Will Taiwan's cutting-edge chipmaking technology be “Americanized”？
The future of Taiwan's cutting-edge semiconductor company TSMC is fraught with uncertainty.
This week in China has been jam-packed with major news. According to Xinhua, Jiang Zemin passed away due to leukemia and multiple organ failure in Shanghai on Nov. 30, 2022, at the age of 96. A memorial meeting for Jiang will be held in the Great Hall of the People in Beijing on Dec. 6, according to an announcement from Comrade Jiang Zemin's Funeral Committee Thursday.
Regarding COVID-19, many China watchers have discovered evidence that might suggest China is entering a new phase in terms of COVID-19 control efforts.
Your Ginger River will not be surprised if more information about the policy's optimization becomes available in the coming days and weeks.
Today's piece is about another major topic that may have gotten lost because of the above-mentioned news -- the destiny of TSMC (Taiwan Semiconductor Manufacturing Company), which is caught between China and the US.
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Taiwan's leader Tsai Ing-wen resigned as head of the Democratic Progressive Party (DPP) last Saturday after her party suffered heavy losses in recent local elections. While the major opposition party, the Kuomintang (KMT), won 13 out of 21 city mayor and county chief seats, DPP only secured five. Tsai's resignation is a response to DPP's poor performance in the election, according to Taipei Times.
The midterm elections were not the only topic of discussion in the region. TSMC's plans in the United States also generated a great deal of disappointment.
"The US is turning the 'TSMC' 台积电 (Taiwan Semiconductor Manufacturing Company) into 'ASMC' 美积电 (American Semiconductor Manufacturing Company)," said Joyce Huang, a TV Taiwanese commentator, adding that no political leaders in Taiwan dare to say no to the US.
According to Central News Agency, on Nov 21, TSMC founder Morris Chang said that the company planned to bring its 3-nanometer process technology to the US in the future. When reporters sought confirmation later, the company gave no further information.
In a press conference that day, when asked about moving advanced semiconductor technology out of Taiwan, Chang said that the company is building a factory in Arizona to produce the 5-nanometer chips, adding that 5-nanometer chips are the most advanced ones in the US now, but TSMC is able to produce 3-nanometer chips in Taiwan. A reporter then asked him whether TSMC would bring the 3-nanometer technology to Arizona too. Chang responded: “Yes, after the fab begins producing 5nm chips."
Back in April, during an interview with the Brookings Institution (a think tank based in Washington), Chang noted that compared with Taiwan, the same product costs 50 percent more when manufactured in the U.S. and the U.S. product is "not nearly as profitable as the Taiwan product." He also mentioned a lack of manufacturing talents in the US, and that TSMC's investment is "at the urging of the U.S. government."
TSMC founder Morris Chang
So why would TSMC involve itself in a business hardly profitable?
Many believed TSMC built the Arizona plant to satisfy the U.S. government's request. Besides, the US passed the "chip bill" worth 52 billion U.S. dollars in August. But in Chang's view, the subsidies were far from enough. The US will produce more semiconductors, he said, adding, "but all of that will be very high-cost increase, high unit cost." Chang argued that the US will still be uncompetitive in the world markets.
Under the circumstances, building fabs in the US means higher costs and lower profits for TSMC. It is unlikely that TSMC didn't see the red flag, but the company embraced the US anyway. Therefore, some deeper reasons may lie behind the decision, including those mentioned by Business week, a weekly magazine based in Taiwan.
First, TSMC needs to better serve its U.S. customers, so moving closer to them is reasonable. Among the top ten revenue contributors, eight are from the U.S., including Apple, which accounts for over a quarter of TSMC's operating revenue. Moreover, Tesla is reported to replace Samsung with TSMC for the next generation of Full Self-Driving (FSD) chips. If confirmed, Tesla would be among the top seven customers of TSMC in 2023.
Second, TSMC needs to build a diverse manufacturing landscape. At present, many chip design companies wish to distribute the chip manufacturing in different places to reduce supply chain risks. Thus, the relocation may assuage customers' concerns.
For example, Apple plans to have some of its chips produced in the U.S. and will also purchase chips from European foundries. According to Bloomberg, Apple's CEO Tim Cook once said that 60 percent of the company's processors come from Taiwan. "60 percent coming out of anywhere is probably not a strategic position," he commented.
