TSMC (Taiwan Semiconductor)

Ichiro Suzuki Offshoring has been an oft-talked about issue in the U.S. over the past decade. It began decades ago, and became a wave in the 21st century as a variety of companies moved production facilities to countries with greater labor cost advantages. As developed countries moved up on income, assembly lines were shipped to elsewhere. Semiconductors are no exception to this progression. Silicon Valley half a century ago was literally a hub of silicon chip production. As the industry progressed, chip makers began to focus themselves on designing circuits, leaving production to outsiders. Today, contract manufactures of semiconductors, called foundries, are located predominantly in the Far East. TSMC (Taiwan Semiconductors) stands out among a handful of foundries that control the highly oligopolistic business of making chips for others. The company commands roughly 60% market share, while South Korea’s Samsung being in the distant second with approximately 10%. TSMC was started by Stanford-educated Taiwanese engineer Morris Chang in 1987, after 25 years with Texas Instruments, returning from the U.S., responding to the the Taiwanese government’s request. As more and more chip makers went fabless, leaving production to foundries, TSMC grew exponentially to become a dominant player in the global semiconductor sector. At the end of April, TSMC is the largest semiconductor company in terms of equity market capitalization at $481 billion, edging NVIDIA, $462 billion, that was also started by Taiwanese-American Jensen Huang. Intel on the other hand grew very little since the days of ‘Wintel’ at the turn of the century, and is now worth only $178 billion. Toward the end of the 2010s, the U.S. began to feel weary about its dependence of semiconductor manufacturing on Asians. TSMC’s foundries are located in the city of Hsinchu on the west coast of Taiwan, facing the strait, only 250 kilometers (155 miles) from the eastern shore of the People’s Republic of China. Should the Chinese Communist Party decides to invade Taiwan to bring the island back into the hands of where they think it is supposed to belong to, it would be a nightmare for the U.S. and the rest of the West. Its adverse effects would be far greater than the havoc created in the food markets by Russia’s Ukraine invasion. For this geopolitical reason, the Biden administration tries to promote semiconductor manufacturing capability on the U.S. soil, wooing TSMC to build a foundry in Arizona. In fact, the U.S. is hoping to create ‘Silicon Desert’ with chip making facilities by Samsung and Intel, in addition to TSMC. The U.S. has reportedly offered TSMC $5 billion in taxpayers’ money as an incentive to build a foundry in Arizona. Such a subsidy narrowly dodges WTO rules as the fund is claimed to be spent for national security reasons. Nonetheless, building new foundries is totally different from relocating car factories from Mexico back to the U.S. Cutting edge technology of semiconductor manufacturing is in the hands of Taiwanese, not Americans. Over the past 20 years, once dominant Intel has suffered a stall in technological progress in etching more minute circuits on chips. TSMC is reluctant to transfer the most advanced technology to the U.S., where labor costs are high and best and brightest engineering talents are not interested in working in manufacturing. In a world of ever greater miniaturization of semiconductors, TSMC is only willing to make 5 nanometer chips in Arizona (nanometer is one-billionth of a meter), whereas most advanced 2 nanometer chips are made only in Hsinchu. The best ones stay in Taiwan. China receives the same treatment as well. TSMC has absolutely no interest in making the most advanced chips in China. It remains to be seen how successful the Arizona project turns out to be. Having left the U.S. a few decades ago, semiconductor manufacturing has evolved into a distinct segment of tech industry in its own right. Though Intel has held onto making chips in the U.S., TSMC has already overtaken Intel as the most-skilled chip makers. TSMC has made a business decision to build a foundry in Arizona since the U.S. is by far the largest market for chip consumption. Nonetheless, unlike in other industry, the U.S. plays only the second fiddle in semiconductor manufacturing. Trying to have semiconductors made in Arizona is not considered as on-shoring, where Americans relocate factories back to the home soil. The U.S. has to beg Taiwanese to transfer their technology, in the same fashion China did to foreign capital when the age of globalization took off at the outset of this century.

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan. (Author's note: This article is inspired by “Geopolitics of Semiconductors” by Yasuhiro Ota.)