TSMC navigates stormy seas of Sino-US Cold War

Mark O'Neill November 03, 2022 06:00

Never have the figures looked so good for Taiwan Semiconductor Manufacturing Company (TSMC). It has just reported net profits of NT$280.87 billion for the third quarter of this year, a 79.7 per cent increase from the same period in 2021.

It dominates the global semiconductor industry as the world’s largest contract chipmaker. Taiwan accounts for 20 per cent of global wafer fabrication and an extraordinary 92 per cent of the most advanced chips.

But TSMC is trapped in the middle of a worsening technology Cold War between China and the United States, its two largest customers. China accounted for 17 per cent of its revenues in 2020, 10 per cent in 2021 and 8 per cent in the third quarter of this year.

Washington wants to cripple China’s semiconductor industry. In early October, it announced its strictest ever curbs on China’s chip sector, aimed at almost every aspect of advanced chip development for use in military, AI and supercomputer applications. As a result, on October 11, shares of TSMC fell 8.3 per cent to NT$401.5 on the Taipei stock market.

On October 13, TSMC announced its third-quarter results. Chief Executive C.C. Wei said the effects of the U.S. export controls should be manageable. “Our initial reading and feedback from our customers is that the new regulations set the control threshold at a very high-end specification, primarily used for AI and supercomputing applications,” he said. “We are closely monitoring the situation to ensure that we comply with all the rules and regulations.”

He said that the company had been given a one-year license to cover its manufacturing facility in Nanjing. It is TSMC’s most advanced semiconductor plant in China, which opened in 2018. It makes chips in the 16 nm grade, under the scope of Washington’s latest export controls, but also mature chips, known as the 22nm/28 nm production node.

The U.S. restrictions mean that TSMC can no longer help Chinese customers put advanced graphics and AI processors into production. Analysts estimate that the current controls would affect less than 0.5 per cent of TSMC revenue in 2023. But, if Washington broadened them to chips for data centre GPUs and CPUs, that figure would rise to five per cent.

Overhanging this is a debate more ominous for TSMC. In July this year, U.S. Commerce Secretary Gina Raimondo said that the U.S. could not keep relying on Taiwan to support the domestic production of high-end computer chips. Addressing the Aspen Security Forum in Colorado, she said: “Our dependence on Taiwan for chips is untenable and unsafe.” Were the world to lose access to Taiwan’s chips, the production of everything from automobiles and computers and jet fighters would be severely disrupted.

The nightmare scenario for Washington is Chinese control of TSMC, through a peaceful or military takeover. It has a cluster of factories in northwest and central Taiwan that are more cost-efficient than any of its competitors in the world. Some call them the most valuable real estate in the world, worth more than Fifth Avenue in downtown Manhattan or the Champs-Elysees in Paris.

In June this year, Chen Wenling, chief economist of the China Center for International Economic Exchanges on the mainland, said that, if the West imposed sanctions on China like those it has put on Russia, Beijing must seize TSMC. The Center is a state-backed research institute.

“They are speeding up the transfer to the U.S. and to build six factories in the U.S.,” Chen said. “We must not let all the goals of the transfer be achieved. This would put TSMC outside China’s grasp.”

In January, an article published by the U.S. Army War College recommended that the U.S. and Taiwan threaten to destroy TSMC’s facilities if Beijing invaded.

TSMC is building one factory in the U.S., in Phoenix, Arizona, due to start production in 2024, as well as one in Japan. It is also considering one in Germany. Intel and Samsung are also building new fabs in the U.S., bigger than the one in Phoenix. TSMC has bought enough land there to build several more fabs.

During her visit to Taiwan in August, U.S. House speaker Nancy Pelosi was invited by President Tsai Ing-wen to a lunch in Taipei. She also invited Morris Chang, 91, the founder of TSMC who learnt his skills in the U.S.

In blunt terms, he told Pelosi that her government’s efforts to rebuild chip manufacturing at home would fail, because of the cost, complexity and skilled manpower required.

So is TSMC now a matter of national security for the U.S.?

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.