less power and generating less heat. Microchip size is measured in nanometres (nm)—a minuscule scale. Compared with a strand of human hair, which is roughly 50,000 to 100,000 nm thick, today’s advanced chips are built at under 10 nm. Some of the latest designs are going a step further, competing with the scale of a DNA strand—around 2 nm.

In general, the more transistors a chip contains, the faster and more powerful it is. Shrinking chip sizes adds immense complexity, as manufacturers are forced to cram ever more transistors into an incredibly small slice of silicon. For example, Nvidia—currently the world’s most valuable company by market capitalisation, has packed around 208 billion transistors into a single chip in its latest flagship Blackwell chips.^[5]

As chips have become smaller and more powerful, they have also become significantly more difficult and costly to manufacture.

The Global Semiconductor Landscape

The global semiconductor industry has become a cornerstone of the modern digital economy, underpinning advances across automotive systems, healthcare, energy infrastructure, and artificial intelligence. According to the World Semiconductor Trade Statistics (WSTS) organisation, global semiconductor revenues were expected to cross US$770 billion by the end of 2025.^[6] WSTS also projects strong momentum into 2026, with growth pushing the market close to US$975 billion.^[7] Looking further ahead, McKinsey estimates that the semiconductor market could reach around US$1.6 trillion by 2030 (with a range of US$1.5–1.8 trillion), driven largely by AI, data centres, and next-generation electronics.^[8]

Figure 2: Global Semiconductor Market Size (US$ billion)

 

Source:  World Semiconductor Trade Statistics (WSTS); McKinsey & Company^[9],[10]

Growth within the industry is increasingly concentrated in advanced chips. Demand for 2-nm nodes is expected to rise sharply—by over 130 percent through 2030—while 3-nm nodes are projected to grow by around 25 percent. These leading-edge chips, used primarily in AI and high-performance computing, are expected to account for roughly 62 percent of total industry growth, while the memory segment is projected to contribute 31 percent of overall growth.^[11]

Geographically, the semiconductor value chain is highly fragmented, with no single country or region commanding strength across all segments. Taiwan, however, occupies a uniquely dominant position in advanced fabrication. Led by Taiwan Semiconductor Manufacturing Company (TSMC), Taiwan accounts for over 60 percent of global foundry revenue and more than 90 percent of leading-edge chip production.^[12] The United States (US) leads in chip design software and intellectual property, Europe controls critical lithography technologies, Japan supplies key upstream inputs—including roughly 90 percent of global silicon wafers—and China has built significant scale in assembly, testing, and mature-node manufacturing, while investing heavily to move up the value chain.

Figure 3: Geographic Concentration Across the Global Semiconductor Value Chain

Source:  McKinsey & Company^[13]

Taiwan’s Dominance in the Microchips Industry

Modern microchips are among the most complex manufactured products in existence, and this complexity translates directly into cost. Chip design that once required under US$50 million at the 65-nm node now costs roughly US$500–600 million for a leading-edge 5-nm chip, reflecting the exponential rise in engineering, software, and verification requirements.^[14]

Figure 4: The Widening Cost Gap Between Chip Design and Manufacturing (US$ billion)

Source:  McKinsey & Company^[15]

Note: Design cost includes IP qualification, architecture, verification, physical, software, prototyping, and validation.  

Manufacturing costs have escalated even more sharply. Fabrication facilities for earlier-generation chips at the 65–28-nm nodes typically cost well under US$1 billion. At advanced nodes, however, a 5-nm fabrication module alone costs approximately US$5–6 billion, and total investment can exceed US$15–20 billion once cleanrooms, utilities, and advanced tooling are included.^[16] This widening gap between design and fabrication costs has fundamentally reshaped the structure of the semiconductor industry.

Until the 1980s, most firms operated as integrated device manufacturers (IDMs), controlling design, fabrication, and sales in-house. As fabrication costs began to dwarf design costs, the industry reorganised around a separation between capital-light design and ultra-capital-intensive manufacturing, giving rise to the fabless–foundry model. Under this structure, design-focused firms concentrate on chip architecture and applications, while specialised foundries undertake manufacturing at scale.

