China Will Never Beat Taiwan, Here’s Why

If you could choose one area on the globe

to build the industry that powers

the modern world, you would not choose this

island. Tall mountains running down one side, pushed to the sky

by the ever shifting plates underneath and make up

the ring of fire, waiting for the inevitable

earthquakes that sprout from it to rattle your factories, factories and gear that require impossible precision down to the atom. You would not place it here where water is

surprisingly scarce. Your factories will need

the same amount of water as San Francisco every day, and you certainly would

not choose to place it just 100 miles away

from your eternal enemy. Frequently

and aggressively vocal about their intent

to invade you. Warning shots. Missiles

have already passed overhead or splashing to the ocean

just miles off your coast. Yet in one

small area of this one unremarkable island, sit the factories

that breathe life into the wires connecting

every piece of the planet. This is the story

of how Taiwan engineered its survival, turning weakness

into unmatchable strength that no one has been able

to copy. Exactly,

because they do not have the pressures

and the reality of Taiwan's physical world

bearing down upon them. This video is sponsored by public.com. More on them later. Taiwan does not exist. What you see in its cities, what you hear

in the mountains. What you smell in the air. It's not Taiwan. It never was. It never will be. Don't say the name. Abandon your embassies. Erase it

from your statements. That is the official position of 142 countries

where we must start. Because not only

is the story fascinating, but the Taiwan is China,

not Taiwan. Tension is the whole reason

we're here. So before we do

anything else, here's the short story that surrounds the tension. As a bonus, we get to enter the mindset

that pushed an island, which shouldn't be important to become powerful. From here, going

all the way back forever. The island of Taiwan was not ruled by anyone. Nobody claimed it. Nobody wanted it. There was nothing

about the island that was attractive. Jungle and mountains on one

side, plains on the other. It was fine. There was a trickle

of immigrants from mainland China,

but there was no desire to have the island be part of the greater

Chinese kingdom. So to say it was independent this whole period

would be overstating it. It was indigenous

people of Polynesian descent and small villages,

subsistence farming. There was nothing to declare

independence. It just was. It wasn't until here that China

reluctantly annexed it. It wasn't until here that China made it

a formal province, just in time

to hand it over to Japan after losing a war

with them. China took it back after Japan lost World War Two. Just to be extra clear

about some of these details. A few years before

Japan took it from China, Japan had sent

a few thousand soldiers to the island to punish the indigenous

people who had slaughtered

the crew of a Japanese boat that shipwrecked on

the shore. China got word and was like,

what's up with that? Japan. That is our island. Japan goes. Why don't you control

your people then? China says, well, actually, we don't really control

that island. Making an official statement saying

the Aboriginal territories were outside

the sphere of civilization. Japan says then that land according to the rules

technically isn't yours. So yes, Japan took it from China,

but it's not quite the same as if France

demanded the bottom half of Italy after

Italy lost World War two. Anyway, Japan loses

World War two, so China gets it back

just in time for the Chinese Civil War

to flame up and then solidify

the conclusion that dramatically altered the makeup of global power

for the next century. Because the losing party of the Civil War, the party, in direct opposition

to today's ruling Chinese Communist Party,

made themselves at home 100 miles off the coast on the island of Taiwan. They took all of the gold and silver reserves

that China had, all the foreign currency

and escaped on boat. Just imagine if the US civil

war had ended and the Confederates

took all the money and set up their own country

in the Bahamas. This would not be a settled

issue in the United States. Of course, there's tension between mainland China and Taiwan, but it gets even crazier. I remember the first time

hearing this. What? Really? And realizing that Taiwan is a classic

Cinderella story and at this point is in the

carriage headed to the ball. The United Nations was designed

to be the World Police. It was the first real

international body was mASSOB. Decisions

were legally binding. It could sanction authorized force,

could use its own troops. The only thing standing

between the U.N. declaring something

and it happening was the Security Council. United States, Soviet Union,

the UK, France and China were given

the five permanent seats

on the Security Council. When the U.N. was formed in 1945, any member

of the Security Council could veto anything,

one veto from any of those five,

and whatever the proposal was, doesn't matter

if every other country in the world voted for it,

it died. End of discussion. Four years

after the UN formed China's civil war

ended, the party that lost the civil war

that was forced to flee to Taiwan. That was the official UN recognized

government of China. Here it is. Cinderella arriving at the ball that U.N. Security Council seat China

was given when the U.N. was formed, according

to the rules of the U.N., followed the fleeing Chinese government

to Taiwan. This small,

unremarkable island with a population

of a few million, the government

having just arrived that had been ignored

for most of history, suddenly had veto power

over the entire world. And they would maintain

that veto power for 22 more years until it all spectacularly collapsed in a single day. Who actually represents

