TSMC's fab plan is a political play aimed at governments in the United States, a tactic that could haunt the company...
The announcement by Taiwan Semiconductor Manufacturing Co. (TSMC) last week to build a fab in the United States was very likely motivated by a number of political factors, according to people with knowledge of the matter. It’s a move that could haunt TSMC and its future.
On May 15, the company announced it will build a 5nm fab in the U.S. state of Arizona with support from that state and the U.S. federal government. Hours after the TSMC news broke, the U.S. Department of Commerce announced new restrictions on TSMC’s second-largest customer, HiSilicon of China. People say the two events were related to the issue of U.S. export control.
“From past discussions over a year ago, those were elements that were being discussed in Washington,” Dick Thurston, TSMC’s former general counsel, said in an interview with EE Times.
Thurston, who is now with the U.S. law firm Duane Morris, says he has been working with TSMC for more than a decade to help the company set up a fab in the United States.
Thurston said TSMC has not consulted him on the decision to build the Arizona fab. He says the last “meaningful” conversation he had with the chipmaker was with TSMC Chairman Mark Liu around June 2019.
“They have hired export control and antitrust lawyers, and hopefully they are smart enough to get some quid pro quo from the U.S. government for relaxation on some of these issues,” Thurston said. “That’s what should be of real value to TSMC and its shareholders. That’s what I was advocating to Mark. Not just tax incentives.”
The U.S. could ease up on the next export control and EAR (export administration regulations), according to Thurston.
“The Commerce Department and the BIS (Bureau of Industry and Security) have made it really clear that they are willing to do some relaxation,” Thurston said. “It’s that sort of geopolitical thing that I’d be looking for. TSMC would have to make some sort of long-term commitment.”
That was the advice Thurston says he gave TSMC Chairman Mark Liu about a year ago.
In March of 2018, Ian Steff (Director General of the U.S. and Foreign Commercial Service) went to Taiwan for his first time, Thurston says.
The unit Steff works for is part of the Commerce Department. The U.S. Department of Commerce is effectively the same Cabinet level organization in the White House that facilitated TSMC’s investment in the U.S. and restricted its sales to China.
The visit was related to a program that Thurston joined to put together a program for companies that wanted to invest in the United States. Former TSMC Chairman Morris Chang was a participant, according to Thurston.
“Ian had a very successful meeting with Morris,” Thurston says. “Since then, Ian has had about three visits to Taiwan to talk with TSMC and others about investing in the U.S. That’s been a principal goal of the Trump administration since the beginning.”
Caught in the Crossfire
As the trade war between the U.S. and China morphs into a technology war, TSMC, which has been able to sell chips without restriction to HiSilicon, is caught in the crossfire. TSMC, with the world’s most advanced chip manufacturing technology, makes products for companies ranging from Apple to Xilinx.
TSMC to Build and Operate 5nm Fab in US
Besides Thurston, other people see the TSMC fab deal as a chance to get preferential treatment from the United States allowing continued sales of chips to HiSilicon, the semiconductor design arm of Huawei.
Last week, the U.S. Department of Commerce announced “plans to protect U.S. national security by restricting Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad.”
TSMC is expected to find a way to work around the Commerce Department restrictions.
TSMC should gain a license to sell its products to HiSilicon within a short period, veteran TSMC analyst Andrew Lu told EE Times. “If they can do that, the deal to set up the U.S. fab is worth it.”
TSMC denied that politics played a part in the U.S. fab project.
“This is really a business decision for TSMC, it’s not political. The reason we chose Arizona was supply-chain readiness,” Nina Kao, TSMC’s assistant spokesperson, told EE Times. “It provided us more investment options.”
Others said the choice of Arizona was probably favored by the administration of U.S. President Donald Trump, who wants to support a state run by a governor in the Republican Party.
“Arizona is one of the few remaining ‘golden boys’ in the Republican network,” Thurston said. The Arizona decision was “not necessarily in the best interests of TSMC.”
Thurston said he had been working with Morris Chang since 2005 to find a U.S. manufacturing site. “We were looking at acquiring IBM Microelectronics five different times, including 2012,” Thurston said. Under consideration was the fab in East Fishkill, New York, and other IBM operations in Poughkeepsie as well. Thurston says he worked with Chang on approximately seven potential investment projects in the United States.
One of the things at issue was IBM’s production for DARPA (Defense Advanced Research Projects Agency), according to Thurston.