As reported by Reuters earlier this month, MediaTek, another big client of TSMC, has realized that some large equipment manufacturers will require their chip suppliers to have multiple sources. "I think in those cases, we will have to find multiple sources for the same chip if the business warrants that," said Rick Tsai, CEO of MediaTek. His words echoed with an announcement the company made in July, saying it has formed a strategic partnership with Intel and planned to produce some chips in Intel's fabrication facilities.
Third, TSMC's advances in the US may be connected with its current operating conditions, as suggested by Caijing Eleven.
Over the past month, the chip giant has seen major order cuts from its top clients, such as Apple, Qualcomm, Nvidia, and MediaTek. MediaTek has reportedly reduced 20 percent of its orders, while Apple has canceled 40 to 50 percent of its orders of A15 and A16 high-end chips. Due to order cuts, TSMC has encouraged employees to take vacations and shut down four extreme ultraviolet (EUV) lithography machines to cut production.
The market is indeed at a low ebb: According to Jefferies, a U.S. investment bank, the launch of iPhone 14 failed to save the dimmed market, and the sales of iphone in China fell by 27 percent (in the week of Oct. 24), a third successive week of increasingly steep drops. In the third quarter, Both Samsung and Xiaomi saw their global shipments drop around 8 percent year on year, Oppo and Vivo suffered a decline of more than 20 percent, and Honor's shipments in the Chinese market also fell by 17 percent ...
So even TSMC has reported record-breaking quarterly revenue growth for the third quarter, the market sentiment remained gloomy. So far, the market capitalization of TSMC fell from over 700 billion U.S. dollars at the beginning of 2022 to over 400 billion U.S. dollars now, a drop of over 40 percent. According to Barron's, a magazine published by Dow Jones & Company, Goldman Sachs kept a Buy rating, but it has removed TSMC from the firm's Conviction List, and analyst Bruce Lu cut the price target on TSMC's ADRs (American Depositary Receipts) from 126 U.S. dollars to 89 U.S. Dollars. The move was reported to reflect TSMC's weakened profit outlook and rising uncertainties in demand.
"The company won't be in full production in the fourth quarter, as compared to the same period over the past three years," said Wei Zhejia, president of TSMC, on the day TSMC announced its financial earnings for the third quarter of 2022. Wei also predicted that the semiconductor industry will enter a downturn in 2023.
With gloomy expectations in 2023, TSMC is under even more pressure. Clients from North America make up over 70 percent of TSMC's revenue, while only eight percent of the revenue comes from China's mainland. Therefore, TSMC doesn't really have a big say when negotiating with the U.S. government and the U.S. customers. As a commentary by AloTRay (a tech company based in Beijing) pointed out, TSMC can't push back even during a strong stage, which means leaving Taiwan for the US will be inevitable when the company enters a downturn.
How did the transfer turn out so far?
In a recent cover story titled "First-hand from TSMC's chartered flight, A disclosure of U.S. semiconductor war 直击台积电300人包机，揭开美国淘晶战争," Taiwan's Business Weekly reported that TSMC sent 300 employees and their families to Phoenix, Arizona. They were just the first batch of engineers, and another six chartered planes will send more than 1,000 engineers from Taiwan to Arizona in the future, according to Business Weekly.
"People are circulating a screenshot on PTT(the largest online bulletin board system in Taiwan)," said Buyidao (a WeChat account affiliated with the Global Times), adding that the first batch of TSMC engineers to the U.S. found out that they were reduced to "second-class citizens" once they started working in the US.
Screenshot of a post on PTT. PTT is also seen as Taiwan's equivalent of Reddit (Translated by GRR)
Compared with their U.S. counterparts, engineers from Taiwan have fewer vacation days, more workload, and fewer salaries, as shown in the screenshot.
Before the Arizona plant started operation, a bunch of U.S. engineers were sent to TSMC's plant in Taiwan for a year of training. When they returned to the US, many Taiwanese employees also expressed their dissatisfaction on the website, according to Buyidao.