Taiwan’s dominance emerged from a deliberate strategic choice. Rather than competing directly with US firms in chip design or branded products, Taiwanese policymakers identified advanced fabrication as a critical entry point into the global value chain. With strong government backing, Morris Chang—a senior executive at Texas Instruments—returned to Taiwan in the late 1980s to establish TSMC, the world’s first pure-play foundry. Sustained state support, targeted industrial policy, and private-sector entrepreneurship enabled Taiwan to build an advanced fabrication ecosystem that now anchors global semiconductor production, with firms such as Apple, Nvidia, and AMD relying heavily on Taiwanese manufacturing. Today, four of the world’s top ten foundries are based in Taiwan.^[17]

Beyond fabrication, Taiwan has also built notable capabilities across adjacent segments of the value chain, including the export of machinery and apparatus used in the manufacture of semiconductor devices and integrated circuits, with such exports totalling roughly US$5 billion. At the design layer, Taiwanese firms such as MediaTek, Realtek, and Novatek have emerged as notable global players, generating an estimated US$23.1 billion in revenue in 2022 and US$25.5 billion in 2023, with growth increasingly driven by high-performance computing demand.^[18] In total, Taiwan’s semiconductor industry generated over US$165 billion in revenue in 2024^[19] and accounts for roughly 18 percent of the global semiconductor value chain—second only to the United States at around 39 percent.^[20]

This concentration has embedded semiconductors directly into Taiwan’s national security calculus. Often described as a ‘silicon shield’, Taiwan’s central role in global chip manufacturing creates powerful economic and strategic incentives for the United States and its allies to preserve stability across the Taiwan Strait, given the scale of disruption any conflict would pose to the global economy.^[21]

The Strategic Contest for Taiwan

China’s determination to reunify with Taiwan is driven by three closely linked factors: historical legitimacy, technological ambitions, and strategic control of key maritime routes.

For China, Taiwan is not a conventional territorial dispute but a legacy of China’s unresolved statehood. Since the founding of the People’s Republic in 1949, China has asserted sovereignty over the island, grounding its claim in China’s historical governance of Taiwan dating back to the Qing dynasty. Taiwan’s separation from the mainland was the result of the unresolved outcome of the Chinese civil war, after which the Nationalist Party, or Kuomintang (KMT), retreated to the island and continued to operate as the Republic of China, while the Chinese Communist Party (CCP) established the PRC on the mainland.^{[22],[23],[24]}

However, Taiwan’s importance to China is well beyond just history. The island now occupies a central position in the global semiconductor ecosystem, particularly in advanced fabrication. Taiwanese foundries produce chips that underpin artificial intelligence, high-performance computing, defence systems, and critical infrastructure worldwide. China remains structurally dependent on this ecosystem, importing close to US$90 billion worth of semiconductors annually from Taiwan alone.^[25] Control over these capabilities would materially alter China’s position in the global technology supply chain.

More significantly, access to Taiwan’s advanced fabrication infrastructure—including leading-edge process nodes, manufacturing expertise, and associated production know-how—will shorten China’s technological learning curve. Such access will weaken the effectiveness of Western export controls designed to slow China’s progress in advanced computing, artificial intelligence, and military technologies, accelerating China’s push towards technological self-sufficiency.

Geography reinforces these technological stakes. Taiwan sits at the centre of the first island chain, linking Japan, Taiwan, and the Philippines, and separating the East China Sea from the South China Sea. The Taiwan Strait and surrounding waterways rank among the world’s most commercially and strategically significant corridors. Roughly one-third of global maritime trade passes through the broader South China Sea,^[26] while an estimated US$2.45 trillion in goods transited the Taiwan Strait in 2022 alone.^[27]

Source: Center for Strategic and International Studies^[28]

China’s own exposure to this geography is substantial. Approximately US$1.3 trillion of Chinese imports and exports pass through the Taiwan Strait each year—more than for any other economy.^[29] Control over Taiwan would therefore enhance China’s ability to secure its trade routes while increasing leverage over regional competitors and US allies, including Japan and South Korea.

