The world’s largest contract chipmaker is under pressure to pick a side in the US-China rivalry for technological supremacy, posing a dilemma for a company that has become crucial to the global supply chain.

Taiwan Semiconductor Manufacturing Company, which has been thrust into the spotlight in the midst of a worldwide chips shortage, faces accusations of indirectly supplying China’s military. That has further embroiled the semiconductor group in the US campaign to curtail China’s access to high-tech components.

It has also posed a big question for TSMC and other Taiwanese groups on whether to commit themselves to the larger US market, or to faster-growing China.

Taiwan on Wednesday challenged reports that technology from TSMC and Taipei-based chip designer Alchip supported Chinese military development. Wang Mei-hua, economy minister, told reporters that “our companies comply with US, domestic, and multilateral rules when they meet global demand for chips”.

That followed a Washington Post report that Chinese supercomputer maker Phytium used chips made by TSMC, which is also an important US military supplier, in machinery to test hypersonic missiles for the People’s Liberation Army.

The US Commerce Department placed Phytium and six other Chinese supercomputing companies on its “entity list” last week, barring American suppliers from exporting directly to the company without a special licence. The rules do not apply to overseas companies, but TSMC and a Taiwanese chip designer have both proactively halted sales to Phytium.

TSMC declined to comment on the matter.

Washington’s moves showed that “the US is pressuring Taiwan and TSMC to support its supply chain” over China, said Paul Triolo, an analyst at consultancy Eurasia Group. They also challenge TSMC’s historic position of neutrality and the company’s strategy of “being everyone’s foundry”.

The US last year accounted for over 60 per cent of TSMC’s sales, compared with only 20 per cent to China. However, the latter is the fastest-growing market for semiconductors, making China a lucrative opportunity for TSMC as “Chinese tech firms make cutting-edge consumer electronics, a huge source of growth for TSMC's advanced nodes”, added Triolo.

Chart showing that TSMC is leading the way in advanced chip technology fabrication

TSMC has previously been caught up in US-China tensions. Almost two years ago, the Trump administration said chips the company had sold to technology group Huawei were being used in Chinese missiles.

Washington’s efforts to draw TSMC away from Beijing have extended to the chip company moving parts of its supply chain on to American soil.

Last May, under pressure from the Trump administration, TSMC announced plans to open a plant in Phoenix, which would bring it closer to the operations of US military manufacturers Raytheon and Honeywell. Washington wants sensitive technology, such as the TSMC computer chips used in F-35 stealth fighter jets, to be manufactured in the US.

Su Tzu-yun, a director at the Taipei-based Institute for National Defense and Security Research, believed that a recent escalation in tensions between China and Taiwan meant the island’s tech companies had little choice but to side with the US. Taiwan “shares national security interests with the US, as well as values of freedom and democracy”, he added.

The US push to distance TSMC from China has yet to hit the company’s sales, with a global shortage in semiconductors ensuring strong demand.

The company has proved nimble at adapting to geopolitical shifts in the past. After suspending sales to Huawei last summer because of US sanctions, TSMC quickly replaced the lost orders with shipments to Apple as the newly released iPhone 12 drove up demand for its advanced 5 nanometre chips.

Following TSMC’s lead may be harder for other Taiwanese tech groups, many of which are reliant on the mainland Chinese market. Beijing has stepped up military manoeuvres around Taiwan in the past month, underlining the need for those companies to diversify their client bases.

Johnny Shen, chief executive of Alchip, said the company has stopped shipments to Phytium, which made up 39 per cent of its revenue last year. He added the company was “facing a very big challenge”: its Taipei-listed stock has plunged 40 per cent since Washington blacklisted the supercomputer maker last Thursday, while TSMC’s shares barely reacted. Shen told investors that the products and services provided to Phytium were for civilian, not military, use.

For the wider industry, the politicisation of the semiconductor supply chain has created uncertainty between tech groups and their clients. That “trust built up over years has been a huge source of innovation”, said Eurasia’s Triolo.