In her opening remarks at the 2023 Yushan Forum, Taiwan’s President Tsai Ing-wen reaffirmed the New Southbound Policy (NSP)’s central role in the island’s Indo-Pacific strategy. During the same event, Vice President William Lai echoed the policy’s significance in deepening Taiwan’s engagement with the NSP’s targeted countries. That includes six states in South Asia, as well as Australia and New Zealand, but the most important target is the 10 members of the Association of Southeast Asian Nations (ASEAN).
Given that Lai remains the candidate most likely to win Taiwan’s presidential election in January, his speech sent a clear signal to the attending Taiwanese business leaders that, if elected, his administration will continue to shift the island’s economic focus from China to the NSP countries, especially ASEAN.
As its title suggests, the NSP is a new version of an old policy. It originated from the Go South policy that President Lee Teng-Hui unveiled in 1994. During that time, Taiwan’s international space was rapidly shrinking. Lee’s Go South policy aimed to broaden Taiwan’s engagement with Southeast Asian countries in order to enhance the island’s diplomatic visibility and diversify Taiwan’s investments from China to ASEAN.
The policy yielded some initial success. From 1993 to 1994, Taiwan’s foreign direct investment (FDI) into ASEAN countries rose from $1.76 billion to $4.98 billion. Over the same period, Taiwan’s FDI into China declined from $3.17 billion to $962 million. Moreover, guided by Lee’s Go South policy, Taiwan helped build several industrial parks for ASEAN members, including the Philippines’ Subic Industrial Park and Indonesia’s Medan Industrial Park.
Yet, in 1996, Taiwan’s Ministry of Economic Affairs abruptly announced a freeze on government enterprises’ overseas investment, as it began to direct resources into promoting domestic industrial growth. That effectively brought Lee’s Go South policy to an end.
In 2002, Lee’s successor, Chen Shui-bian, launched his own Go South policy, a year after Taiwan acceded to the World Trade Organization. Chen’s policy objectives were similar to Lee’s, but with less successful results. During Chen’s eight-year administration, except in 2001 and 2008, Taiwanese FDI to China significantly outweighed its investment in Southeast Asia.
After 2008, it became increasingly evident that China has developed a growing appetite for using economic coercion to achieve political goals. Its rare earth export ban to Japan in September 2010 was a case in point. With that recognition in mind, Tsai put forth her NSP in 2016, the year she came into office. The overarching goal remains the same: diversifying Taiwan’s economic engagement from China toward ASEAN. Yet, the international environment could not be more different.
During Chen’s era, China’s economic rise created a market that proved impossible to resist for many Taiwanese businesses. Essentially, the gravity of China’s economy blunted the effectiveness of Chen’s Go South Policy. By contrast, only one year after Tsai became president, the China-U.S. trade war began to escalate. The unresolved trade tensions between the world’s two biggest economies started to shake up global supply chains. That gave Tsai’s NSP a significant boost, as major companies began to pivot away from China.
For instance, Apple has requested its Taiwanese suppliers to relocate their factories from China to ASEAN countries such as Vietnam. Quanta Computer, the top contract manufacturer of Apple’s MacBooks, signed an agreement in April to build its first plant in Vietnam. Pegatron, the second biggest iPhone producer, formed a subsidiary in Vietnam in 2020 and began mass production in the country last year. Moreover, Apple’s biggest iPhone maker Foxconn signed a $300 million agreement with a Vietnamese developer last August to build a new factory in the country, with a lease that will run through February 2057. In fact, for the first time in 2022, Taiwanese companies invested more in the NSP’s selected countries than in China.
The rising risk of doing business in China will sustain this trend of supply chain restructuring. This presents a rare strategic opportunity for Taiwan to leverage its manufacturing prowess in bolstering the island’s relations with ASEAN nations. Specifically, Taiwan’s incoming president should celebrate the Go South policy’s 30th anniversary next year by putting semiconductor cooperation at the forefront of the Taiwan-ASEAN partnership.
Each ASEAN country has distinct strengths in manufacturing various products. Yet, almost all of these products require the installation of semiconductors to function, from cars produced in Thailand to smartphones assembled in Vietnam. As Taiwan produces nearly two-thirds of the world’s chips annually, this creates opportunities for the Taiwanese government to collaborate with individual ASEAN countries in meeting their respective chip demand, laying the groundwork for higher-level partnerships with ASEAN as a whole.
