China clash leads to microchip windfall for small European nation

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Lithuania’s showdown with China around Taiwan will bring the small Baltic country an unexpected stroke of luck that France and Germany can only dream of: investing in microchip production.

Europe is lagging behind in the all-important semiconductor industry and an important pillar of the EU’s industrial strategy – which is to keep Europe in the top economic class with competitors like China and the USA – is a driver for microchip production. Although EU giants have sought cooperation with heavyweight (and democratic) Asian players in the electronics sector such as Taiwan and South Korea, their efforts have so far been of little fruit.

That impasse appears to be breaking, however, as a bitter trade dispute between Lithuania and China is turning Vilnius and Taipei into an unusual pair of geopolitical Davids who have allied themselves against Goliath in Beijing. Due to the warming diplomatic relations between Lithuania and Taiwan, China has imposed a strict embargo on the Baltic country and boycotted not only its exports, but even goods from other EU countries with Lithuanian components.

To ease the pain of its most stubborn European ally, Taiwan has announced a $ 200 million investment plan. And that raises the prospect of working with Chips.

Taiwan’s investment plans in Lithuania are still ongoing as studies by a team of Taiwanese experts are expected to be conducted over the next few months. But in an interview with POLITICO, the Taiwanese top diplomat in Vilnius said that nothing was off the table and that Lithuania could act as a foray into the rest of the European semiconductor market.

“This is the first time the Taiwanese government has launched such an investment fund,” said Eric Huang, head of the Taiwanese representative office in Vilnius. “When we examine the possibility of semiconductor investment in Lithuania, we will look at the issue in the light of the whole European Union market, because then it will be more sustainable, it will be profitable.”

Mighty friends

Just the mention of a partnership with a powerhouse like Taiwan is remarkable. Taiwan Semiconductor Manufacturing Company (TSMC) – with an oversize 54 percent share of global foundry sales in 2020 – has been pressured by many foreign governments to diversify its production. So far, however, Taiwan has approached the offers with the utmost caution and has made sure that only strategic partners like the United States and Japan – countries that may come to the defense of the island in case of war – take the chips.

Europe has felt a severe crisis from the scarcity of microchips, particularly during the coronavirus pandemic, with manufacturing strongholds like Germany feeling pain in sectors like auto electronics.

A certain amount of judgment about the money required is crucial. Taiwan’s proposed investment is a drop in the ocean compared to what a large facility would require. For example, TSMC’s Arizona factory, which is slated to go into production by 2024, requires a $ 12 billion investment.

A European Commission official also questioned Lithuania’s financial and logistical ability to operate such facilities, highlighting the need for cheap electricity and plentiful water.

Huang acknowledged that it would be difficult for a single EU country to replicate the Taiwanese model of a full supply chain for manufacturing microchips that the island had developed over the past four decades.

Individual countries, he added, should develop their own strengths within the system, with Taiwan already pledging to help Lithuania focus on a particularly sought-after area: talent development.

“Taiwan is playing its economic cards cleverly,” said Mathieu Duchâtel, director of the Asia program at the Montaigne Institute in Paris. “Taiwan clearly has something concrete to offer to strengthen the European semiconductor ecosystem, and the message is that this is linked to deepening Taiwan’s international space – so this is a form of economic statecraft.”

Taiwan’s Minister of National Development, Kung Ming-hsin, who is also a board member of TSMC, will hold a meeting with his Lithuanian counterpart, Economy Minister Aušrinė Armonaitė, on Tuesday.

Exhausting week

This meeting will be followed later in the week by the informal meeting of all EU foreign ministers in the port of Brest in western France, where EU-China relations will be high on the agenda.

According to diplomats, the meeting is likely to focus on the Beijing Winter Olympics just three weeks later as EU countries face public pressure to confirm whether they intend to join the US, UK and others in a diplomatic boycott in the US to join in light of human rights concerns in China.

“There will hardly be a common position as some countries like Belgium and Austria have already ruled out official representation, while France has to send someone as it hosts the next Olympic Games,” said a diplomat. “However, it will be useful to coordinate positions.”

Two relatively new additions to the group of EU foreign ministers – Annalena Baerbock from Germany and her Czech counterpart Jan Lipavský – will probably form a chorus of strong China-skeptical voices alongside Lithuania’s EU diplomat Gabrielius Landsbergis.

Baerbock recently called on the EU as a whole to ban forced labor goods, reiterating his concern about products made in Xinjiang, where reports of large-scale detentions of Uighur Muslims have been reported. Lipavský, who rose dramatically into the role a few weeks ago after an initial rejection from Beijing-friendly President Miloš Zeman, was a former member of the Inter-Parliamentary Alliance on China, an international group of MPs with a hawkish attitude from Beijing.

At the table, however, few have come as close to Taiwan – and its microchips – as Lithuania.

“Because Taiwan has so much experience [in semiconductors], I think our best tool is to help our friend seriously and sincerely see the comparative advantage, “said Huang.

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