I was sitting down to dinner one night with some friends who know what I do.
And one of them, a Taiwanese, said to me:
“My dad said that America is trying to steal TSMC.
What do you think about that?”
With Taiwan having recently gone through local elections and TSMC Arizona starting up soon
in 2024, people in Taiwan have been bringing up this talking point more and more.
I didn't expect to be talking about TSMC again so soon, but I have been hearing this enough
times that I felt it was necessary.
For this short video, I want to just say a few thoughts that have been tossing around
in my head.
## Shout out
But first I want to shout out a recent episode of the Startup Island Taiwan podcast.
I guest host this little podcast from time to time, interviewing various members of the
Taiwan startup community.
In this wonderful episode, I sit with Tim Koay, a Taiwan semiconductor historian, and
we talked about Taiwan's early semiconductor days.
It's wild and worth listening.
I'll have a link below.
(https://podcasts.apple.com/us/podcast/tsmc-and-taiwans-semiconductor-industry-all-started/id1648273735)
## Note
Before we get started, I do want to note that I grew up in America.
I consider myself an American.
I also have family ties to Taiwan.
I have more than a few times mentioned my family home back in Tainan.
And of course, I have lived here in Taiwan for many years.
Take all that as you will.
I hope this information does not automatically cause you to dismiss what I have to say here.
If it does, then well ... okay.
## The News
TSMC has been working on this new production facility in Arizona ever since May 2020 when
they first announced about it.
I remember that people were wondering at the time if this was going to be another Foxconn
in Wisconsin scenario.
At least people aren't bringing that up anymore.
The plan for the facility has always been to produce N5 chips, which is very advanced
- the most advanced node TSMC has ever tried to bring outside of Taiwan.
However, people back home in Taiwan took some comfort in two things.
First, the fact that the Arizona site was quite small - about 20,000 300-millimeter
wafers a month.
This is in comparison to Taiwan's 4 Giga-Fabs, which can put out over 100,000 such wafers
a month.
Second, the fact that N5 would not be the leading edge by the time the factory comes
online.
The presumption being that N3, the next full node step, would be up and running by the
time the Arizona factory goes online sometime in 2024.
## Expansion
Shortly before its big tool-in ceremony in December, TSMC made a bunch of new announcements.
First, that they will bring their N4 process over to Arizona.
This is an upgrade to the pre-existing N5 line, so that sort of makes sense.
Second, TSMC is preparing to invest another $28 billion over the next 3 years to open
a second Arizona factory.
That fab will be equipped with N3.
N3 has not yet entered high volume production, but it should be by 2026 unless something
goes horribly, Intel-ishly wrong.
According to the Financial Times, TSMC remains committed to keeping its most advanced nodes
in Taiwan.
TSMC is already planning their N2 and N1 fabs and the former should be in production by
2026.
And third, there has been a lot of talk about TSMC expanding out into other countries.
The company is already building that specialty N28 plant in the Kumamoto Prefecture in Japan.
And then there are the discussions for putting a plant in Germany.
Nothing there has been announced yet, but it has been percolating for a long time.
For a long time, TSMC leaders like Morris Chang have repeatedly said that the secret
to its operational success has been to do everything - and certainly its most advanced
things - in Taiwan.
All of these new developments are moves away from TSMC’s long running norms.
And so it’s understandable that it makes people in Taiwan nervous.
Which in turn makes it easy to capitalize on their anxieties with a catchy slogan like
“stealing”.
## The Customers
At the heart of this move is a confluence between demand and financing.
TSMC is a commercial entity working in close communication with its customers.
The foremost of those customers is Apple - which makes up some 25% of total revenue.
Apple is the singular customer bankrolling the most advanced chip rollouts.
TSMC can trace its ascent into the stratosphere to Apple's decision to defect from Samsung
and produce its chips with TSMC.
Bloomberg reports that CEO Tim Cook said:
> We’ve already made a decision to be buying out of a plant in Arizona, and this plant
in Arizona starts up in ’24, so we’ve got about two years ahead of us on that one,
maybe a little less ... And in Europe, I’m sure that we will also source from Europe
as those plans become more apparent.
If Apple says that they want to source from the US and the economics work, then TSMC will
follow.
I don't think TSMC should ever risk the chance of Apple deciding to go back to Samsung or
defecting to Intel.
Both competitors by the way are building massive new facilities in the United States.
Samsung has their $17 billion plant out in Taylor, Texas.
And Intel has their massive $20 billion chip plant out in Columbus, Ohio.
These large buildouts exist because of the $50+ billion of subsidies set aside by the
CHIPS Act of 2022.
Strategically, TSMC should take those subsidies if it means less is available to fund Intel
and Samsung's buildouts.
## Stealing the Tech
We should talk about stealing in the context of technology.
Is America trying to force a technology transfer from TSMC to an American company?
This channel has previously covered technology transfer situations.
And generally they come in the form of joint ventures, where the foreign company has to
partner with an indigenous company.
Furthermore, there need to be specific requirements on how much of the final product needs to
be indigenous, how much on-hands knowledge transfer from the foreigner to the native
company happens, and so on.
I haven't seen any of these.
TSMC is not doing a joint venture and with the one exception of that SSMC fab in Singapore,
they have always owned their fabs outright.
This was even the case when they expanded to the Chinese mainland.
There is always the risk of a high level executive pulling a Richard Chang and starting his own
company, but an Arizona fab doesn't change that risk.
## Scale
I have seen people on Twitter saying that America has stolen "all" or "a lot" of Taiwan's
manufacturing, causing "massive loss" to the Taiwanese economy.
