Since Donald Trump fired the first shot in the U.S.-China trade war, a tech company has been in the middle, trying to avoid crossfire. It’s a wonderful thing to be able to sell to all parties until one party forces you to make a choice.
China Taiwan Semiconductor Manufacturing Co. (Taiwan Semiconductor Manufacturing Co., referred to as: TSMC) is an important supplier to China and the United States, and its status is enviable. Headquartered in the prestigious Hsinchu Science Park, the company manufactures world-class products for companies such as Apple Inc., Qualcomm Inc., Nvidia Corp. and Huawei Technologies Co. State-of-the-art chips.
As described by the White House, Pentagon and Commerce Department, the U.S. is concerned that allowing China to source the world’s best semiconductors without the U.S. being able to produce them domestically is an urgent and critical national security threat. This has prompted the United States to adopt a two-pronged strategy in recent years: limiting China’s access to and development of chip technology and enhancing its domestic power.
TSMC’s strategy has always been to remain neutral. The company has most of its capacity in Taiwan, a new and sub-new plant in mainland China, and an older plant in Washington state.
A year ago, I wrote that the company’s chairman, Mark Liu, politely resisted pressure to expand in the United States, citing high costs. I concluded: “TSMC can’t be neutral forever. While Mark Liu may just want to do chips, he will eventually have to make a choice.”
This day has come.
The coronavirus pandemic has highlighted the need for the U.S. government to protect supply chains from disruption and heightened concerns about Taiwan’s reliance, The Wall Street Journal reported over the weekend. To that end, the Trump administration is pushing hard for chipmakers including Intel Corp., TSMC and Samsung Electronics Co. to expand in the United States. The Wall Street Journal wrote that it was to use their best technology.
Unsurprisingly, Intel’s argument was that the US should ramp up domestic production for “geopolitical” reasons. Most of the company’s employees and more than half of its plant and equipment are located in U.S. manufacturing areas including Arizona, New Mexico and Oregon.
While Intel is best known for supplying the processors needed for PCs and servers, it also operates a foundry business that makes chips from customers’ own designs. The Santa Clara, Calif.-based company was once the global leader in chip production but has now fallen behind TSMC and South Korea’s Samsung.
Intel clearly sees an opportunity. If it can convince defense and business officials that it is in national security interests to require that at least some chips be made domestically, it could have an opportunity to return to the foundry business.
TSMC has been trying to fight back, or at least have a place in policy discussions. The company recently hired Peter Cleveland, a former Intel lobbyist, to coordinate its work in Washington. As the saying goes: “If you’re not on the table, then you’re on the menu.”
But another aspect of the U.S. strategy could be harder to negotiate for the Taiwanese company. In addition to expanding domestic production capacity, Washington also wants to limit the entry of mainland Chinese companies. To do so, the Trump administration is considering new rules to limit the use of U.S. equipment and materials in making chips for companies like Huawei, citing the Chinese company as a conduit for Beijing’s security activities.
This puts TSMC and many other companies in a bind. Last year, the US market accounted for 59% of its sales, while the Chinese market accounted for only 19%. However, the momentum clearly favors the world’s largest country, which is focused on developing components for artificial intelligence, 5G communications, surveillance, and possibly weapons.
TSMC has tried to challenge Switzerland. A year ago, the company insisted that “we are everyone’s foundry”.
The U.S. government increasingly wants TSMC to become its own foundry. The pressure has clearly increased over the past year, with a long list of U.S. customers and a huge revenue contribution being used as a battering ram to show that the U.S. is the priority. Ten years ago, when Taiwan-China relations were relatively friendly, companies may have tended to favor mainland China. Now that sentiment has shifted.
Granted, China is an important, growing market — and Beijing has used the momentum to bring global companies to China — but it will be harder for China to displace the U.S. in size or technological leadership over the next 20 years. To allay concerns and fight for a reprieve from supply curbs to China, TSMC has no choice but to offer something to the US.
After years of delays and boycotts, it’s time for TSMC to build a brand new factory in the United States. The company is expected to announce concrete plans and huge numbers of U.S. investments in the next year or so.
[Wall Street Digest translation – original Bloomberg — May 11, 2020]
From Wall Street Digest wsdigest.com
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