The military implications are equally consequential. Taiwan currently constrains the movement and coordination of China’s naval forces. Under its control, China’s North, East, and South Sea Fleets could operate with greater integration, enabling more flexible power projection during crises. Control over Taiwan would also deny adversaries strategic depth in the Western Pacific while strengthening China’s maritime posture.

Against this backdrop, reunification has remained non-negotiable for China. Western intelligence assessments and Chinese military planning increasingly reference the period leading up to 2027—the centenary of the People’s Liberation Army—as a milestone by which China seeks to acquire the capabilities necessary to compel or execute reunification. Whether pursued through coercion, blockade, or force, Taiwan today represents not merely a territorial dispute, but the central fault line where history, technology, and geopolitics converge—shaping the future balance of power in the global technological order.

Efforts to Decouple

In recent years, semiconductors have come to be viewed as strategic assets rather than purely commercial inputs. Their role in defence systems, artificial intelligence, telecommunications, and critical infrastructure has made supply security a matter of national policy. As China’s technological ambitions have expanded and tensions over Taiwan have intensified, governments have reassessed the risks associated with concentrated semiconductor production in East Asia, particularly in Taiwan and mainland China.

The COVID-19 pandemic reinforced these concerns. Supply disruptions persisted for more than three years, affecting automotive production, medical equipment, consumer electronics, and defence systems. Weather-related disruptions and industrial incidents further constrained output. The broader economic implications are significant. Bloomberg Economics estimates that a conflict over Taiwan could reduce global output by approximately US$10.6 trillion in the first year alone, equivalent to roughly 9.6 percent of global GDP.^[30]

Although supply conditions normalised in 2023, governments and firms have realised that structural vulnerabilities remain. In response, major economies have introduced policies aimed at expanding and securing domestic semiconductor capacity.

In the United States, the CHIPS and Science Act allocated US$52.7 billion in direct subsidies^[31] as part of a broader US$280-billion initiative to strengthen semiconductor manufacturing and research.^[32]  The policy objective is to increase domestic fabrication capacity and reduce strategic dependence on external supply. This direction has continued under the Trump administration. Taiwanese firms, particularly TSMC, have adjusted investment strategies accordingly. While maintaining limited operations in mainland China, TSMC has curtailed advanced-node expansion there and increased investment in the United States, Japan, and Europe. The company has committed approximately US$165 billion towards US manufacturing facilities, including major fabrication plants in Arizona.^[33]

The European Union has adopted a similar approach. The European Chips Act mobilises over US$51 billion (€43 billion) in public and private investment to expand fabrication, research, and supply-chain capabilities. Europe also seeks to leverage existing strengths in lithography through ASML and in industrial software and engineering systems. The EU’s stated objective is to increase its share of global semiconductor production from roughly 10 percent to 20 percent by 2030.^[34]

Japan has introduced incentives estimated at approximately US$65 billion (¥10 trillion) to reshore and ‘friend-shore’ critical stages of semiconductor production. The government projects the long-term economic impact to reach approximately US$1 trillion (¥160 trillion).^[35]

India has also renewed its semiconductor strategy. The India Semiconductor Mission, approved in December 2021, allocated approximately US$9–10 billion (INR 76,000 crore) in incentives, providing up to 50 percent fiscal support across fabrication, packaging, testing, and chip design. As of December 2025, ten projects totalling roughly US$19–20 billion (INR 1.60 lakh crore) in investment have been approved across six states. An additional allocation of approximately US$1 billion (INR 8,000 crore) for 2026–27 is intended to accelerate capital investment and expand domestic capabilities across the value chain.^[36]

These global policy shifts underscore a broader reality: semiconductors are no longer treated as a purely commercial industry, but as strategic infrastructure. As major economies invest heavily to reduce concentration risks, Taiwan remains the single most critical node in the advanced chip ecosystem. No amount of short-term diversification can immediately replicate the scale, expertise, and network effects embedded in Taiwan’s fabrication base. For now, the semiconductor fault line continues to run through the Taiwan Strait—where technology, security, and geopolitics converge most sharply.