“IBM and DARPA wanted to make sure that none of that technology went to Asia without their approval,” Thurston said. “There was this perception in Washington that Taiwan is China.”
New York would have been the best location for TSMC, according to Thurston.
“That’s what I’ve advocated,” he said. “You could make the case for Oregon, or Camas, where they (TSMC) have a fab in Washington state. Every other state is comparable, if not better, than Arizona.” Thurston says “political factors” must have been behind the Arizona decision.
The Trump administration has been very astute, says Thurston.
“That’s what the Democrats have not been able to comprehend,” he says. “They’ve overlooked what the bureaucracy is doing. Commerce has done an amazing job.”
After years of failed attempts, the U.S. government has succeeded in winning new investments from overseas semiconductor companies, he explains.
As President Trump campaigns for the U.S. presidency this year, fulfilling his pledge to bring more overseas jobs to the United States would help his chances of re-election. The semiconductor industry has shifted from the United States, where it started, to Asian nations like South Korea, Japan and Taiwan. The effort to slow China’s advance in 5G equipment production is also one of Trump’s initiatives aimed at protecting U.S. industry and manufacturing jobs.
TSMC’s decision may have been related to incentives the U.S. Federal government has granted, but from what Thurston has heard, those incentives may be nothing in financial terms. “It could be ‘you could quid pro quo with us’ not to go hard after Huawei,” he said.
Thurston recalls advising Taiwan’s electronics manufacturer Foxconn a few years ago on its plans to set up an LCD plant in the U.S.
“Trump basically told them ‘don’t come to New York’ or to a couple of strong Democratic states,” Thurston said. “At the time, he (Trump) recommended going to Republican states that were swing states, for votes. Wisconsin, Texas and Ohio were on that list. That’s what he told (Foxconn founder) Terry Gou when he visited the White House.”
The Foxconn project in southeastern Wisconsin was originally planned as a $10 billion flat screen TV and LCD panel manufacturing plant that would employ 13,000 people. The state of Wisconsin made an agreement with Foxconn under which the company would receive subsidies ranging from $3 billion to $4.8 billion if Foxconn met certain targets, which would have been by far the largest subsidies ever given to a foreign firm in U.S. history. The factory was supposed to start production by the end of 2020 but as of December 2019, construction had yet to begin.
The only thing Foxconn has made in Wisconsin is headlines, according to Susquehanna analyst Mehdi Hosseini.
For its part, TSMC said there is and will not be any quid pro quo with the U.S. government.
“Arizona is associated with the semiconductor industry,” TSMC’s Kao says. “They did offer more investment options,” she adds, without providing details.
TSMC is evaluating several sites in Arizona for the fab, according to Kao.
There are the export issues that TSMC faces, and “Trump has control over that,” Thurston says. “You have a range of different factors that are considerations. I hope TSMC does not get trapped between China, Taiwan, Samsung and Apple. All those factors are geopolitical issues more than anything else.”
In China, HiSilicon up to now has accounted for about 14 percent of TSMC’s sales. That chunk of business is at risk following the U.S. Commerce Department announcement.
“If TSMC only gets the consumer side of HiSilicon’s business, that will account for ten percent of TSMC’s revenue,” Andrew Lu says. In that case, TSMC’s U.S. fab project is “worth it,” according to Lu.
Getting a license from the Commerce Department for every product TSMC produces for HiSilicon will not be easy, Lu says. Consumer and handset chips may be easier, but other products will not. Some of that revenue will not be replaceable, he says.
The U.S. government will block anything related to national security, according to Lu.
“It’s very difficult to define national security,” he says. “From the U.S. point of view, 5G is national security. Servers, data centers and AI are national security. Only consumer handsets will be allowed.”
Even after TSMC ramps up its fab in the United States, it will not make money, according to Lu. “This investment was made to minimize TSMC’s losses,” he says. If TSMC’s revenue from Huawei drops to 7 percent of TSMC’s overall sales, the U.S. fab plan will not be worth it, according to Lu. The scale of the U.S. project, at 20,000 silicon wafers per month, is far too small to match the profitability of TSMC’S much larger “gigafabs” in Taiwan, he says.
In response to recent press reports saying TSMC will be forced to stop selling chips to HiSilicon, TSMC declined to comment.
“TSMC does not disclose customer order details,” Kao said. “But we always comply with the laws and applicable regulations.”
