Taiwanese semiconductor manufacturer TSMC has just reported a 23.3% fall in second-quarter earnings, its first year-on-year drop in quarterly profit since the second quarter of 2019. And that isn’t the only piece of bad news for the company. It has also been announced that mass production of semiconductors in the factory it is building in Arizona will be pushed back to 2025 — a delay of up to a year — just days after China imposed export controls on two rare metals essential for making semiconductors, gallium and germanium.
None of those issues prevents TSMC from remaining one of the most valuable companies in the world and manufacturing the most advanced semiconductors. But they highlight the extent to which the company is being buttressed by geopolitical headwinds and the uncertainty that produces.
“It’s impossible to predict” which company will lead on advanced chips in five or ten years, Chris Miller, author of Chip Wars, said at a Nikkei Asia online forum on Thursday. Most experts “expect TSMC to retain its absolutely critical role at the center of the industry fabricating logic chips” but, Miller explained, the U.S. government is likely going to be hedging its bets when it allocates funds from its Chips Act, pushing it to all three leading chip manufacturers, TSMC, Samsung and Intel.
TSMC’s precarious position between China and the U.S. generates a significant amount of that uncertainty. The U.S. has imposed sanctions on advanced semiconductors being exported into China and sought to “reshore” some advanced semiconductor production. This includes the building of two TSMC factories in Arizona. However, at the same time, TSMC currently still operates in China, producing and selling less advanced chips there and having supply chains routed through it. It was granted a one-year license to continue ordering American chip-making equipment into China last October.
On the U.S. side of that balancing act, TSMC has maintained that the factory locations have “been based on various factors, including customer demand, market opportunity and the chance to tap global talent.” But experts such as former tech analyst and chairman of private equity firm Kirkland Capital Kirk Yang (楊應超) have suggested that “TSMC’s investment in the U.S. from a business perspective makes no sense at all,” because of the high cost of the project. Yang suggested to The New York Times that TSMC may have conducted the project due to political pressures and The Times reported that TSMC workers have privately said the project “could distract from the research and development focus that had long helped TSMC outmaneuver rivals.”
In China, on top of being banned from selling the most advanced chips, TSMC’s business could soon be squeezed in two additional ways. First, China is attempting to develop chips itself and has significant control over the rare metals used for producing them. In attempting to protect its own position, it could limit demand for TSMC chips and limit its manufacturing ability. TSMC said last week that “After evaluation, we do not expect [China’s] export restrictions on raw materials gallium and germanium will have any direct impact on TSMC’s production,” but it did not go into the long-term, or more indirect impacts.
The second way TSMC could be squeezed out in China may be just as significant if it comes to pass. Some, including Chris Miller, believe sanctions from the U.S. and countries like Japan could at some point cut off the sale of less advanced chips to China, too. “If you look at the really vast expansion of production capacity coming online in China, especially in ‘lagging edge’ chips over the next couple of years, this does seem to me to set the conditions for additional trade disputes when it comes to lagging edge chips,” Miller said. The origin of this idea is that other countries may worry China can repeat its success in manufacturing solar panels, where it has come to dominate the market by operating at a larger scale than other countries, having seen the technology originally developed elsewhere.
Of course, losing potential revenue streams is not the only source of uncertainty. Beyond finances, China’s “most dangerous” card in a battle of retaliation and counter-retaliation with the U.S. over semiconductors is ultimately using force against Taiwan, Nikkei Asia Tech Correspondent Lauly Li (李露莉) pointed out during the same online forum Miller spoke at. Though any such action would also have massive consequences for China, it would likely be devastating for TSMC production in Taiwan, too.
Amidst all of this uncertainty, TSMC is by now perpetually linked with building factories outside of Taiwan as one form of solution. Factories in the U.S. and Japan are being built. A factory in Germany is much-discussed. There have also been links with Singapore.
But there are no clear ways out of the fog of unknowns TSMC currently sits in. As well as the difficulties of moving some of the most complex manufacturing processes across continents, political considerations at home and abroad seem to turn up around every corner. Just this week, for instance, Taiwan Foreign Minister Joseph Wu (吳釗燮), confidently promised that advanced semiconductor production would remain in Taiwan, in an interview hosted by TVBS Meeting Room. “Taiwan is extending more of its semiconductor influence over the global community but the main production and the research and development at the highest end of production will remain in Taiwan. I have no doubt about it,” he said. The opposition Chinese National Party (KMT) has previously accused Taiwan’s government of “gifting” TSMC to the U.S.
No direction is safe from major political implications. And in considering just how difficult a position that might be for TSMC, it’s interesting to consider a point from Cheng Ting-fang (鄭婷方), Nikkei Asia Chief Tech Correspondent. She noted at the forum on Thursday that until 2019 — when Chinese tech giant Huawei was sanctioned by the U.S. — most semiconductor company executives were barely dealing with geopolitics at all. In other words, they’re supposed to be good at making computer chips; they’re not supposed to be master geopolitical strategists. This is uncharted territory for even those heavily involved.
Image: TSMC
Leave a Reply