TSMC’s Semiconductors Ending up in Chinese Missile Guidance Systems Aimed at Taiwan, as per U.S. Officials

Rohail Saleem
TSMC Huawei China

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According to Financial Times, the Trump administration has been pressing Taiwan to restrain the Taiwan Semiconductor Manufacturing Company (TSMC) (TPE:2330), the world’s largest contract chipmaker, from selling its semiconductors to Huawei – the Chinese telecoms and tech behemoth at the epicenter of the ongoing Sino-U.S. trade war – and to institute firmer technology export controls vis-a-vis China.

Over the past year, Washington’s officialdom has repeatedly conveyed to the Taiwanese government the urgency of curbing TSMC’s continuing sale of sensitive components to Chinese entities in general and Huawei in particular. The driving force behind this concerted push stems from the widespread belief in Washington that China has been, for some time now, engaging in an ever-increasing pace of technology transfer from the civilian sector to the military one. This, in turn, has given rise to the Trump administration’s concerns that China is able to procure the required sensitive components for its military through the commercial civilian trade.

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Last month, a U.S. official informed Taiwanese diplomats that the semiconductors produced by TSMC and then procured by Huawei, were ending up in Chinese missile guidance systems aimed at Taiwan, as per the reporting by Financial Times.

"US officials often have conversations with Taiwan interlocutors about the security and end-use of their technology supply chains. We have similar general export control and non-proliferation conversations with many partners,” the official said.

“In this particular case, we have a partner that is under a direct military threat from China, and is also one of the few places that produce certain technologies China needs to support its military ambitions.”

Of course, this conversation has been occurring in the wider context of the Sino-U.S. trade war that has seen reprisals and counter moves from both sides. Earlier in June, the U.S. Commerce Department added the Chinese tech behemoth Huawei to the Entities List over national security concerns and for violating U.S. sanctions on Iran (read our related coverage here). The step bars Huawei from seeking sensitive components from American companies without a prior approval from Trump administration. Thereafter, in August, the Trump administration barred the use of federal grants for the purchase of telecommunications equipment from five Chinese entities including Huawei.

The blacklisting of Huawei has disproportionately benefited TSMC. According to Randy Abrams, the head of regional semiconductor research at Credit Suisse, China accounted for about 20 percent of TSMC’s revenue in the third quarter of 2019 with Huawei constituting almost half of that proportion. This means that Huawei was directly responsible for about 10 percent of TSMC’s total revenue in the quarter. Consequently, given the lucrative financial stakes involved, industry experts remain skeptical that Washington can force Taiwan’s hand in this matter. Randy Abrams believes that “if the Taiwan government were to force TSMC to drop Huawei as a customer, the stock market would react unfavorably.”

Though Taipei has declined to directly comment on this matter, the spokesperson for Taiwanese President has said that “Taiwan’s technology industry strictly respects international rules and continues to co-operate with major countries including the US.”

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