https://www.economist.com/business/2023/01/19/tsmc-is-making-the-best-of-a-bad-geopolitical-situation

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Business | Schumpeter

TSMC is making the best of a bad geopolitical situation

Speak softly, and carry a big chip

[20230121_W]
Jan 19th 2023
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For a company worth $430bn that straddles one of the world's most
dangerous geopolitical flashpoints, there is something endearingly
unflustered about Taiwan Semiconductor Manufacturing Company (TSMC).
Both America and China covet its unmatched ability to make advanced
chips. It's a far bigger supplier to the former than the latter, but
if either superpower, through economic pressure or brute force, fully
stifled its independence, the fallout would be immense. Many of its
fabrication plants are on the west coast of Taiwan and perilously
exposed to a Chinese invasion across the Taiwan Strait. Yet it
refuses to be panicked. "If there is a war then, my goodness, we all
have a lot more than just chips to worry about," its 91-year-old
founder, Morris Chang, said in a podcast last year. His successor as
chairman, Mark Liu, insists that peace is in everyone's interest.

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Such insouciance runs the risk of sounding naive. Like it or not, the
big-power rivalry over semiconductors--what some call the Silicon
Curtain--has solidified in recent months. China has long sought, to
little avail, to build a chip industry from scratch. Last year
America strengthened its stranglehold on certain "choke-point"
technologies, such as artificial-intelligence chip design, chip
software and semiconductor-manufacturing equipment, in order to
stymie China's ambitions. Moreover, America's CHIPS Act, enacted last
year, has used subsidies to entice about $200bn in investment
commitments. One of the biggest beneficiaries has been Intel, a rival
as well as client of TSMC.

In response, TSMC appears as if it has joined Uncle Sam. Last month
President Joe Biden stood in front of the firm's vast new American
fab under construction in Phoenix, Arizona, and celebrated a proposed
$40bn investment. Yet look closer and TSMC offers lessons on how to
handle the dirty business of geopolitics. Contrary to what some
people think, the new cold war is not forcing it to break away from
Taiwan, where it has foundry capacity for making more than
three-quarters of the world's high-end chips. It is unlikely to
jeopardise its profitability, which generates the cashflows necessary
to retain its edge. Yet it is thinking about a long-term future in
which one day there may be a premium on geographical flexibility. In
short, it is playing a subtle game of diplomacy in which its business
interests come first.

The fab in Phoenix is exhibit A for those who fear
"de-Taiwanisation". Spread out over miles of desert, it is pharaonic
in size. It is due to start making four-nanometre chips next year,
which, provided it beats Intel to the punch, will be the most
advanced ever made in America. A big part of the $40bn investment, 
TSMC says, will be a second fab that will start to make even more
sophisticated chips in 2026. Its biggest customer in Phoenix will be
Apple. Beyond America, it plans to build its first fab in Japan for
Sony, another gadget-maker. This looks like a strategy to move closer
to its customers, which if you are sitting in Taiwan might look
suspiciously like abandonment.

"Complete nonsense," retorts Pierre Ferragu of New Street Research, a
financial firm. TSMC has almost simultaneously launched a new fab in
Taiwan, with four times the wafer capacity--and more advanced
technology--than the two proposed Arizona foundries. Its bet on
America is more of a long-term insurance policy than an immediate
game-changer. It enables TSMC to start the tough job of recruiting a
workforce and amassing suppliers in America, providing a baseline for
expansion "if the Chinese are crazy enough to bomb Taiwan". For the
foreseeable future, though, most R&D is likely to remain in Taiwan.
So will at least four-fifths of TMSC's capacity.

Next comes profitability. The fears are two-fold. First, for all the
subsidies offered by America, manufacturing there is cripplingly
expensive, and the concern has been that TSMC will bear the losses as
a gesture of goodwill to the country. Second, the subsidies could
support the revival of Intel, which long ago lost its lead in
chipmaking to TSMC but has since banged the drum for chip
nationalism. In fourth-quarter results on January 12th, TSMC laid
some of those fears to rest. Though construction costs in the United
States are, officials said, up to five times higher than in Taiwan,
they indicated that customers who wanted their chips to be made in
America would pay a higher price, protecting profits. Moreover,
despite a cyclical downswing in the global chip market, TSMC is
boosting market share vis-a-vis rivals such as Intel. As Malcolm
Penn, an industry consultant, puts it, it is so far out on the
leading edge of chip manufacture that its most advanced products will
always be in short supply.

In some ways, TSMC is deftly cosying up to the Biden administration.
The Arizona fabs may not solve America's chip-security problem. But
at the very least they will provide some of the good (ie, unionised)
manufacturing jobs so beloved of the president. In other ways, the
company is building a long-term hedge into its own future. It
believes high-end chips will become increasingly complex and costly
to manufacture, and the digitisation of the world economy will
increase the intensity of their use. In that case, eventually TSMC
may outgrow Taiwan, whose population is shrinking. Accessing more
global brainpower, in America or elsewhere, will become an
imperative.

Silicon Curtain call

Will its offshore investments contribute to the oversupply that is
currently weighing on the global chip market? No, says Mr Penn. Chip
demand increases by 8% a year on average. Provided investments can be
adjusted for the state of the market, it makes sense to plan for the
future. What matters more is the extent to which America and its
allies blacklist China, where TSMC has a fab in Nanjing making
mainstream chips for domestic use. The company may be right to
believe that cool heads will prevail. But if it is wrong, at least it
has started the long process of hedging its bets. #

Read more from Schumpeter, our columnist on global business:
Go to Texas to see the anti-green future of clean energy (Jan 12th)
How to avoid flight chaos (Jan 5th)
How Bernard Arnault became the world's richest person (Dec 20th)

To stay on top of the biggest stories in business and technology,
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This article appeared in the Business section of the print edition
under the headline "Speak softly, and carry a big chip"

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