China, it was discovered,

was a legitimate but procedural loophole

kind of question that could be asked

by the General Assembly. Rule 27 and article 18. Matters of representation

are decided by the General Assembly,

where every country has one vote and there is no veto power. In other words,

who actually represents China was a question member

nations could put to a vote and determine without the Security Council killing the outcome. So they did abstain. Yes. Yes. Nay. No. 76. Yes. Votes 53 no votes 17. Abstentions. The People's

Republic of China, who wasn't

in the U.N. at all? How could they be? Taiwan

was the official government, according to the UN, suddenly was in and had

a Security Council seat. The clock is about to strike midnight

for Cinderella comb through. How was worded in. What you will find is that

Taiwan wasn't just removed from the Security Council

or the UN. Its representatives

were declared unlawful rebels to the government

in Beijing, warning that China has pointed

to ever since as proof that the UN already

settled the Taiwan question. They argued that if the seat was unlawfully occupied, that Taiwan has no legal existence

under international law, your mortal enemy takes

your Security Council seat. It kicks you out of the UN entirely, and two cleverly

worded paragraphs put you into permanent

international limbo in one afternoon. This is what kicked off

Taiwan's desperate pivot to survival, to erecting what would become known

as the silicon shield. If you wanted to take

that shield away to break Taiwan's

monopoly, these are the three key

things you'll want to copy. It's unlikely

anyone ever will. But if you wanted to, here's exactly how they built it. Taiwan's famous milk oysters

grown right here must be shucked as soon as they're

pulled out of the water. Which is why you will never

eat them off the shell. And even the high end

restaurants of the world force, fed by the nutrients

carried into the ocean, by the wall of water

that slides off the island every few days,

they grow five times faster

than any other oyster. Compared to the briny sweet

flavor of the oysters. We feed off the half shell. These are creamy, light,

and unable to be grown

anywhere else in the world. Not for lack of trying,

but because no other piece of land is shaped

like Taiwan from above. It looks like

a regular island, but look at it from its side and the extreme geography comes into full view. Just 90 miles across, half of it quite flat. The other half shoots up to a peak of over 9000ft,

acting as a giant bowl for the storms

that batter from the west during the summer,

and then from the east during the winter

to drop their rain against four times. The amount of rain that

falls in London in a year will fall on this island,

largely in the mountains, where the extremely steep

slope and shores that within a matter

of hours 80% of all the rain has rush

right off the island. Excellent

for growing milk oysters, terrible for making chips. You know the saying

necessity is the mother

of all invention. Whoever said

that was probably talking about Taiwan. As precise as the chips in our phones

and computer art, it would be unheard of if nine out of every ten chips that came out of the factory

worked. Eight out of ten

is considered outstanding, even seven out of ten

is considered respectable in some cases. For the three companies

on the cutting edge, Taiwan Semiconductor gets more

than a Intel, maybe seven. Samsung hasn't

been able to hit five. The industry calls

this yield. We're

going to run a new batch, and we expect the yield to be about 81% compared to South Korea. A bright, sunny, perfect