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Tuhin Harit is an economist who does research on issues of corporate finance and pricing.

Ankit Budania is an investment professional whose work focuses on cross-border capital flows, political economy, and global industrial value chains.

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All views expressed in this publication are solely those of the authors, and do not represent the Observer Research Foundation, either in its entirety or its officials and personnel.

Endnotes

^[1] Silicon VLSI, “Semiconductor vs Microchip,” April 13, 2024, https://siliconvlsi.com/difference-between-a-microchip-and-a-semiconductor2024/.

^[2] Mesh Flinders and Ian Smalley, "What Is a Semiconductor?" IBM Think, https://www.ibm.com/think/topics/semiconductors.

^[3] Our World in Data, “Moore’s Law Has Accurately Predicted the Progress in Transistor Counts Over the Last 50 Years,” April 15, 2024, https://ourworldindata.org/data-insights/moores-law-has-accurately-predicted-the-progress-in-transistor-counts-over-the-last-50-years.

^[4] Microchip USA, “Semiconductors: A National Defense Priority,” August 6, 2025, https://www.microchipusa.com/industry-news/semiconductors-a-national-defense-priority.

^[5] Nvidia, “Nvidia Blackwell Architecture,” https://www.nvidia.com/en-in/data-center/technologies/blackwell-architecture/.

^[6] World Semiconductor Trade Statistics (WSTS), “Global Semiconductor Market Approaches USD 1 Trillion in 2026,” December 2, 2025, https://www.wsts.org/esraCMS/extension/media/f/WST/7310/WSTS_FC-Release-2025_11.pdf.

^[7] WSTS, “Global Semiconductor Market Approaches USD 1 Trillion in 2026.”

^[8] Bill Wiseman et al., “Hiding in Plain Sight: The Underestimated Size of the Semiconductor Industry,” McKinsey & Company, January 15, 2026, https://www.mckinsey.com/industries/semiconductors/our-insights/hiding-in-plain-sight-the-underestimated-size-of-the-semiconductor-industry

^[9] WSTS, “Global Semiconductor Market Approaches USD 1 Trillion in 2026.”

^[10] Wiseman et al., "Hiding in Plain Sight."

^[11] Wiseman et al., "Hiding in Plain Sight."

^[12] International Trade Administration, “Taiwan – Semiconductors Including Chip Design for AI,” US Department of Commerce, December 1, 2025, https://www.trade.gov/country-commercial-guides/taiwan-semiconductors-including-chip-design-ai.

^[13] Harald Bauer et al., “Semiconductor Design and Manufacturing: Achieving Leading-Edge Capabilities,” McKinsey & Company, August 20, 2020, https://www.mckinsey.com/industries/industrials/our-insights/semiconductor-design-and-manufacturing-achieving-leading-edge-capabilities.

^[14] Bauer et al., “Semiconductor Design and Manufacturing.”

^[15] Bauer et al., "Semiconductor Design and Manufacturing."

^[16] Bauer et al., "Semiconductor Design and Manufacturing."

^[17] Visual Capitalist, “Ranked: Semiconductor Foundries by Revenue Share,” January 22, 2025, https://www.visualcapitalist.com/ranked-semiconductor-foundries-by-revenue-share/.

^[18] International Trade Administration, "Taiwan – Semiconductors Including Chip Design for AI."

^[19] International Trade Administration, "Taiwan – Semiconductors Including Chip Design for AI."

