Index > Briefing
Back
Sunday, November 20, 2022
The Geopolitical and Geo-economic Impact of the U.S. 'Hallowing Out' of TSMC
He Jun

On November 17, 2022, TSMC's first batch of 300 key employees and their families boarded a U.S. chartered flight and flew directly to the production base in Phoenix, Arizona. Since 2021, TSMC plans to invest USD 12 billion in Phoenix to build the first phase of the semiconductor chipmaking plant. These employees and their families will settle in the United States. According to media reports, TSMC employees not only brought their family members, but also their pets, and left Taiwan with them.

This is just the first batch of TSMC employees relocating to the U.S. According to the previous plan, it is estimated that before the end of 2022, there may be another 6 chartered flights to continue transporting more than 1,000 key TSMC employees and their families to the Phoenix chip factory. In the end, it is expected that about 3,000 TSMC talents will be sent to the U.S., and they will become long-term core employees of TSMC's American factory. It is said that in addition to installing necessary new production equipment, TSMC may also dismantle a large number of precision equipment located in Taiwan and transport them to the Phoenix production base for reinstallation.

This scene is quite symbolic. Researchers at ANBOUND believe that the relocation of TSMC's talents, their families, and pets to the U.S. may be permanent. In an era of anti-globalization where geopolitics dominates the world, this permanent technology and talent transfer means that the U.S. has begun to effectively "hollow out" TSMC and Taiwan's semiconductor industry.

For TSMC to invest in a chipmaking plant in Phoenix, this was a "request" of the U.S. government during Donald Trump's presidency. TSMC's chip factory in Phoenix started its construction in June 2021. It plans the installation in 2023 and starts mass production in the first half of 2024, mainly producing 5-nm process chips. The Biden administration took over the project, and introduced the CHIPS and Science Act in August 2022, further attracting semiconductor manufacturing companies to move to the U.S. In addition to this USD 12 billion 5-nm chip factory, some American media have disclosed that TSMC will build a new factory in Phoenix with a 3-nm advanced process. This means that TSMC will have more investment, technology, and talent transferred from Taiwan to the U.S.

The establishment of TSMC's factory in the U.S. is not merely a simple incremental investment. Rather, it is an industry and talent transfer that will have a major impact on Taiwan. TSMC currently has a total of about 50,000 employees. Except for more than 17,000 production line technicians, most of the rest are about 30,000 professionals and assistants. Judging from the transfer of 3,000 key talents in the 5-nm factory, if TSMC invests in new production lines in the U.S. in the future, it is likely for the company to transfer more talents. Taiwan's economy is highly dependent on a few industries such as semiconductors, and TSMC plays a pivotal role in its economic development. According to publicly disclosed financial reports, TSMC's revenue in 2021 was NTD 1.59 trillion (approximately RMB 357.75 billion), while the total GDP of Taiwan in 2021 was RMB 4.9 trillion (USD 772.745 billion). The revenue accounted for 7.3% of Taiwan's GDP. Under such circumstances, TSMC's technology, talents, and investment flow from Taiwan to the U.S. is a drastic move for the semiconductor industry in Taiwan.

For TSMC to invest in the U.S., a country with higher cost, it is not so much of an economic factor. Morris Chang, the founder of TSMC, has repeatedly expressed his objections implicitly, for the reason that the cost of manufacturing chips in the U.S. is too high, which will weaken the market competitiveness of TSMC products. However, TSMC's investment in the U.S. is not a simple market-oriented investment, but a complex investment behavior with multiple significances. On November 19, 2022, while attending the informal meeting of Asia-Pacific Economic Cooperation (APEC) leaders in Bangkok, Chang said during talks with U.S. Vice President Kamala Harris in Thailand that although the cost of manufacturing chips in the U.S. is at least 50% higher than in Taiwan, this does not mean that TSMC will rule out plans to transfer some production lines there. He has also invited U.S. Secretary of Commerce Gina Raimondo to participate in the first tool-in ceremony of TSMC's Arizona plant on December 6 this year.

There are, indeed, important market and technical reasons for TSMC's huge investment in the United States.

TSMC has a greater dependence on the American market. In 2021, its top ten customers are Apple (25.93%), MediaTek (5.8%), AMD (4.39%), Qualcomm (3.90%), Broadcom (3.77%), Nvidia (2.83%) %), Sony (2.54%), Marvell (1.39%), STMicroelectronics (1.38%), ADI (1.06%), and Intel (0.84%). Among the top ten customers, apart from Taiwan's local company MediaTek and Italy's STMicroelectronics, the other eight are American companies, accounting for 44% of TSMC's revenue.

