we will see is a small island off the coast of China. An island, which does not particularly

stand out for anything.

At first glance, its territory is quite small; its population, with about 20 million inhabitants,

does not exactly make it a giant, also its geographical location does not seem particularly

relevant.

At the end of the day, Taiwan does not stand out any more than other Asian islands such

as those that make up the Philippines or Indonesia.

However, in spite of everything, the truth is that today, Taiwan is one of the most crucial,

strategic and potentially dangerous territories in the world.

We are talking about an island that, according to many, could trigger a new global war.

(China and the US: On collision course for war over Taiwan. – DW)

(Pelosi's [Former speaker of the United States House of Representatives] Taiwan visit risks

creating greater instability between the US and China. – CNN)

But why on earth is the island of Formosa so important to major powers like China or

the US? What is it about this small territory that the mention of a world war even comes

up?

Well, the answer lies in semiconductors.

Semiconductors are the electronic components needed to manufacture computers, airplanes,

household appliances, cars and, in short, any technology we can imagine.

While in the 20th century hundreds of battles were fought to control the supply of oil,

today those battles, or at least the political battles, are fought to control the semiconductor

sector.

And, do you know what?

It turns out that Taiwan is the most advanced place in the world in the manufacture of these

components.

For example:

Do companies like AMD or Nvidia ring a bell?

These are companies dedicated to the sale of processors and graphics cards. Without

a doubt, they are true titans in their sectors, and yes, they are US companies.

But... how would you feel if I told you that AMD and Nvidia products are not manufactured

by them, but by a Taiwanese company called TSMC?

What's more: You've all heard of Apple, right?

Recently, Apple has released cell phones and computers with the most powerful, fastest

and most efficient processors on the market.

And once again, like AMD or Nvidia, Apple does not manufacture its own processors, but

rather they are manufactured by Taiwanese company TSMC.

So it's a pretty big deal, right?

Well, let's go then to the most famous chip producer in the world: the American giant

Intel.

We have all used a computer or cell phone with an Intel processor at some point. In

fact, before the Taiwanese TSMC manufactured Apple's processors, Intel was the one who

occupied that place.

Well, the thing is that in this case, Intel does manufacture its own processors, but it

does not manufacture all of them. It turns out that the graphics processors of the American

Intel are also manufactured by TSMC in Taiwan.

Now, do you realize what all this means?

If China decided to invade Taiwan tomorrow, and expropriate companies like TSMC, China

could essentially cut off much of the world's supply of advanced semiconductors overnight.

In other words, by invading Taiwan, China could put virtually the entire global technology

industry on the ropes, thus gaining enormous political power. In fact, it wouldn't even

have to invade the island. It would be enough to block its trade with the rest of the world.

In any case, the most serious problem of all is that a cut in Taiwan's supply would not

only affect the computers and iPhones of its citizens, but would also have a terrible impact

on the military and war capabilities of the West.

A lot of military weaponry, from ships, tanks and fighter jets to missiles and drones, require

advanced semiconductors that are only produced on this island, in Taiwan. And that's something

that explains news stories like this:

(Pentagon ups pressure on Taiwan's TSMC to produce chips in the U.S. U.S. fears interference

from company's Chinese customers. – Taiwan News)

In short, Taiwan is not only the undisputed leader in the semiconductor sector, but also

the entire West is terribly dependent on it.

Now, given all this, there is something very surprising that we should pay attention to:

How did a remote Asian island become the world's most advanced semiconductor powerhouse?

How on earth is it possible that not even the USA or Japan, the cradles of world technology,

have been able to match Taiwan in the production of these components?

What recipe for success has the island of Formosa followed to be so many steps ahead

of the rest of the world?

Well today, on VisualEconomik, we tell you what's behind it all. So... Let's get started!

Let's see. Although today Taiwan is indispensable in the most technologically advanced sectors

of the modern economy, in reality, this was not always the case.

In fact, until just a few decades ago, Taiwan was a really poor island, a place that had

been ravaged by numerous wars, and had to be helped economically by Western countries

such as the US in the 1950s.

At that time, and somewhat like mainland China, Taiwan was a territory with very little industry.

Its main activity was agriculture, a sector that did not allow it to advance economically.

So if Taiwan wanted to leave poverty behind, it had to change its productive model and

start betting on industry.

And as we say around here, no sooner said than done.

Starting in the 1960s, and thanks to international aid, Taiwan began to develop its industry

little by little.

In the beginning, Taiwanese factories were engaged in making products that were highly

dependent on cheap labor such as the production of clothing, toys or accessories.

But over time, the Taiwanese government wanted to go a little further, it wanted to promote

a more advanced industry, and for this purpose it supported the arrival of companies such

as the well-known Philips for instance. We are talking about companies that, in many

cases, were dedicated precisely to the production of semiconductors.

Of course, the first semiconductor factories in Taiwan were quite rudimentary. Basically,

they were assembly factories: they did not do any design or fabrication, but simply assembled

parts.

[A bit like being someone who has Lego pieces and builds a figure with them. That's it.]

The point is that this was the seed of the semiconductor industry in the country. However,

as you can imagine, something had to happen for those small assembly factories to become

the huge technology behemoths they are today.

Something must have switched for that impoverished little island to emerge as the kingdom of

semiconductors.

The question is, what was that something?

Well, pay close attention.

(SEMICONDUCTORS AND TAIWAN: AN IMPOSSIBLE STORY)

By the 1970s, which is when Taiwan began to have those first assembly factories, the island's

government realized one thing.