^[20] Shuching Jean Chen, “Meet Taiwan’s Little-Known but Elite Semiconductor Makers,” Forbes, August 28, 2023, https://www.forbes.com/sites/shuchingjeanchen/2023/08/28/meet-taiwans-little-known-but-elite-semiconductor-makers/.

^[21] Domenico Vicinanza, "Taiwan's Latest Computer Chip Has Serious Implications for Technology—and the Island's Security," The Conversation, April 7, 2025, https://theconversation.com/taiwans-latest-computer-chip-has-serious-implications-for-technology-and-the-islands-security-251633.

^[22] Encyclopaedia Britannica, “Qing Dynasty,” https://www.britannica.com/topic/Qing-dynasty.

^[23] Encyclopaedia Britannica, “Nationalist Party,” https://www.britannica.com/topic/Nationalist-Party-Chinese-political-party.

^[24] Office of the Historian, “The Chinese Revolution of 1949,” US Department of State, https://history.state.gov/milestones/1945-1952/chinese-rev.

^[25] Directorate General of Customs, Republic of China (Taiwan), “Trade Statistics: Country of Origin – China,” Bureau of Foreign Trade, https://publicinfo.trade.gov.tw/cuswebo/FSCE30F0I/FSCE30F0I?Val=CN.

^[26] Center for Strategic and International Studies, “How Much Trade Transits the South China Sea?” https://chinapower.csis.org/much-trade-transits-south-china-sea/.

^[27] Thibault Denamiel and Evan Brown, “The State of Maritime Supply-Chain Threats,” Center for Strategic and International Studies, November 4, 2024, https://www.csis.org/analysis/state-maritime-supply-chain-threats.

^[28] Matthew P. Funaiole et al., “How Much Trade Transits the Taiwan Strait?” ChinaPower Project, Center for Strategic and International Studies, August 22, 2024, https://features.csis.org/chinapower/china-taiwan-strait-trade/.

^[29] Funaiole et al., “How Much Trade Transits the Taiwan Strait?”.

^[30] Bloomberg Economics, “The $10 Trillion Fight: Modeling a US-China War Over Taiwan,” Bloomberg, February 10, 2026, https://www.bloomberg.com/news/articles/2026-02-10/the-10-trillion-fight-modeling-a-us-china-war-over-taiwan.

^[31] Heather Wishart-Smith, “The Semiconductor Crisis: Addressing Chip Shortages and Security,” Forbes, July 19, 2024, https://www.forbes.com/sites/heatherwishartsmith/2024/07/19/the-semiconductor-crisis-addressing-chip-shortages-and-security/.

^[32] Justin Badlam et al., “The CHIPS and Science Act: Here’s What’s in It,” McKinsey & Company, October 4, 2022, updated May 16, 2024, https://www.mckinsey.com/industries/public-sector/our-insights/the-chips-and-science-act-heres-whats-in-it.

^[33] John Ruwitch, “As Political Winds Shift, Top Chipmaker TSMC Looks Beyond Taiwan,” NPR, December 1, 2025, https://www.npr.org/2025/12/01/nx-s1-5620992/tsmc-chipmaker-expands-beyond-taiwan.

^[34] Tobias Mann, “European Commission Finalizes €43B Chips Act,” The Register, April 19, 2023, https://www.theregister.com/2023/04/19/eu_chips_bill/.

^[35] Takaya Yamaguchi, “Japan to Propose $65 Billion Plan to Aid Domestic Chip Industry, Draft Shows,” Reuters, November 11, 2024, https://www.reuters.com/world/japan/japan-propose-65-bln-plan-aid-domestic-chip-industry-draft-shows-2024-11-11/.

^[36] Ministry of Electronics and Information Technology, Government of India, https://www.pib.gov.in/PressNoteDetails.aspx?NoteId=157237&ModuleId=3&reg=3&lang=2.

• Cyber and Technology
• East Asia
• advanced nodes 2nm 3nm
• AI chip demand
• data centre chips
• global chip supply chain
• memory segment growth
• semiconductor market growth
• semiconductor value chain
• TSMC dominance

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