TSMC is also technically dependent on the United States. As the world's largest chip foundry, TSMC is highly dependent on supply chains from the U.S., Europe, and other regions, especially that of the U.S., Japan, Germany, and the Netherlands. To cite some examples, the lithography machine is provided by ASML from the Netherlands, and most of the main raw material suppliers are Japanese, American, and German companies. Apart from Formosa Plastics, the top 5 suppliers of its silicon wafers are Japan's Shin-Etsu Semiconductor (which has the world's largest market share) and Seiko (the world's second-largest market share), as well as Germany's Siltronic (the fourth in the global market share), and South Korea's SK (the fifth in the global market share). The top five suppliers of chemical mechanical abrasive materials are 3M from the U.S., AGC from Japan, Cabot Microelectronics from the U.S., DuPont which is also from the U.S., and Fujibo from Japan. The top five suppliers of chemical raw materials for process are Air Liquide from France, BASF from Germany, DuPont and Entegris which are both from the U.S., and Fuji Electronic Materials from Japan. The top five suppliers of special gases are Air Liquide from France, Air Products from the U.S., Central Glass from Japan, Entegris from the U.S., and Linde LienHwa: (a joint venture between LienHwa Industrial of Taiwan and Linde of Germany). The three companies Applied Materials, Lam Research, and KLA Corporation alone account for more than 50% of the global semiconductor equipment market.

For the U.S. to require TSMC to invest and build factories in the country, there are obvious geopolitical considerations. In the process of globalization in the past, the manufacturing capacity of semiconductor chips was largely concentrated in Asia. The data for 2021 shows that the chips produced in Asia account for nearly 80% of the world's total chip production capacity, while the figure for the U.S. and Europe combined was 21% (12% for the U.S. and 9% for Europe). Among the chip production capacity in Asia, Taiwan accounts for about 22%, South Korea about 21%, Mainland China 15%, and Japan about 15%. However, among the 15% of the production capacity in Mainland China, the chip production capacity of purely local manufacturers only accounts for about 8%, and the other 7% of the production capacity is the branches established by foreign companies. This production capacity pattern has caused some concerns in the U.S. While possessing the technology, most of the supply chains are concentrated in Asia, which poses a potential risk for the U.S. In order to control the semiconductor industry, President Joe Biden has continuously implemented measures to reflow the supply chain since he took office.

In the National Strategy for Advanced Manufacturing launched by the U.S. National Science and Technology Council in May 2022, three interrelated goals are set to achieve: (1) Develop and implement advanced manufacturing technologies; (2) Grow the advanced manufacturing workforce; and (3) Build resilience into manufacturing supply chains. In terms of advanced manufacturing technology, accelerating "manufacturing innovation for microelectronics and semiconductors" has an important position. The report said advances in semiconductor technology are critical to national security and nearly every sector of the economy, serving as the backbone of power electronics and enabling electric vehicle charging and the integration of renewable energy into the power grid. Currently, the manufacturing industry is confronted with fundamental performance limitations of complementary metal oxide semiconductor technologies, diversification of markets beyond processors and memory, and intense global competition. Improving future performance requires research into the fabrication and processing capabilities of new microelectronic materials, devices, and interconnect solutions. The report established three directions in this regard: first, nanofabrication of semiconductors and electronics; second, semiconductor materials, design, and fabrication; third, semiconductor packaging and heterogeneous design. The specific third goal, i.e., to build "resilience into manufacturing supply chains" includes enhancing supply chain interconnection, expanding efforts to reduce manufacturing supply chain vulnerabilities, and strengthening and revitalizing the advanced manufacturing ecosystem. In these supply chain adjustments, TSMC's investment in the construction of a chip factory in the U.S. has the dual role of strengthening the chip manufacturing capabilities of the country and improving supply chain security.

Can the act of "hollowing out" of TSMC by the U.S. be sustainable? Does the U.S. have the ability to continue to push TSMC to ignore manufacturing cost factors and allow it to transfer advanced technology and talents to the U.S.? We believe the answer is yes. As it stands, the Taiwan Strait issue is of high importance in the U.S.' geopolitical game. In August this year, after Speaker of the House Nancy Pelosi's visit to Taiwan, Mainland China launched military exercises around the island, further attracting concern on the U.S. side. It is expected that the U.S. will continue to use the Taiwan Strait issue as a bargaining chip in the future. If the situation continues to be at risk of intense geopolitical friction, TSMC may adjust its strategy of mainly investing in Taiwan. Once the company's layout strategy is adjusted to this, the U.S. will become the biggest beneficiary of TSMC's foreign transfer investment.

Final analysis conclusion:

The transfer of TSMC's chip manufacturing technology and technical talents to the United States has kicked off the process of "hollowing out" of the company. Once started, this may become an irreversible process. In an era when geopolitics dominates the world, and against the backdrop of the U.S.' moves against China as its long-term strategic competitor, TSMC's role in geopolitics has been largely determined. The company will continue to transfer technology, talent, and investment to the U.S., and become an "American company with Taiwanese DNA". This may be TSMC's future destiny.

ANBOUND
Copyright © 2012-2022 ANBOUND