Some complained on PTT that the U.S. engineers earned more, even with less workload and less education background. When the U.S. employees ran into tech problems, all they knew was to turn to Taiwanese colleagues. Some local employees thus called their U.S. counterparts "grown-up babies." There were also posts saying that though TSMC banned smoking indoors, American engineers did it anyway, so "the area from the dormitory to the food storage room was full of smoke."
How did different sides view the transfer?
When former U.S. House of Representative Speaker Nancy Pelosi visited Taiwan in August, Morris Chang told her in stark terms that Washington's efforts to rebuild chip manufacturing at home were doomed to fail, said Financial Times in an article published in late October.
Frank Huang, chairman of Powerchip Semiconductor Manufacturing Corporation (PSMC) and former chairman of Taiwan Semiconductor Industry Association, didn't believe the US would be able to reconstruct the semiconductor supply chain either, according to Business Today.
In his interview with the magazine, Huang said that Taiwan would remain a pioneer in the industry, as the labor cost is much lower than that of the US. He noted that Taiwan has a large number of engineers dedicated to hardware, adding, "this is Taiwan's advantage that makes it irreplaceable because the semiconductor industry is more than burning cash and buying equipment."
Taiwanese officials and analysts have claimed several times that although TSMC are building fabs in the US, Taiwan still has an edge in semiconductor technology. Wang Mei-hua 王美花 , a senior officer in charge of economic affairs in Taiwan, said that TSMC's plant with 5-nanometer process won't start mass production until 2024. However, TSMC has done a pilot of 3-nanometer chips mass production at the Southern Taiwan Science Park, and a plant with 2-nanometer process technology is under construction in north Taiwan's Hsinchu, and relevant departments have gotten the land ready for TSMC to build a plant with 1-nanometer process technology.
"We will keep TSMC's most advanced technology on the island," Wang said.
Joanne Chiao 乔安, senior semiconductor analyst with TrendForce Corp estimated that Taiwan will account for approximately 48 percent of global wafer production capacity and 58 percent of the world's capacity for advanced process chips in 2022, which means Taiwan still remains a global leader in advanced semiconductor manufacturing processes.
But some media questioned the arguments above.
"The US is to swallow TSMC like a crocodile, but the Democratic Progressive Party (DPP) is too weak to fight back, so it treats TSMC as a bargaining chip," commented China Times, one of the largest newspapers published in Taiwan. According to other Taiwanese media, the U.S. sells Taiwan out-of-date arms, but the DPP offers the US the most advanced 3-nanometer process technology in return, which blatantly betrays Taiwan to fawn over the US.
Hong Kong China News Agency pointed out on Nov. 22, TSMC will be "Americanized", and no one knows for sure that the US won't decouple Taiwan from TSMC one day.
"In the face of the 'chip war' launched by the US, China's mainland is striving to achieve high-level self-reliance in science and technology, which would provide wide space for the development of the semiconductor industry," said the official WeChat account of Reference News, a Chinese newspaper run by Xinhua News Agency. The article also pointed out that TSMC and the semiconductor industry in the China's mainland could have complemented each other well. But now TSMC turns a blind eye to such an enormous market close at hand, and chases something far away instead. "The move would hurt the company and definitely not a wise call," Reference News commented.
"The U.S. is eating up TSMC step by step," according to Buyidao. Urging TSMC to move some of the semiconductor manufacturing onshore is a step the US took to decouple the semiconductor supply chain with Taiwan. The article said that the US clearly places its own geopolitical interests before Taiwan.
Where does the road lead?
How would an increasingly "Americanized" TSMC and the U.S. strategies aimed at bringing in semiconductor talents affect the chip industry of China's mainland?
Caught up between China and the US, there is little strategic room for TSMC, an expert told Buyidao.
TSMC understands clearly the close connection between China's mainland and the global semiconductor industry and supply chains. In the semiconductor industry, no company could ignore China's mainland due to its unique position.
Buyidao noted that as the US keeps raising questions of national security in the chip sector, more companies will face TSMC's dilemma, and then it will inevitably weigh on the chip industry in China's mainland. But no matter how the external environment changes, the mainland should focus on ensuring and further optimizing existing technology and investment plans. This is the key to overcoming challenges and securing sustainable growth.
As the US steps up the ban on semiconductor exports to China's mainland, adding the unique geography of Taiwan Island, there might be a lot more storms for TSMC to sail through. Enditem
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