California Taiwan is built the world's most advanced

industrial process on a tropical earthquake

prone island with frequent droughts providing the necessity

to invent solutions that, over time

have not just gone Taiwan's yield on par

with other companies, but dramatically better a single stray organic molecule in the air,

or 1% swing in humidity, can ruin

an entire batch of chips. Taiwan averages

80% humidity. Each chip in the batch,

hundreds of thousands of chips

per batch, requires 15 gallons of ultra pure water, and ultra doesn't even cut it

as the right word. It's literally yes, I'm going to use the word

literally here. It literally is perfect

water. Nothing but

hydrogen and oxygen atoms. Taiwan, despite

all the rain, has regular droughts, absolute

atomic level stability. There can be zero shaking. Taiwan

sits on the ring of fire. Two tectonic plates produce dozens of medium sized

earthquakes every year, and a major one

every few decades. The inventions

and over engineering to account

for the variability. Taiwan experiences are exactly

what is meant by aim small miss small talk by every 100

to their children, every coach to player, every

military shooting range. You don't just try to hit

the target. You pick out

the smallest detail you can see in the center

of the area you need to hit. That is what you aim at so that when, not if, but when you inevitably

miss, your miss will

still be effective, still landing within an area

that achieves the goal. But there's something

slightly off with this example. I just used because Samsung, Intel, Taiwan, they're all shooting

at the same goal. They all know where to aim. So let's try this again. Let's run this back. This is the target

they're all trying to hit. And this is Intel's

environment. Very stable. If this is Intel's environment

very stable then this is Samsung's. And if this is Samsung's in South Korea then this is Taiwan. After practicing

for millions of hours in those environments

over the next million shots, when the target is stationary, who do you think

hits more targets? What about when

the original target is replaced

by a smaller one, the next generation chip

and the next generation chip and the next one

and the next one? Aim small, miss small. If you can keep a cutting

edge chip process stable during a typhoon or drought and a magnitude six earthquake

simultaneously, you have an engineering

discipline that competitors in stable climates

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to check it out. And big thank you to public for sponsoring this episode. Let's get back to it. So many options

for how to arrange this one. This is such a good story. Do we start here or do we start here all the way back out? Let's do it. Bring them up. What do these six areas all have in common? Each mark represents

a small piece of land that you could drive top

to bottom or across in under one hour. San Francisco, Los Angeles, Detroit, Antwerp,

Zur Valley, Shinshu. These relatively tiny

sections of land have all the parts,

companies and people

of a single industry so tightly clustered

together that at least 50% of all the value created for

the global industry comes

just from that area. Semiconductors for Shinshu watches for Jura Valley, diamonds for Antwerp, film for Los Angeles, software for Silicon Valley, the auto industry

in Detroit. Well, 50% of the value used to come from their tap inside the thundering iron heart of the Motor City, where a symphony

of screaming whistles and flashing

steel births the very future

of the American road watch as a skeleton of cold Michigan,

or marches down the line, cloaked in chrome and scorched by fire, transformed in a mere 90 minutes into a gleaming chariot of freedom. It's a mechanical miracle of the common man up tick tock trial, where the ticking clock is

king, ticking clock is king. The ticking. From the famous brands like Ford

to the suppliers of transmissions, tires,

metal stamping, fasteners, all the parts needed to make

a car were within a 40 minute

drive. Everything about Detroit

was about time. It was truly

the primary raw material. So much so that to Detroit's

efficiency experts, the 62nd minute was a

mathematical nightmare. It didn't fit neatly

into an accounting column, so they dropped it

and adopted stopwatches

that divide the minutes in 100 segments instead of 60s spot defect. Keep the line going. Put a ribbon

in the wrong place. Keep the line going. Made a mistake? Doesn't matter. Keep the line going. The steadier the clock,

the more cars that came off the line, the lower

the price of a car. That was the heartbeat

of Detroit. And that is exactly what Japan had to exploit to begin overtaking American

car companies starting in the 1980s,

creating an entirely new way

of building complex things that Taiwan would copy

and make the foundation of how it built

semiconductors. Detroit would push cars

out of factories with the intention

of lowering prices. Lowering prices would

increase demand for cars. Japan did the opposite. They only built a car

when someone had bought a car,

letting demand pull cars out of factories

to spot a defect, stop the line, put a rivet

in the wrong place, stop the line, made a mistake, stop the line caused, and pile up in huge lots outside the factory. Defects were stamped out early last rework. An employee

could absolutely not hit a button

to halt the production line in Ford's plant,

because they noticed a little bit

of stitching was off. Toyota had a cord running straight down

the line that stopped the production

line. Any employee could and was encouraged to pull it. Put yourself in the two minds of employees

