In recent months, the US government has tried to make it more difficult for China to access cutting edge chip technology from American firms, as well as from our allies. Back in March, Ben Thompson discussed one consequence of delinking from China:
This point applies to semiconductors broadly: as long as China needs U.S. technology or TSMC manufacturing, it is heavily incentivized to not take action against Taiwan; when and if China develops its own technology, whether now or many years from now, that deterrence is no longer a factor.
In October, Thompson expanded upon that warning:
China meanwhile, has had good reason to keep TSMC around, even as it built up its own trailing edge fabs: the country needs cutting edge chips, and TSMC makes them. However, if those chips are cut off, then what use is TSMC to China? . . . the more that China builds up its chip capabilities — even if that is only at trailing nodes — the more motivation there is to make TSMC a target, not only to deny the U.S. its advanced capabilities, but also the basic chips that are more integral to everyday life than we ever realized.
Bloomberg points out that the US is heavily reliant on Taiwan’s chips, and that even the new TSMC factory being built in Phoenix will not change that reality:
TSMC’s Arizona fabs will produce 600,000 wafers annually. That sounds impressive, but it’s really not. The Taiwanese company topped 14.2 million last year and is on track to churn out 15.4 million 12-inch wafers loaded with chips this year. If it keeps the same average capacity growth of 8.1% it achieved over the past five years, Arizona will account for just 2.85% of its 21 million annual global output in 2026.
That’s a drop in the bucket, not a game changer.
In my view, this exercise in industrial policy merely papers over the fundamental problem, which is a lack of talent:
TSMC founder Morris Chang has poured cold water on the US ability to compete.
“There’s a lack of manufacturing talents to begin with,” Chang told The Brookings Institution earlier this year. “We did it at the urging of the US government, and we felt that we should do it.”
If the government were serious about competing with China they’d be changing our immigration laws to attract more engineering talent, not building white elephants in the Arizona desert:
Research, development, planning and operations will all remain in Taiwan. Should Beijing decide to attack, those functions will cease at least temporarily, if not permanently. This would mean cutting TSMC Arizona off from all the crucial know-how it needs to run the minuscule capacity it has on US soil.
READER COMMENTS
MarkW
Dec 8 2022 at 9:56am
<i>the more that China builds up its chip capabilities — even if that is only at trailing nodes — the more motivation there is to make TSMC a target</i>
But surely Taiwan and TSMC realize this too. In that case it seems like TSMC should be doing it’s best to move production away from China (while Taiwan should be doing its best to prevent that move so that attacking Taiwan remains costly). And then, if the U.S. economy is heavily dependent on Taiwanese-produced chips, that suggests that the U.S. may increase its security guarantees for Taiwan (which Biden has ham-handedly been doing), thereby increasing the probability of a direct U.S. – China conflict. Bottom line — yikes!
TMC
Dec 8 2022 at 11:00am
Counterpoint – TSMC is valuable to China, making Taiwan more valuable to China. Surely when China is producing its own chips TSMC and Taiwan will be less valuable to them, and more secure from takeover.
MarkW
Dec 9 2022 at 12:22pm
Counterpoint – TSMC is valuable to China, making Taiwan more valuable to China. Surely when China is producing its own chips TSMC and Taiwan will be less valuable to them, and more secure from takeover.
TSMC is valuable to China only if A) China is getting some of TSMCs chips, or B) China thinks it could take Taiwan and TSMC would still be a going concern after the invasion. But B seems unlikely. And if TSMC is selling chips only to the West, China would be better off if TSMC were reduced to ruins (they’re not getting the chips and destroying TSMC would deny those chips to the West). And, if China did gain the capacity to produce the most advanced chips domestically and no longer needed TSMC, that would reduce the barrier to invasion. Xi ‘s government doesn’t want Taiwan for financial reasons, they want it for nationalist/symbolic reasons.
One quibble with the whole idea — TSMC is the major source of advanced chips, but it’s not the only one. Samsung is a player too (also Intel, though less so). TSMC is the biggest though. Perhaps S Korea should be vigilant about an attack on Samsung’s factories coinciding with a possible invasion of Taiwan?
TMC
Dec 9 2022 at 4:35pm
Google says ‘China accounted for 10% of TSMC’s revenues in 2021, down from 17% in 2020.’ So they do sell to China. If China were to take over Taiwan I don’t see any reason TSMC would not just continue making chips. It’s not like the people are able to go anywhere.
MarkW
Dec 10 2022 at 7:08am
It’s not like the people are able to go anywhere.
Why not? You think the high-level execs, scientists, engineers, etc of TMC wouldn’t flee Taiwan, be accepted with open arms, and be paid handsomely? Multiple western countries would be falling all over themselves to accept them and help them set up shop. Think of Werner Van Braun and other German rocket scientists after WWII. As for the TSMC facilities, even if undamaged (a big assumption), I doubt they’d be fully operational for long with the domain experts gone and the company would certainly have an extremely difficult time advancing their technology and staying on the leading edge. Also their products would likely be boycotted by everybody except China, while Western countries likely wouldn’t even allow the sale of electronics containing any ‘occupied Taiwan’ produced parts.
TMC
Dec 11 2022 at 12:07pm
I really doubt China would allow them to leave the country. Since they have to stay, they would likely continue doing the work they are good at.
Travis Allison
Dec 10 2022 at 6:44pm
Authoritarian states need to be treated differently when engaging in commerce. We treated the Soviet Union differently. So the question is whether China should be treated differently because of its authoritarian characteristics. If we value the freedom of Taiwan (and we’ve seen how China has treated Hong Kong), then I think there’s a good case to be made to do what is necessary to keep the Chinese military weak. That includes preventing China from having advanced electronics. Unfortunately, there are consequences for Chinese economic prosperity, but that is a trade-off that I am willing to make.
Warren Platts
Dec 14 2022 at 12:30pm
One would think so, but one is also hard-pressed to think of a single example of a war that was prevented because of trade dependencies. On the other hand, history is replete with examples of major wars happening despite, or even because of, trade dependencies. All that free trade during the Gilded Age did not prevent World War I. Arguably Japan’s trade dependency on U.S. oil provoked a faction of the Japanese leadership to order the bombing of Pearl Harbor. Most recently, Europe’s dependency didn’t stop Putin from ordering an invasion of the largest country in Europe, nor has the rest of Europe’s dependency on Russian energy prevented them from rallying to the defense of Ukraine.
Warren Platts
Dec 14 2022 at 12:47pm
Scott, this should be concerning. For a century, USA was the world’s leading manufacturer. But not anymore. What happened?
Comments are closed.