Taiwan's AI-powered economy soars in the shadow of bubble fears and
China threats
[February 12, 2026] By
CHAN HO-HIM
TAIPEI, Taiwan (AP) — In Taipei, real estate agent Jason Sung is betting
that home prices around a high-tech industrial park in the northern part
of Taiwan's capital will soon take flight – because of computer chip
maker Nvidia.
The area is where Nvidia plans to build its new Taiwan headquarters as
it rapidly expands on the island, set to surpass Apple to become the
biggest customer of Taiwan semiconductor maker TSMC, the biggest
contract manufacturer of the advanced chips needed for artificial
intelligence.
Nvidia CEO Jensen Huang describes Taiwan as the “center of the world's
computer ecosystem.” It's riding high on the global AI frenzy. Its
economy grew at an 8.6% annual pace last year, and it's hoping to
maintain that momentum after it recently sealed a trade deal with U.S.
President Donald Trump that cut U.S. tariffs on Taiwan to 15% from 20%.
“We have been lucky,” said Wu Tsong-min, an emeritus economics professor
at National Taiwan University and a former board member of Taiwan’s
central bank.
But Taiwan’s heavy reliance on computer chip makers and other technology
companies carries the growing risk of the AI craze turning out to be a
bubble.
“What if the AI bubble is real, and what if its rapid growth pace slows,
what’s next for Taiwan? That’s the question many have been asking,” Wu
said.
Escalating tensions with Beijing, which claims independently governed
Taiwan as mainland China's territory, are another abiding threat,
despite the island's vital role in global chip and AI supply chains.
Taiwan's leads in chipmaking
An island of about 23 million people, Taiwan depends heavily on exports.
They jumped nearly 35% year-on-year in 2025, as shipments to the U.S.
surged 78% due to ballooning AI demand.
That's thanks largely to TSMC, or Taiwan Semiconductor Manufacturing
Corp., and electronics giant Foxconn, which makes AI servers for Nvidia
and is a major supplier to Apple.
Taiwan has undergone massive economic changes while shifting from mainly
labor-intensive industries such as plastics and textiles to advanced
manufacturing like semiconductor fabrication.
The AI frenzy has made TSMC one of the world's top 10 most valuable
companies. Its profit jumped 46% last year to $1.7 trillion Taiwan
dollars ($54 billion).
The chipmaker is investing heavily both in Taiwan and in new factories
in Arizona in the U.S. It produces more than 90% of the world’s most
advanced chips.
Foxconn, formally known as Hon Hai Precision Industry Co., has doubled
its value since 2023. The maker of Apple’s iPhone and iPads now produces
AI servers and racks and has a partnership with OpenAI to supply AI data
center equipment.
Taiwan's heavy reliance on its technology industry means its biggest
risk is that growth will be “very highly contingent on the AI boom and
tech race continuing,” said Lynn Song, chief economist for Greater China
at ING Bank.
Risks persist of an AI bubble?
Worries that the AI craze may prove to be a bubble prone to a bust
similar to the dot.com crash in 2000 that swept through markets,
alarming many in Taiwan.
“I’m also very nervous about it,” C.C. Wei, TSMC’s chairman said when
asked about a potential AI bubble during an earnings call in January.
“Because we have to invest about $52-$56 billion (this year).”
“If we did not do it carefully, that will be a big disaster to TSMC for
sure,” he said. “I want to make sure that my customers’ demands are
real.”
In a recent report, analysts from Fitch Ratings argued that AI demand
will remain strong at least in the near term. In the longer term,
however, the risks “will depend on the evolution of AI, as well as trade
and investment policies and the adaptability of Taiwanese firms,” they
wrote.
Taiwanese electronics company Asia Vital Components, a key supplier of
liquid cooling systems for Nvidia, is investing heavily in research and
development. Its chairman, Spencer Shen, said he saw no signs of a
slowdown in AI-related demand so far. The company is already designing
thermal solutions for 2028 AI servers, he said.
[to top of second column] |
Asia Vital Components Chairman Spencer Shen speaks during an
interview with The Associated Press in New Taipei City, Taiwan,
Friday, Jan. 30, 2026. (AP Photo/Chiang Ying-ying)
 “We do not believe this is a
bubble,” Shen told The Associated Press in an interview. “AI is
driven by companies with real products and massive cash flows, like
Amazon, Microsoft, Google and Meta.”
“In fact, AI infrastructure is still in short supply,” Shen added.
“I expect AI to trickle through to our everyday level and change the
way that things will work fundamentally.”
Taiwan has a ‘silicon shield’ against Beijing
Some in Taiwan believe that its pivotal role in the technology
sector, especially as a maker of computer chips whose main material
is silicon, helps to protect the island from attack by
communist-ruled Beijing, whose leaders have vowed to reunite the
island with the Chinese mainland, by force if necessary.
The two governments split in 1949 during a civil war. Beijing has
been stepping up pressure, conducting military drills nearby.
Exercises in late December included live rounds landing closer to
the island than before, Taiwan officials said.
Such geopolitical factors cloud the economic outlook, though many in
Taiwan including its former President Tsai Ing-wen believe its
importance to global chipmaking would deter China from attacking.
The risk of an invasion is unclear. Both global tech companies and
Chinese industries would suffer from massive disruptions of the chip
supply chain, said Wu of National Taiwan University.
Still, some companies have been identifying contingency scenarios in
recent years on how to respond in case of military action by China,
said Chen Shin-horng, vice president of the semi-official Chung-Hua
Institution for Economic Research.
“We need to understand the potential risk, potential damages to
Taiwan,” said Chen.
While many of its core research and development activities are in
Taiwan, TSMC already has plants in China, Japan and the U.S., and
it's expanding its offshore production in the U.S., Germany and
Japan.
Roughly 65% of Foxconn's manufacturing is in China, and the company
has factories in other parts of the world such as India, Mexico and
the U.S. AVC has been expanding its production capacity in Vietnam.
While some have called for Taiwan to diversify its economy away from
technology to reduce risks, others argue that doubling down on its
world-leading technology is the way forward. “It is our greatest
strength,” said Shen of AVC.
Some in Taiwan are being left behind
The AI boom has done wonders for Taiwan's stock exchange, where the
benchmark Taiex has climbed nearly 250% over the past decade, making
many investors rich. Economists have significantly upgraded
forecasts for Taiwan's economic growth for 2026 based on its robust
AI-related exports.
But as is true elsewhere, the wealth is not evenly spread. Many
Taiwan residents feel they have been left behind.
Taiwan’s wealth gap, according to official data, has roughly
quadrupled over the past three decades.
The pay of tech workers already earning high wages, especially chip
engineers and managers, has skyrocketed. For other traditional
industries, such as plastics and machine toolmakers, growth has
lagged.
Economists say that gap might widen as the AI frenzy continues.
“It can be tough to make a living,” said Jean Lin, a 30-something
manager of a takeaway outlet selling bento meals in a Taipei
neighborhood where Foxconn's office is located.
“Many of the younger generation still can’t afford to buy an
apartment,” Lin, who wishes to start her own business one day,
added. “A lot of young people still feel they don't have much
money.”
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Associated Press video journalist Johnson Lai contributed.
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