On whether TSMC expects any impact from the new Commerce Department regulations on sales to HiSilicon or other Chinese companies, Kao said TSMC is assessing the situation.
“A lot of people are involved. We are working with outside counsel just to make sure that we do get a complete understanding of all the regulations,” Kao told EE Times.
Others had doubts about the size and location of the Arizona project.
“We believe a ‘consortium’ arrangement in a more adequate location and with a minimum of 45,000 wafers per month capacity is the only economically feasible/realistic option to accommodate U.S.-based customers’ demand through 2028,” Susquehanna analyst Mehdi Hosseni said in a report provided to EE Times. “But, when it comes to geopolitics, we argue TSMC is in the sweet spot as both China and the U.S. need TSMC with no other alternative for leading-edge semiconductor manufacturing,” the report said.
Outside Taiwan, TSMC also has a 12-inch fab in Nanjing, China and an 8-inch fab in Shanghai. In compliance with Taiwan regulations, TSMC keeps production technology at the Chinese fabs at least one generation behind its state-of-the-art manufacturing technology, which is currently at the 5nm node in Taiwan.
Huawei, which was specifically targeted in the Commerce Department restrictions last week, has become a huge company with widespread influence in the electronics industry even after its entity list placement, Credit Suisse Vice President Randy Abrams said in a May 18 report provided to EE Times.
The company had $124 billion in sales in 2019, soaring 14 percent from 2018, the report said. Huawei has a 29 percent share in global telecommunications infrastructure, a 40 percent routing share and an 18 percent chunk of the smartphone market, according to the report. The company is also the world’s third-largest semiconductor buyer with $21 billion in purchases, the report said.
Huawei has its own chip design software but mainly relies on U.S. EDA tools. TSMC and rival Chinese foundry Semiconductor Manufacturing International Corp. (SMIC) will require licenses from the Commerce Department owing to their use of U.S. tools and manufacturing equipment for critical etch, implant, deposition and process control, according to the report.
Huawei’s chip foundries are TSMC and Shanghai-based SMIC, which in SMIC’s case counted on Huawei for 19 percent of its 2010 sales, the report said.
“We expect both to halt their production for Huawei unless a resolution, settlement or loophole is found after a 120-day grace period that allows the foundries to finish the three-to-four month cycle time of in-process wafers as of 15 May,” according to the report.
China-U.S. Split Widens
Analysts say the latest action taken by the Trump administration against China will widen an already large gap splitting the U.S. and Chinese electronics industries.
Nevertheless, the U.S. holds the upper hand if China follows up with sanctions against U.S. companies, they added.
After the U.S. Commerce Department announcement, China’s foreign ministry said the U.S. needed to stop the “unreasonable suppression” of Chinese companies like Huawei, and a Chinese newspaper said the government was ready to retaliate against Washington, Reuters reported.
China’s Global Times newspaper quoted a source close to the Chinese government as saying that Beijing was ready to take a series of countermeasures such as putting U.S. companies on an “unreliable entity list” and imposing restrictions on Apple, Cisco Systems and Qualcomm.
The newspaper, published by the People’s Daily, the official newspaper of China’s ruling Communist Party, said the source also mentioned halting the purchase of Boeing airplanes.
“If China retaliates, the U.S. will apply even tougher rules against Chinese semiconductor companies,” Lu says. “Right now, the U.S. is only focusing on Huawei. If they use the same rules for all of these Entity List companies, that will be even worse.”
The U.S. has the advantage over China because of US technology, he says. The U.S. has a dominant position in manufacturing equipment, EDA tools and operating systems, Lu says.
China’s policy to establish an independent domestic electronic industry is not likely to succeed because it is still decades from being complete, according to analysts contacted by EE Times.
“From China’s point of view, they want to do everything — the entire semiconductor supply chain including foundry, testing, packaging, design, equipment and materials,” Lu says. In chip design, China has made progress with an approximate 15 percent share of the global market. HiSilicon accounts for most of that 15 percent. China’s overall market share in chip design jumped from a 13 percent share in 2018, according to IC Insights.
A U.S. fab equipment workaround for Chinese foundries would be too difficult because U.S. suppliers have about 40 percent of the global market.
“An advanced foundry would not be competitive without the use of leading U.S. suppliers across important process steps,” Randy Abrams with Credit Suisse said. “Even an attempt to build a non-U.S. equipment line for Huawei would require years to ramp the process and reach competitive yields but at the sacrifice of efficiency and best in class tools.”