Why TSMC goes global with its production

November 22, 2021 08:54
Photo: Reuters

The city of Dresden in eastern Germany is lobbying Taiwan Semiconductor Manufacturing Company (TSMC, 臺積電) to locate its first European plant there. The company has many suitors.

TSMC has given up a 20-year policy of concentrating production at home and is going global. It is building an advanced plant in Arizona, its first chip facility in the U.S. for two decades. It is set to start production in early 2024.

On November 9, it announced construction of a fab in Kunamoto, Japan, due to start production by the end of 2024. Sony Semiconductor Solutions Corporation will invest about US$500 million in the project, giving it an equity stake of less than 20 per cent.

TSMC is talking with “multiple clients” about the feasibility of building a chip wafer plant in Germany. Silicon Saxon, in Dresden, is the largest semiconductor cluster in Europe and negotiating hard to be the chosen site for the Taiwan firm.

Many consider TSMC the most valuable company in the world today.

It is the largest contract makers of chips which are used in more than 160 industries, including automobiles, smartphones, data centres, satellites and military equipment. The world is suffering from a global chip shortage, which will cause 3.9 million fewer cars to be produced this year than last.

TSMC controls more than half the global market for made-to-order chips and an even higher share for the most advanced processors. Global chip sales last year were US$440 billion and demand is expected to rise by over five per cent a year, especially in mobile devices, the Internet of things (IOT) and 5G and 6G networks.

On November 10, TSMC announced revenue for the first 10 months of the year – NT$1,238.77 billion, an increase of 17 per cent over the same period in 2020.

The shortages have frightened governments around the world who see their reliance on TSMC and other producers in Taiwan and South Korea. U.S. clients account for 70 per cent of TSMC’s revenue, European ones 5.24 per cent and Japanese ones 4.72 per cent. Apple is its single biggest customer.

“The U.S. has leverage over TSMC,” said one investment banker in Hong Kong. “It pushed strongly for a factory in the U.S. and has got one. So did the Japanese government.

“Tensions over the Taiwan Straits make this more urgent. What if the mainland blockaded Taiwan and the company could not ship its products overseas and, even worse, a war?” he said.

Europe is equally alarmed, especially Germany. “If a large block like the European Union cannot produce its own chips, I cannot be satisfied,” said Chancellor Angela Merkel earlier this month. “If you are a nation known for its cars and cannot make the basic components, that is not good at all.”

The global auto industry is one of the sectors worst hit by the shortage of chips. Many companies have had to shut down some of their capacity.

What makes it more urgent is the transformation of the automobile.

Currently, chips account for four per cent of the cost of a conventional car. By 2030, they may account for up to 20 percent of models that are electric and automatic, driven by artificial intelligence.

Mark Liu, chairman of TSMC, said earlier this year that the firm was considering the possibility of setting up a production base in Germany. “We have been communicating with customers in Germany to find out whether such an investment would benefit them.”

One of the countries most alarmed by the chip shortage is China. It has invested billions of dollars into this sector, with mixed results. Over the last two years, several Chinese chip companies have gone bankrupt, including Wuhan Hongxin Semiconductor Manufacturing Co.

Its strongest firm is SMIC, based in Shanghai. But its most advanced chips are about five years behind those of TSMC and Samsung.

This month SMIC vice-chairman Chiang Shang-yi resigned after just 10 months in the post, officially for family reasons. Three other directors also resigned. In September, chairman Zhou Zixue also resigned, officially for health reasons.

Chiang was head of research at TSMC until 2013. Such expertise from TSMC is vital for SMIC if it is to catch up.

But the situation for Taiwan executives like him is becoming more difficult as Sino-US and Sino-Taiwan relations deteriorate and Washington blocks access to advanced technology for Chinese firms.

As the two worlds decouple, the value of TSMC rises.

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A Hong Kong-based writer, teacher and speaker.