Taiwan Semiconductor Manufacturing Company (TSMC) has, since its founding in 1987, set out to be a global “committed corporate citizen” serving clients worldwide instead of focusing only on one region.
It succeeded. The contract chip maker is today the world’s largest semiconductor foundry. But now TSMC has been drawn into the increasingly fierce tech feud between the United States and China.
On May 14, TSMC announced a plan to build a $12 billion plant in Arizona. A day later, the US Department of Commerce unveiled a rule change that from September would bar global chip makers that use US equipment or technology (effectively most global industry players including TSMC), from selling to China’s Huawei, which accounts for around 14% of TSMC’s revenue, according to Credit Suisse analysts.
Why TSMC matters
At the core of the issue is the extreme importance of semiconductors, which are essential for internet and software companies, as well as being at the heart of many technologies used by militaries around the world. Chips are essential building blocks of modern technology supply chains. Chip factories, which need major capital investment and high tech equipment, are also an economic boon to the cities in which they are located. It is not an exaggeration to say whichever country masters chip production and design know-how will have an upper hand in the technology front.
TSMC, the world’s largest contract chip maker, is vital in the global tech supply chain. Contract chip makers make tailor-made products for clients, unlike companies such as Samsung and Intel which reserve their best chips mostly for their own products. Many of TSMC’s clients are semiconductor makers in their own right and design the integrated circuits but don’t have the capacity to mass-produce them. TMSC is the most important source of chips for a number of US and Chinese tech giants, including Apple, Qualcomm, Broadcom, Nvidia, and Huawei. Overall, the company generates 61% of revenue from the US, followed by China (17%) and Taiwan (8%), according to Bloomberg.
The significance of TSMC’s new plant
Even China’s best chip makers are believed to be as much as a decade behind (paywall) their international peers despite huge investment in the industry from the government. If Chinese tech champions like Huawei are not allowed to use or are restricted from using TSMC’s chips, that creates major supply issues for companies. Although the new Arizona plant is expected to only contribute 3–4% in revenue to TSMC, according to analysts from Bernstein, it’s still bad news for China if it shows that TSMC is leaning towards its American clients rather than Chinese.
The fact that TSMC is a Taiwanese company further complicates the matter. Beijing claims the self-ruling island democracy as part of its territory and so should be “re-unified” with the People’s Republic of China. The coronavirus outbreak has exacerbated the conflict between the two sides, against a backdrop of growing international support for Taiwan, which has had one of the best public health responses to the pandemic.
What could happen next?
One direct consequence of TSMC’s move is that it could accelerate China’s own development of semiconductors, though it’s unlikely China could catch up with the US anytime soon. Even the country’s most advanced chip maker, Shanghai-based Semiconductor Manufacturing International Corporation (SMIC), has only recently launched its latest generation of 14 nanometer chips, some four years behind Intel and Qualcomm, analysts from Fitch Solutions, a research firm, wrote in a note.
“China has been throwing billions of yuan into the semiconductor industry in the last few years trying to expand capacity, but it’s still not there yet,” says Bryan Mercurio, an expert on international trade law at the Chinese University of Hong Kong.
However, despite its still-huge gap with international peers, Chinese chip makers could have a good opportunity by offering cheaper and less powerful products to emerging markets, where demand will come from more practical and lower-tech home and office equipment. In this area, Chinese companies could supplant US brands within the next decade, say the Fitch analysts.
As for TSMC, it remains to be seen whether its opening of a plant in Arizona is a firm move away from its valuable Chinese clients or more of a gesture to generate goodwill in Washington, DC and with Trump.
“The launch of this plant has to be a token gesture from TSMC. Would the company really want to risk losing all of its Chinese clients, not only Huawei, or being shut out of the China market just for a symbolic move like this?” says Mercurio. “Probably not.”
Correction: An earlier version of this article mischaracterized Fitch Solutions as an affiliate of credit rating agency Fitch Ratings