I agree that TSMC is incredibly valuable to Taiwan.
But we need to review scale.
In order for those Twitter claims of “all” or even “a lot” to be true, we need to
see indications that TSMC is investing significantly more in the United States, Japan, or Europe
than it is in Taiwan right now.
The information we have at hand make it hard to credibly make that claim.
Let's look at it on the basis of capital expenditure.
TSMC will spend about $36 billion in capital expenditure in 2022.
Who knows what will happen in 2023 and beyond to 2026, but let's say $36 billion each year
just to be conservative.
This second Arizona fab investment adds about another $28 billion over the three years into
2026 or $9 billion a year.
That's 25-30% of that proposed annual $36 billion CapEx spend.
The majority of the company's spend will still be in Taiwan.
Let’s look at it on the basis of wafer shipments.
Last year in 2021, TSMC produced and shipped 14.2 million 300-millimeter equivalent wafers.
They will probably do something like 15-16 million wafers this year, or about 1.3 million
wafers a month.
A significant number of those are produced in Taiwan - I reckon maybe 75-85%.
When this Arizona fab starts production in 2024 - still over a year away - that factory
will produce somewhere around 20,000 300-millimeter equivalent wafers a month.
That is less than 1/50th of current annual production.
Even after the planned expansion to 50,000 wafers a month in 2026, it will still not
be enough.
We need another 5 or even 10 times what has already been invested.
There’s not enough subsidies to make it happen.
## Taiwan Rollouts
TSMC is doing a fab facility in Arizona.
It is getting a lot of press, yes.
But we cannot forget that TSMC is juggling at least five other such buildouts in Taiwan.
I have mentioned new phases to existing Taiwanese fabs.
I showed the Tainan expansions in my video visit there a few months back.
When I was there, I saw at least four new buildouts there.
I will try to swing by next time and get a better look at them.
TSMC is also working on new N2 plants in Baoshan and perhaps maybe in Taichung, which I have
already mentioned before.
Taiwanese media is also making a lot of noise about future plans for an N1 plant in the
Longtan district of southern Taoyuan City in between Hsinchu and New Taipei City.
N1, yes.
And there is also that Kaohsiung fab.
It used to be a N28 and N7 fab.
But with recent low utilization in N7 capacity due to weakness in the cellphone market, the
company has rolled back the N7 part.
But they are still moving ahead on the N28 build, with construction officially beginning
in November 2022.
I cannot say that I have seen it with my own eyes, but I guess I can head over there later
to check just for sure.
At first glance, the notion that America is stealing TSMC from Taiwan is a bit ridiculous
and I shouldn't bother doing a whole video about it.
But as the American Mark Twain said, "a lie can travel halfway around the world before
the truth puts on its shoes".
People should think through what they’re saying.
Taiwan is still TSMC's greatest asset.
Ben Thompson recently said this in a podcast appearance and I agree.
TSMC has no other choice but to go all in on Taiwan.
Trying to compete on Intel’s home turf is a recipe for eventual failure.
## The Bad Assumption
There is one final thing that I want to add.
The problematic assumption when it comes to this Arizona fab - and the others like it
- is that it "takes TSMC off the board".
That America is now self-sufficient in silicon.
People again aren’t thinking through what they’re saying.
I would like to bring up three major issues.
First, the majority of the world's most industrially important semiconductors - the ones going
into your fridges, airplanes, and cars - are not the leading edge N4 and N3 chips that
the Arizona fab will make.
Those are 130 nanometer, 65 nanometer, and N28 chips.
These chips are high in volume but low in price - the majority of TSMC's volume but
a minority of its revenue.
I talked about this issue earlier in another video.
Second, what about Taiwan’s other semiconductor foundries?
UMC, the number three largest foundry.
PowerChip, the seventh.
And Vanguard, the eighth.
These are not TSMC duplicates.
They have specialty processes that few others have.
And Taiwan’s leading positions in the rest of the chip supply chain like wafers, packaging,
assembly and testing?
America's position in global packaging, assembly, and test capacity is even worse than its fabrication
market share - 3% as opposed to 10%.
America might have a chance in advanced packaging, which is more expensive and so mostly for
high performance computing.
But there is no Arizona fab or national government funding for conventional packaging.
They’re not even trying.
Taiwan has three of the world's five largest outsourced semiconductor packaging, assembly
and testing companies including the largest by far - ASE Group.
The other two are SPIL and Powertech Technology.
I came across massive fabs in Kaohsiung just doing conventional packaging.
I want to do a video about these companies later on.
Someday when I have the time and energy.
They are very underrated.
These are the things that will cripple a global supply chain.
And it will be expensive - maybe even economically impossible - to duplicate all of it.
And third, the managers running the fabs are in Taiwan.
Not just C-suite personnel.
Thousands of difficult-to-replace people doing R&D, operations, and supply chain management.
Can the hands still move if the brain is cut off?
Billions of dollars and some 50 years of industrial development helped make Taiwan a leader - not
just in semiconductor manufacturing but also in other things like electronics assembly
and specialty plastics.
You don't replace that in a year or two.
A new fab in Arizona doesn't change that.
The China-Taiwan scenario is a systemic risk beyond a few companies in the sector.
Your portfolio isn't protected just because you bought Intel stock rather than TSMC stock.
For the foreseeable future, it - and its wider repercussions - cannot be hedged against.
So yeah I don’t know what can be done.
All I have is my own personal opinion - broadly reflected amongst the larger Taiwanese population.
The status quo has done a whole lot for everyone.
I hope the status quo continues on.