Taiwan Semiconductor Manufacturing Company (TSMC), the latest front in the U.S.-China trade war, has hitched a large part of its future growth to the U.S. market.

TSMC, one of the world’s biggest chipmakers, announced on May 14 its plan to set up a US$12 billion factory in Arizona, United States. A few days later, TSMC reportedly halted new orders from Huawei.

With the move, TSMC will break with its practice of retaining its cutting-edge manufacturing capacity in Taiwan.

TSMC is one of the most important companies in the global tech production chain. It has been able to profit by manufacturing complex computer chips, an expensive process, for companies that do not have their own fabrication facilities. TSMC is the largest company in Taiwan and is seen as a bellwether of Taiwan’s stock market.

The manufacturer has mostly retained its core technology in Taiwan. Its operations in China are limited to using more dated engineering processes. Unlike its existing overseas ventures, TSMC intends to bring the more advanced 5-nm process, used for Apple’s new A14 chip, to its Arizona factory.


Photo Credit: AP / TPG Images

Apple is a major purchaser of TSMC chips.

Wedged between China and the U.S.

TSMC has come under pressure by the U.S. because it has been supplying integrated chips to Huawei before the U.S.-China trade conflict. The U.S. government sees Huawei as a threat, alleging that Huawei has broken U.S. sanctions, and has pressured the European Union to impose a “Huawei Ban.”

In 2019, the U.S. added Huawei to its Entity List, which bans the exports of American products to the company and its entities. It prohibited Huawei from acquiring parts made by U.S. companies, selling its phone in the U.S., and participating in the race to build 5G infrastructure.

TSMC initially resisted pressure to discontinue business with Huawei. The chipmaker had continued its sales to Huawei on the basis that its chips did not contain enough American intellectual property to fall under the remit of American regulations.

But TSMC appears to have cut Huawei off to preserve business with U.S. companies. Huawei, the second largest client for TSMC only behind Apple, accounts for 15-20 percent of TSMC’s annual revenue.


Photo Credit: Reuters / TPG Images

Business marching to the tune of politics

The announcement is a sign that the U.S.-China trade conflicts are beginning to substantively affect Taiwan. As the Tsai government has cooperated closely with the U.S., private companies like TSMC have had to maneuver as the political situation it operates in shifts.

Taipei and Washington have increased collaboration on diplomacy and security issues since 2016. Last year, the U.S. sold weapons to Taiwan like the F-16 fighters and M1 Abrams tanks in a high profile manner.

The U.S. also voiced support of Taiwan’s democracy, while Taiwan has taken a firm yet non-provocative stance towards China’s acts of economic coercion.

Despite warming relations with the U.S., business with China remains critical to Taiwan’s economy. China is still Taiwan’s largest trading partner, and companies like TSMC profited from the tension between China and the U.S. by playing off both sides. Analysts say that TSMC building a plant in Arizona is “the minimal price to stay neutral.”

In the U.S., Republicans have generally been supportive of the announcement, while Senate Democrats have sought more details on how the deal was inked. The Trump administration is trying to take credit for TSMC’s announcement, claiming Trump’s agenda has led to “a renaissance in American manufacturing.” Democratic senators are demanding more transparency and asked that no progress be made until “relevant authorization and appropriations committees” are briefed with the proposal.

With TSMC’s plan cautiously worded as an “intention,” uncertainty in Washington can lead to its delay or scrapping.


Photo Credit: CNA

The F-35B Fighter Jet

Opportunities and Challenges

TSMC has traditionally proceeded with caution in expanding its operations abroad. However, amid intensifying trade conflicts, TSMC as a crucial component in the global semiconductor production chain must pick a side.

U.S. policy to block off Huawei’s suppliers will likely have some success. Even though Chinese firms are quickly developing their own production capability and technology level with companies like the Semiconductor Manufacturing International Corporation (SMIC), they are still far less competitive than Taiwan’s TSMC, despite receiving more state subsidies.

For TSMC, a base in the U.S. may be a beachhead for selling to the American defense industry. Currently, TSMC produces computer chips for use in F-35 fighter jets, the company’s new plant would be well-positioned to supply more components for U.S. military use. Phoenix, Arizona is home to many U.S. defense firms, like Raytheon, Honeywell, and others. Since the U.S. has many export restrictions on arms-related products with regulations like International Traffic in Arms Regulations (ITAR), parts not produced in the U.S are subjected to extra scrutiny when used for military purposes.

A U.S. base makes it easier for Taiwan to cooperate on arms production and purchases with the U.S. government. Contracts to produce parts for the U.S. military can also offset the costs of setting up a plant in the U.S., which is likely to be less profitable than the densely clustered facilities in Taiwan.

Nothing currently on the table is certain, however. In the past, a plan publicized as a blue-collar jobs initiative in Wisconsin was announced by Foxconn. But after securing billions of tax incentives for a manufacturing plant, it was quietly scrapped for a research and development center. Foxconn’s plan change was seen as a “bait and switch,” and the promise-breaking precedent set by Foxconn could undermine TSMC’s intentions to build a similarly styled plant.

Nevertheless, the announcement is likely a sign that a reshuffling of the global semiconductor production chain is underway. Taiwan is seeking to place its manufacturing industry under the protection of the United States.

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TNL Editor: Daphne K. Lee, Nicholas Haggerty (@thenewslensintl)

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