Asia's All-In Bet on Semiconductors
Growth, foreign sales and trade now hinge on one notoriously cyclical industry and just two major customers.
Somewhere in central Taiwan a machinery firm nobody outside the trade press has heard of is sending its workers home early. In the chemical belt of South Korea, reactors that have run since the 1970s are throttled back, because a wall of cheaper Chinese supply has made what they produce barely worth the freight. Outside Seoul a battery plant runs its lines at half speed, beaten on price, and now on quality too, by China’s CATL. None of this trends. Furloughs at a tooling company do not trend. And that is the whole problem, because every bit of it is happening in the middle of what is supposed to be the greatest export boom the region has seen in a generation.
Look only at the top line and north-east Asia is having a wonderful war. Taiwan is growing at a pace rich economies are not built to manage. Corporate profits in South Korea have ballooned. Even Japan, patron saint of stagnation, is posting record earnings. Pull one thread, though, and the tapestry comes apart in your hands. The thread is semiconductors. Take out the chips and the AI servers built around them and Taiwan’s export miracle does not merely shrink. It inverts. Everything that is not a chip has been sliding for years.
Roughly eight in ten of everything Taiwan now sells abroad is chips and the hardware that artificial intelligence runs on. 80%. Before the pandemic it was about half. An advanced economy has quietly rebuilt itself around a single product in the time it takes to pay off a car loan, and filed the result under good news.
What hollowed out the rest is no mystery. It was China. The country north-east Asia used to feed, shipping it components and half-finished goods to bolt together, has become the one doing the bolting, and the designing, and the underselling. Cars, chemicals, batteries, machine tools: category by category the mainland has gone from best customer to chief rival, and it is winning. The trade balances say it plainly. Taiwan’s long surplus with China has tipped into deficit. Japan’s monthly shortfall keeps setting records. South Korea would be underwater as well, were it not bailed out, month after month, by the chips.
None of this is hidden from Tokyo, Seoul or Taipei. The puzzle is not whether the governments can see the rot. It is why, having seen it, they keep pouring concrete onto the one pillar already carrying the entire roof.
The honest answer is that nobody chose this.
It is the autopilot.
Each of these economies grew rich by tilting the whole machine toward export manufacturing: subsidies for favoured firms, household savings herded into state-run banks and lent onward to the champions, consumption held down so capital could be hurled at factories. Dani Rodrik of Harvard, who has spent a career on this model, makes the point that the tilt was always meant to be temporary. The closer you get to the technological frontier, the harder it is to eke out more productivity gains, he observes; once a country arrives, the sane move is to ease off production and let people finally spend. North-east Asia arrived years ago. It did not ease off. It leaned in.
Leaning in is now written policy. South Korea has committed to bankrolling its chipmakers for the next two decades, and is nudging Samsung and SK Hynix to branch out from memory chips into, when you read the fine print, other chips. Taiwan hands its silicon giants a tax break fat enough to halve the cost of their equipment. In Japan the old industrial-planning ministry, METI, which steered the post-war economy and was meant to have been mothballed along with the conceit of picking winners, is back at the chequebook, funding Rapidus, a state moon-shot to make cutting-edge chips from a standing start. Three governments stare at a monoculture, and the policy reflex is fertiliser.
The cast:
TSMC, the manufacturing juggernaut whose fortunes simply are Taiwan’s; it towers over the island’s economy and most of its stockmarket, which is the genteel way of saying the country and the company have become hard to tell apart.
Samsung and SK Hynix, two of the most valuable companies on the planet, which Seoul would dearly love to clone into something, anything, other than memory.
METI, Japan’s twentieth-century kingmaker, exhumed, handed a fresh chequebook, and aimed at a chip start-up.
The labour aristocracy, the lifetime-employed insiders with the plum pay deals and the benefits, a phrase coined by the Columbia scholars Arvid Lukauskas and Yumiko Shimabukuro and thoroughly earned by the people it names.
Everyone else, irregular, temporary, part-time and underpaid, far too stretched to shop their way to a healthier economy.
That last entry is where the bill lands. No economy can lean this hard on selling to strangers unless its own people are buying very little, and north-east Asians, for all their wealth, consume strikingly little of what they make. Thrift has nothing to do with it. The cause is design, the same model that fed the exporters and starved the shopper: a labour market split between a protected core and a vast, underpaid fringe; welfare states that are stingy by rich-world standards; pensions pegged to the sort of job a person once held, so that anyone outside the salaried elite retires into next to nothing.
The split runs straight through the workforce. The aristocrats keep lifetime jobs, generous benefits and the occasional fresh pay deal; everyone else, the irregulars and the temps and the part-timers, takes a fraction of the wage for the same hours, and can be cut loose the moment a quarter goes sideways. (That, not some national gift for frugality, is why all the saving looks so virtuous.) Governments have noticed, in the way governments notice things they would rather not fix. Japan has loosened the lifetime-employment rules a little. South Korea is nudging up pension contributions for the first time in a generation. The measures are real and the effect has been faint, which is why the phrase you now hear across the region is the K-shaped economy: the rich line climbing, everyone else’s drifting sideways or down.
The upshot is a quiet scandal tucked inside a boom. South Korea, wealthy enough to fabricate the most advanced memory on earth, lets two in five of its over-sixty-fives fall into poverty, the worst rate in the rich world. Ageing societies are supposed to consume more, not less; the old have stopped producing and still have to eat. Instead the elderly in Seoul are poorer than almost anyone their age in a comparable country, and the young in Taipei, despite degrees held by nearly all of them, meet youth unemployment stiff enough to send a steady stream abroad each year. The political fight in Taipei, meanwhile, is over the pledge Washington extracted to build TSMC’s fabs on American soil, which critics warn will hollow out the island and leave a feidao, a waste island, scraped clean of the one industry that made it matter. In Tokyo an official watches the tariffs arriving from Washington and the competition arriving from Beijing and laments that the country has simply lost autonomy.
References:
Why South Korea’s Welfare State Fails Its Elderly
Why Taiwan Fears America First Risks Eroding Its Silicon Shield
AI boom drowns out war fears to fuel Asia’s great market divide