It realized, and quite rightly so, that the semiconductor sector could be a great bet

for the future, and therefore wanted to boost it even more.

Of course, it wasn't as easy as pushing a button and suddenly getting the industry off

the ground.

Historically, developing the semiconductor industry has proved to be very complicated.

The question is, why is developing this sector particularly complicated?

Here we could point out three main difficulties.

The first is that the investment required for semiconductors is very, very high.

For a company to be competitive, it needs to acquire the most advanced machinery, it

needs to face very slow development and production times, even several years, and it also has

to invest a lot of money in R&D with no clear results. To make matters worse, in many cases,

these companies also have to pay for licensing millions of dollars of external patents. In

other words, it takes a lot, and we're talking truckloads, of money.

However, beyond the investment, the second difficulty is that companies must hire highly

qualified personnel, personnel with very good training. Scientists and engineers are often

not easy to find or are simply not available.

And finally, the last major difficulty in this business is risk.

Semiconductor lifetimes are very short. If a processor or graphics card goes on sale,

it is typical that after a couple of years, a new version comes out that is much more

powerful than the previous one, making it obsolete.

In other words, if a company spends a lot of money and time manufacturing a product,

and then something goes wrong, it will not have time to fix it before the product becomes

completely obsolete. This makes the semiconductor industry particularly risky.

Well, knowing this, and going back to the Taiwan case, I guess you can see why it was

not going to be easy for the government to drive the semiconductor industry.

In the 1970s Taiwan was still a rather poor country. Its financial muscle was frankly

weak, and getting local companies to invest all the money required to develop this expensive,

unknown, and risky sector seemed doomed to fail.

At the same time, Taiwan also had no skilled workers, nor did it have large scientific

or technological entities.

In fact, until 1968, basic education was not compulsory on the island. So, to invest in

a sector that required so much knowledge, when people could not even read, well, what

can I say... It did not seem the most straightforward of ideas.

Nevertheless, they did it. The island managed to get this complicated industry off the ground

despite all the difficulties. The real question here is: How did it do it? What policy measures

were taken to achieve this goal?

Well, the answer can be summed up in three factors: copying, investing, and educating.

But let's look at them in order.

(DON'T KNOW HOW? IMITATE THE OTHERS)

If there is one thing we can take away from this whole story, it is that it was unrealistic

for Taiwan to be able to develop all the research needed to compete with the advanced technology

of countries like the US or Japan on its own.

What it could do, however, was to copy those technologies. And in fact, it did so on many

occasions.

But do you want a concrete example? Then take a look.

In the early 1990s, companies from developed countries, such as Philips and Sony, had great

success with the sale of CDs and DVDs.

In those years, these products were true commercial revolutions, the problem was that Taiwan neither

manufactured them nor knew how to manufacture them.

However, that was not a problem for the Taiwanese company UMC.

In only six months, this company copied the technology of CDs and DVDs, and after a short

time it ended up being the largest producer in the world. UMC ended up manufacturing up

to five million discs per month, more than the original creators, Philips and Sony.

Now: Don't think that when we talk about copying, we are talking about Taiwan skirting intellectual

property laws. In reality, Taiwan's technology copying was all legal, and part of a government

strategy.

More specifically, Taiwan's technology copying strategy was carried out by ITRI, the Taiwanese

Industrial Technology Research Institute, which was created by the government in 1973,

and was aimed at expanding the country's technology industry.

The question is: What exactly did this technological copying strategy consist of?

Well, you see, on the one hand, using government money, ITRI bought patent licenses from foreign

companies. Thanks to these patents, Taiwanese companies were able to copy the technologies

in a completely legal way. Take, for example, the following case:

(In 1975, ITRI signed an agreement with RCA to license complementary metal oxide semiconductor

(CMOS) and negatively-doped metal oxide semiconductor (NMOS) process technologies. – Tung, A.

C. (2001). Taiwan's Semiconductor Industry: What the State Did and Did Not)

Meanwhile, apart from the patents, ITRI also managed to adopt the technology of foreign

companies by collaborating with them.

For example, through ITRI, companies such as Intel or Motorola negotiated with Taiwanese

companies to outsource part of their production to them.

This is something that allowed them to save costs, as Taiwanese labor was very cheap.

But in return, Taiwanese companies were able to access the most advanced technology, and

learn a great deal from these companies – Intel and Motorola – without having to spend huge

amounts of money on research.

However, apart from buying patents or reaching agreements with foreign multinationals, another

thing ITRI did was to help local companies develop their own scientific research.

For example, in the early years of the industry in Taiwan, companies had to test their products

manually. This was a very time-consuming and expensive process, which damaged their competitiveness.

So what was the solution? The solution was that this institute financed

and developed expensive computerized testing tools. That is, computer-based tests instead

of manual ones. Faster tests, which considerably increased the productivity of companies.

Well, in that capacity alone, ITRI was something like the shared research center for Taiwan's

technology companies.

A center that supported and reduced costs for companies, it was in fact the main source

of in-house research in Taiwan until the mid-1990s. In short, we could say that the Taiwanese

Industrial Technology Research Institute was responsible for bringing foreign technology

into the country and, to a certain extent, also for creating its own technology.

Be that as it may, Taiwan's recipe for success did not stop there. If Taiwan wanted to become

a superpower, it needed to do more than just copy foreign technology. It needed to create

its own companies capable of adapting, improving and exploiting that technology.

And VisualEconomik viewers, it was right here, where the second phase of the country's enormous

technological development came into play. Listen up!

(THE NEW FORMOSA CLUSTER)

As we said earlier, the semiconductor sector is very expensive and involves taking on a