in these plants at Ford. It's my job. Do it

well. Good. Keep the line moving. Oh. What's that? It's fine. They'll catch it at the end and we'll figure it out

when they have a solution. I, Toyota to my job. Do it well. Oh, that doesn't look right. Hey, John. This. Well, it's already cracking. Pull the cord. Fix the problem. Fix it just in time to prevent it from

becoming a major problem. Everything was done

just in time. That's

what the system is called. And what almost

every industry uses. Now, don't order

a year's worth of tires for how many cars you think

you're going to build. Take delivery of tires

every week, or even every day

for the exact number of cars that have been sold

that need to be built just in time to

hand over to the customer. Taiwan is small enough that clustering would have

naturally happened, but they took it

to an extreme degree intentionally. The father of Taiwan's ship

industry, Maurice Chang, talked a great length

with the father of Silicon Valley,

Frederic Terman. How do we do what

you did there? You cluster, he said. Take your top

two universities like Silicon Valley,

Berkeley and Stanford. Every piece of your industry wraps around them. So that's what Taiwan did, all located minutes

from one another in this purpose

built science park. Shanghai University, Zhao Dong University, number one

and number two in Taiwan, the companies that create

the materials needed

to make semiconductors, and then 20 chip factories

called fabs, ranging from the absolute bleeding

edge of the technology to mature workforces. If you count every chip

in the world from your toaster

to your car, roughly 1 in 5 was born

here. Add in the chips

from all the fabs. In Taiwan, it's 3 or 5, but if you count only the most advanced chips, the market share of Shinshu Science

Park is essentially 100%. It was a very intentional design, definitely not organic. The people

that the government forced to move off their land

in this area and the surrounding area,

we're not thrilled. 150,000 people in an area dramatically smaller that Silicon Valley work across 530 different companies,

equipment and materials, fabrication, testing

and quality control R&D. This campus even has its own

power and water system, data

network and rail yard. They then married the campus to the just in time system pioneered

by their geographic cousins and once rulers

from the north. Chips

made only when purchased. Inventory never builds up. Every chip shuttles around

these massive factories in a little box,

going through 1500 steps. One flick of a switch. Every box stops moving. There's a problem

that solve it. Materials don't pile up much of what is needed for that day's work,

especially gases and chemicals, often arrives

the same day, not just in a box

or a tank or container, but through a whole

specialized pipe system

that lets each factory buy the amount of nitrogen,

helium, chlorine, whatever they need

right now. All of this,

coupled with that extreme focus on controlling

the environment, is what gives them more

than eight working chips for every batch of ten, 1 or 2 more working chips might not seem like

a massive advantage, but over hundreds

of millions of chips per year it is decisive. But there is one more absolutely critical reason why Taiwan pulled way ahead of everybody else. Intel and Samsung

are not incompetent, but there is a fundamental

way that Taiwan Semiconductor arranges business with its customers that these other companies

do not. That makes it

the only chip maker. Companies like Apple, Tesla, Google

and Amazon will work with. Steve Jobs was pissed. He says, I'm

going to make this a nuclear war

if they don't back down now, he says,

thermonuclear war. There's even a speech he gave

right around this time, and he never mentioned

other brands or anything that would distract

from the Apple shop. But he puts his slide

on the screen that says year

of the copycat. And on that slide

are a bunch of logos. It was the one right at the

top, right in the middle. Samsung. That's who

he was really pissed at. And this is something

all companies worry about. You have a thing

you need to make, right? But you don't make

that thing you just designer. You pay someone else

to make it. Kind of like

how Ikea gets you to build

all of its furniture. No, no, I'm kidding. That's a different kind

of terrible partnership. Jobs was, and I quote, genuinely shocked. Infuriated because Apple was paying Samsung

for chips. Of course, that meant Apple had to tell Samsung

everything about the iPhone. Why do you need chips

like this or that? So was June 2010. Yes, jobs wakes up one morning, goes to work, turns on the TV

to watch Samsung present its brand new Galaxy

phone to the world. And it looked

just like an iPhone. Remember, this was the start

of the iPhone days. There was nothing like it

until that day. All of it down to the box. It came in

and jobs was obsessed with the unboxing

experience. All of it

looked like a direct copy. The software, the rounded

edges, the rubber band effect menus

when they were pulled down. When you have to give all

the intimate details of your product

to another company, it's always

in the back of your head. What if they copy this? This is why Apple

and all the other major tech companies only buy their most important chips from Taiwan Semiconductor, Intel and Samsung,