Take Thailand for example. Its consistent lead in auto production among its ASEAN peers has made it known as the Detroit of Asia. Now, the country is transforming into a central hub of electric vehicle (EV) manufacturing. The Thai government has laid out a 30:30 EV ambition – 30 percent of vehicles produced will be electric by 2030. The growing trend of EVs will go hand-in-hand with the rising demand for car chips. That is because, compared to internal combustion cars, EVs have a heavier reliance on software, which is powered by chips. As a result, whereas a traditional car requires around 1,000 chips, an EV needs double that amount.
McKinsey’s projection shows that the overall revenues for auto chips could rise from $41 billion in 2019 to $147 billion by 2030. S&P Global Mobility estimated that the value of auto chips installed in vehicles will go up from its 2020 level of $500 per car to $1,400 by 2028. In fact, the automotive semiconductor market already witnessed a 28 percent year-over-year growth in 2022, reaching $69 billion.
A stable supply of car chips is key to realizing the Thai government’s EV dream. Without it, auto companies could not deliver the final products to consumers. This is where the Taiwanese government could come in and demonstrate the value of partnering with the island. Taiwan could work with the Thai government in designing subsidy programs that incentivize Taiwanese chip manufacturers to build new facilities in Thailand. Taiwan could also support capacity building by providing semiconductor training programs for local personnel. Its latest partnership with Singapore to cultivate the city-state’s chip talent exemplified the value of Taiwan’s half-century of experience in nurturing its semiconductor workforce.
Furthermore, chips made in these Thai facilities could be delivered to automakers by land rather than via maritime transport. For Thailand, that proximity will ensure its access to car chips even in an extreme supply chain disruption, such as a Chinese blockade of the Taiwan Strait. For Taiwan, that will position its chipmakers to profit from the expanding pool of revenue there. The same strategy applies to Vietnam’s and India’s booming manufacturing sectors for consumer electronics, another critical end market for Taiwan’s chip companies.
Expanding production footprints outside Taiwan has an additional domestic benefit: It could mitigate the pressure on the island’s growing scarcity of electricity and water, two essential ingredients for chip production. Indeed, by allocating some of their manufacturing capacity to ASEAN, Taiwanese chip companies could free up more resources for their most profitable advanced plants at home, enhancing supply chain resilience and efficiency.
On the geopolitical front, spreading out manufacturing facilities could also help Taiwan alleviate U.S. and Japanese concerns about their reliance on the island’s chip production. For Taipei, meeting its major partners’ diversification demands is imperative to buttress their support to Taiwan if China attacks. Without external support, it’s estimated that China could subjugate Taiwan in 90 days.
The conventional wisdom posits that Taiwan must maintain as much domestic chip production as possible to increase Washington’s and Tokyo’s material stake in preserving Taiwan’s autonomy. That strategy, known as Taiwan’s silicon shield, is counterproductive. A Chinese military assault would disrupt Taiwan’s chip production; overconcentration would send the U.S. and Japanese economies into a tailspin. Amid the chaos, U.S. and Japanese leaders would arguably prioritize the management of domestic economic issues over the defense of Taiwan. After all, voters’ grading criteria for their leaders are based predominantly on economic performance, not foreign policy. Hence, rather than enticing U.S. and Japanese support, Taiwan’s silicon shield would damage its partners’ capacity to defend the island.
In contrast, a more diversified chip manufacturing landscape could ensure partial semiconductor supply to Washington and Tokyo in a Taiwan Strait contingency, minimizing the adverse impact of disruptions. That could enable both capitals to keep their houses in order, which in turn creates room and resources for them to intervene militarily. Indeed, it is hard to imagine that the United States and Japan would come to Taiwan’s rescue if their domestic economies were already in tatters at the beginning of the war.
Crucially, Taiwanese chip firms’ investments outside Taiwan do not necessarily have to come at the expense of the island’s semiconductor dominance. It is not a zero-sum game, where a semiconductor investment outside Taiwan will directly undermine the island’s chip supremacy. As long as Taiwanese chip companies keep the most valuable research and development centers and the most advanced manufacturing plants at home, while the Taiwanese government continues to invest in human capital through public-private partnerships with leading universities, Taiwan’s semiconductor preeminence will remain intact.
The incoming Taiwanese administration should recognize the NSP’s strategic value as an integral platform to advance Taiwan-ASEAN semiconductor cooperation. A successful advancement could sustain the island’s semiconductor leadership through broader revenue streams and more efficient use of resources. That could cement Taiwan’s role as an indispensable linchpin of the global economy, while demonstrating that its survival matters to the prosperity of the international community.
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