Chairman of the world’s largest chipmaker met with Nancy Pelosi in Taiwan, risking the firm’s mainland China market. ‘China is looking for people and companies to punish.’

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Nancy Pelosi did not have much time to spare in Taiwan. But on the speaker of the House’s controversial visit, she made sure to meet with one of the self-governing island’s most important business leaders, Mark Liu, chairman of the Taiwan Semiconductor Manufacturing Company (TSMC), the world’s biggest chipmaker.

Pelosi included Liu on her shortlist for good reason. TSMC is the world’s most valuable semiconductor manufacturing company with a $426 billion market cap. The firm produces the world’s most cutting-edge chips, making semiconductors that Americans depend on every day to power their iPhones, medical equipment, and fighter jets.

During the meeting, Liu and Pelosi discussed the U.S.’s recently-passed Chips and Science Act, according to Taiwanese media. The new legislation includes $52 billion to support chipmaking in the U.S., and TSMC will likely be among its beneficiaries due to the $12 billion chip factory it’s planning to build in Arizona.

Phelix Lam, equity analyst at Morningstar, said that in addition to talking about the new law, Pelosi and Liu may have discussed “larger and recurring subsidies” and “nurturing STEM graduates” in the U.S.

Liu and Pelosi’s meeting signals that the world’s most prominent chipmaker and biggest economy are strengthening their already close relationship. The U.S. is TSMC’s largest market, with U.S. buyers making up 64% of TSMC’s total sales last year, up from 60% two years ago. TSMC’s chip sales to American tech giant Apple alone made up one-quarter of TSMC’s revenue last year.

The meeting also indicated TSMC’s willingness to endure Beijing’s wrath. Beijing has repeatedly condemned Pelosi’s visit and said that all forms of retaliation, including military ones, remain on the table.

“Any countermeasure to be taken by China would be a justified and necessary response… to the U.S.’s unscrupulous behavior,” a spokesperson for China’s foreign ministry said Tuesday.

“China is looking for people and companies to punish” for Pelosi’s visit, says Dafydd Fell, a Taiwan politics professor at the School of Oriental and African Studies in London. “There are risks to [Liu] meeting Pelosi.”

Pelosi’s visit has squeezed Taiwanese corporations that have spent years weighing the interests of China and the U.S., forcing them to choose a side. TSMC, it seems, has made its pick.

Economics back up TSMC’s decision. TSMC has become less reliant on revenue from China in recent years. The Chinese market makes up 10% of TSMC’s revenues, down from 20% two years ago.

Lee says he cannot “rule out the possibility” that Liu’s decision could derail TSMC’s business in China. But he argues that even though TSMC’s market in China has shrunk, both sides still depend on one another.

China may be a relatively small market for TSMC chips in finished products, but China is the world’s largest semiconductor consumer when it comes to unfinished goods. Apple supplier Foxconn, for example, may import a TSMC chip from Taiwan to mainland China. That chip could end up in an iPhone that’s sold in the U.S.

“China needs TSMC as much as TSMC needs China,” Lee said.

Liu’s meeting with Pelosi did not appear to scare off investors. TSMC’s stock price jumped 1.8% on Wednesday after news of Pelosi and Liu’s meeting was made public.

The semiconductor industry as a whole has loomed large during Pelosi’s visit to Taiwan. A chip shortage amid the pandemic has delayed production of cars, TVs, and computers and helped fuel global inflation. The shortage prompted U.S. President Joe Biden’s administration to redouble efforts to invest in and re-shore the chipmaking supply chain. A larger conflict between Beijing, Taiwan, and the U.S. could cause further disruption.

China’s government has seized on Taiwan’s chip sector as a means of retaliation for Pelosi’s visit. On Wednesday, Beijing announced that it would ban the export of natural sand—a raw material used in chipmaking—along with food and other items in retaliation for Pelosi visiting Taiwan. Chinese state media outlet the China Daily wrote Wednesday that the sand ban would damage Taiwan’s chipmaking abilities. But the ban’s damage is likely to be limited; Taiwan imports just 3% of its natural sand from China.

TSMC is preparing for a scenario in which Beijing’s retaliation goes beyond export bans. Liu told CNN earlier this week what a Chinese invasion of Taiwan would mean for TSMC.

“If you take a military force or invasion you will render TSMC’s factory non-operable because this is such a sophisticated manufacturing facility. It depends on the real time correction with the outside world,” Liu said to CNN’s Fareed Zakaria. “Nobody can control TSMC by force.”

He also nodded to the balancing act TSMC pulled off amid an escalating U.S.-China trade war and rising tensions.

“If [China] needs us, it’s not a bad thing,” Liu said, referring to China’s reliance on TSMC’s chips. “Nobody in the business world wants to see a war happen. Why [would] we jump again into another trap?” he said.

China may be less important to TSMC than it was a few years ago, but TSMC still needs the Chinese market, and peace between Taiwan, mainland China, and the U.S. to thrive, said Fell.

“Taiwanese companies need to carefully balance their relationship with the two governments in order to operate successfully,” he said.