TSMC must balance U.S. and China markets

Mark O'Neill April 29, 2021 10:17

The global shortage of semi-conductor chips has brought record profits for Taiwan Semiconductor Manufacturing Company (TSMC) but left the company torn between its two customers, the United States, and China.

TSMC has a 28 per cent share of the global market for matured nodes (40 nanometre and below), ranking first, followed by UMC of Taiwan with 13 per cent, Semiconductor Manufacturing International Corporation of China with 11 per cent and Samsung of South Korea with 10 per cent, according to a report by Counterpoints Research in February.

Never has demand been so strong and the product so important.

At a meeting in Washington earlier this month, President Joe Biden said that the U.S. should be the world’s computer chip leader. Currently it produces just 12 per cent of global supply.

“China and the rest of the world are not waiting and there’s no reason Americans should wait,” he said. “We have not made big investments to stay ahead of global competitors and need to step up our game.” He proposed an investment of US$50 billion to increase chip manufacturing within the U.S.

Global production cannot meet demand. Since the middle of 2020, auto companies in the U.S., Europe, Japan and China have been forced to shut down production lines because of the shortage.

This is because, since the start of the pandemic early last year, demand for computers, mobile phones and other intelligent devices has soared; the chipmakers have diverted their output to these products. Now demand for autos is picking up – but the makers cannot keep pace.

Li Shaohua, deputy secretary-general of the China Association of Automobile Manufacturers, said that, in the first two months of this year, China’s automakers cut production by 5-8 percent. “The global chip shortage is hitting many industries, not only automobiles but fields like consumer electronics, communication systems and medical equipment,” he said. “The imbalance between supply and demand has caused a sharp rise in prices of various chips. The supply shortages will continue over the next six to nine months.”

The dilemma for TSMC is how to balance its two largest markets.

In 2020, the U.S. accounted for over 60 per cent of its sales, three times the 20 per cent that went to China. But the latter is the world’s fastest-growing market for semi-conductors, especially from makers of state-of-the-art consumer electronics.

But the U.S. government wants to restrict China’s access to high-tech components. Last summer, following U.S. sanctions against Huawei, TSMC suspended sales to the company, one of its largest customers. It easily made up the shortfall by sales to makers of consumer electronics.

Earlier this month Wang Mei-hua, Taiwan’s Economy Minister, said that the island’s companies followed U.S., domestic and multilateral rules when they meet global demand for chips.

Legally, TSMC is not required to follow sanctions imposed by the U.S. government. But it usually does, because the country is such an important client. In the new Cold War, the company has no alternative but to take the U.S. side.

Earlier in April, the U.S. Commerce Department added China’s Phytium Information Technology to its “Entity List”, meaning that U.S, firms could no long work with them. It said Phytium was involved in military deployment of hypersonic missiles.

TSMC then suspended new orders from Phytium, while completing those placed before the announcement putting the firm on the blacklist.

TSMC is investing US$12 billion in a factory in Phoenix, Arizona to make five-nanometre chips. Construction is due to begin this year and the firm wants to hire 300 engineers who will be sent for a year-long intensive training programme in Tainan. Mass production is due to begin in 2024.

This is a smart business decision. It both diversifies the sites of production outside Taiwan and also meets the demand of the Biden administration for increased manufacturing of this key industrial component on American soil.

Mindful that the restrictions will become more severe, China has been increasing imports of chips to record levels. In the first quarter of 2021, it imported 33.6 per cent more units of integrated circuits compared to a year earlier, worth US$93.6 billion.

Last week Tsinghua University in Beijing opened its “School of Integrated Circuits”, to train specialists in this sector. Last Monday President Xi Jinping visited the campus and stressed the need for universities to accelerate the education of specialists in sectors where they were badly needed.

The government has designated increased production of semiconductors as a strategic sector.

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.