the only other companies that can make cutting edge

chips. They also design their own

chips. Taiwan explicitly does not will not start it out

from the beginning not to compete

with its own customers. This is a strategy

of neutrality. Like Switzerland

during World War Two, it is the final

and critical third piece of the silicon shield before TSMC. If you want to make a chip

but do not own a factory a fab, you had to go to a company

like Texas Instruments, Samsung, Intel and ask to use

their leftover machine time. You were paying

your competitor to make a product. If their own chips suddenly

became more popular, it would kick

you off the line. To prioritize

their own production. You had to hand over

your designs to a company that might decide

to borrow your best ideas. No one had done this before. Taiwan Semiconductor was the very first

in history to say, we will be the world's

best manufacturing chips, so you can be the best

at design. We will not design

a single chip. We will only make what

designs you bring to us. If they never

designed a chip, they would never sell

a chip, which meant Apple could pour

billions into chip design, hand the design to Taiwan

and never worry, Taiwan

was going to borrow it. It is the quintessential division of labor, just like

Adam Smith hints at in the very first sentence

of Wealth of Nations. And boy, did it work. There are now

thousands of companies that want to design chips, but are not going to build

a $20 billion factory that needs to be upgraded

every two years just to stay relevant. Fast forward a few years and Apple moves all its chip

production to Taiwan. You know what happens

when you provide 25% of the annual revenue of a company

like Taiwan Semiconductor? Any time they advance

their capabilities, Apple gets the full first year of their factory capacity. Everybody else

has to wait in line. The chips are a little bit

more expensive. That first year. TSMC works out the kinks,

but worth it for Apple. They love the arrangement. And of course, because Apple

gets first crack, TSMC and Apple basically co-develop

each new generation so we can hit what Apple

wants for its power and temperature

requirements. The example of all examples of an anchor tenant just like this Apple Store on Fifth Avenue, New York. What does

this thing remind you of? What an attraction. There's 12,000ft² of space down those stairs. Why on earth

the original designers decided to put a basement on

what could otherwise be expensive retail store fun is still debated

decade after decade. This plaza is very

prestigious office building. It lost money. Your average person

just was not going to walk down the stairs

to see what was down there. So if you couldn't

get a tenant in here, the whole value of

the building would just stagnate. A new owner

takes over the building in 2003, goes and has dinner with jobs. They get a deal done

at a fraction of the cost of normal retail

space. In New York, on

the corner of Central Park. This is prime New York. This glass cube goes

up, crowds form. The value of the GM building

triples in 12 years, all because Apple became

the anchor tenant. The gravity that would pull

other tenants, customers and businesses

right towards it. If you took this store

out of here, this building would fall in value

by 2,025% instantly. At least $1 billion. Apple as the anchor pushes Taiwan's technology

further, those leaps attract more designs

from other companies. Taiwan invest that money

back into the factories. Apple guarantees

the new factories will be fully used. It's a flywheel

that's moved Taiwan some years ahead

of its two closest rivals. So today, Taiwan is now Switzerland, not for its mountains

and guns and secrecy. Companies all over the world

from every country United States, China, Japan, UK, India, Brazil,

Norway, Russia, they all rely on this

little area. On this tiny little island,

countries may wish

production would stop so their enemies wouldn't

get chips, but then they wouldn't

get chips. You work together and that

makes the situation better. Positive. Some one side loses,

one side wins zero, some both sides

could lose everything. In a conflict that wipes out

Taiwan's factories. Negative. Some these dynamics this complex game around it. How embedded

it is in our everyday life. I'm not sure there's a more complex,

interesting situation that has ever developed

on this planet. This island really should not be this important. One more thing. People keep telling me that I've got to ask people

to like and subscribe. So if you like this, you will love the 2000 other videos

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Barrels of oil, or the one

right before this, where we explore

how the wide leg pants trend wasn't actually organic, but it was manufactured. Thank you for watching. I hope to see you

in the next video. Like and subscribe.