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TSMC Fab in US Part of Second Wave of the Trade War: Industry Insiders

TSMC Fab in US Part of Second Wave of the Trade War: Industry Insiders

Source:Chien-Ying Chiu

In a stunning departure from its customary cautious approach, Taiwan Semiconductor (TSMC) hurriedly issued an announcement confirming its intention to establish a wafer manufacturing facility in the United States. The U.S. Commerce Department quickly followed the announcement with a new rule aimed at hurting Huawei. Does this series of moves herald a coming second wave in the U.S.-China trade war?

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TSMC Fab in US Part of Second Wave of the Trade War: Industry Insiders

By Liang-rong Chen
From CommonWealth Magazine (vol. 698 )

“It came out of the blue,” admits one U.S.-based foreign investment analyst. Within hours of reports by Bloomberg and the Wall Street Journal that Taiwan Semiconductor (TSMC) will build a semiconductor fab in Arizona, TSMC publicly acknowledged the claims on May 15.

Rumored for a full year, and carrying broad implications across politics and industry, word of the investment plan spread with lightning speed, shocking the analyst with extensive connections to executives inside TSMC.

TSMC stated that construction of the Arizona fab would begin in 2021, with production of 20,000 5-nanometer chips per month slated for 2024. Total spending on the project is estimated to reach US$12 billion.

Although (TSMC chairman) Mark Liu acknowledged at a TSMC investor conference a month ago that the company was “currently evaluating plans for another U.S. fab,” he also stressed that “there is a cost gap that is hard to accept at this point.” Clearly, the company was still in the phase of looking around and negotiating with the US government. “It won’t be that fast,” the analyst thought at the time.

He suspects that TSMC’s decision was made in haste, or even that it was “pressured into it.”

One item of proof is that TSMC’s press release was worded very cautiously, indicating the company’s “intention” to establish an advanced semiconductor fab in the United States. “That it didn’t even use the word ‘plan’ is quite odd,” the analyst asserts.

Many industry insiders believe that TSMC’s sudden announcement of its intention to build a new U.S. fab was connected to a subsequent major U.S. government announcement.

US to Take Action to Thwart Huawei

Within several hours of TSMC’s announcement of its intention to build a new fab in the United States, the U.S. Department of Commerce announced a new rule demanding the use of U.S. technology, and requiring U.S. government approval for the sale of all semiconductor products to Huawei. These conditions are stricter than previous restrictions that apply to products “containing at least 15 percent U.S. technology.”

“This is the start of the second wave of the U.S.-China trade war,” commented a senior vice president of one U.S. semiconductor maker.

Chips manufactured by TSMC for sale to Huawei are clearly first on the chopping block. And whether or not shipments can go through will be up to the U.S. government. This is why ADR issued by TSMC in the United States took a 4.2 percent dive on May 15.

Solution to Picking Sides Between the US and China

Taking notice of TSMC’s planned monthly output of 20,000 12-inch wafers, several semiconductor industry insiders immediately thought of the company’s Nanjing fab.

TSMC announced plans to build a facility in Nanjing in 2016, using the 16nm process, TSMC’s most advanced mass production mode at the time. However, by the time the Nanjing fab reached production two years down the road, TSMC’s latest production process had already advanced to 10nm, putting the Nanjing facility one generation behind.

The situation is similar with the Arizona facility, for which plans are to manufacture 5nm process wafers only recently brought to mass production by TSMC. By the time it reaches full production four years from now, that technology will also be one or two generations behind. “Five nanometers will no longer be cutting edge, because full production of 3nm processes will take place in 2022, followed by 2nm in either 2024 or 2025,” analysts wrote in a Sanford C. Bernstein & Co. report.

Therefore it appears that TSMC has struck a delicate balance at a sensitive time when both China and the U.S. are asking companies to choose sides by setting up facilities in each country of comparable scale and similar levels of technology.

As for production capacity, Sanford C. Bernstein & Co. projects a monthly volume of 20,000 wafers, which only amounts to less than two percent of TSMC’s production capacity four years down the line. Given Apple’s current demand of 60,000 to 100,000 advanced process wafers per month, the U.S. fab will fall considerably short of meeting Apple’s needs. In light of this, it can be anticipated that the Arizona facility will be producing the most sensitive military-use chips requiring U.S.-based production, such as processors for use in fighter jets.

With this in mind, Sanford C. Bernstein & Co. analysts wrote in a May 15 report to clients that TSMC’s plan to build a semiconductor fab in the United States “is probably the minimal price to stay neutral.”

So, why did TSMC choose Arizona?

New Fab in Foe’s Backyard

“It’s easier to recruit people away,” one analyst stated frankly.

Arizona is the site of Intel’s most advanced production capacity. The latest Fab 42 facility located on the outskirts of Phoenix in Chandler, AZ, is set to produce 7nm process wafers.

It is also a symbol of the return to U.S.-based manufacturing. U.S. President Donald Trump visited Arizona in 2017 to preside over a ground-breaking ceremony, at which time Intel announced plans to invest US$7 billion to build the world’s most advanced semiconductor plant.

According to media reports, Intel is the largest employer in the Phoenix area, with 11,000 employees over three plants. The most advanced fab, Fab 42, was Intel’s first facility to incorporate EUV (Extreme Ultraviolet Lithography) into the production process.

One executive at a foreign semiconductor firm relates that not long ago there were whispers that Intel was considering selling its entire old 12nm mode Arizona plant - including the employees - to TSMC, which would have saved TSMC the trouble of having to build a facility from scratch. And although Mark Liu has admitted to thinking about acquiring other companies’ older fabs, his company has clearly given up on that option.

One analyst said that when an older facility is purchased, it is common practice for the seller to request that both facilities and staff be transferred over in the deal. However, TSMC has consistently refused to take on senior staff from other companies. In the past, both industry people and TSMC executives have explained that manpower has been the chief factor underlying TSMC’s hesitancy to build manufacturing facilities in the United States. Reportedly, TSMC has complained that American workers do not work overtime, lack discipline, and are too expensive.

Dr. Shang-yi Chiang, former chief operating officer at TSMC who commanded the helm of TSMC’s R&D efforts for many years, once shared an illustrative story with CommonWealth.

Years ago, an executive at a U.S. semiconductor manufacturer curiously asked Chiang, why are TSMC’s R&D efforts so efficient? Chiang replied, “The wafers I develop in Taiwan are three times faster than yours. Even if you’re twice as smart as I am, I will still beat you.”

Why?

Explaining, Dr. Chiang related that the university graduates in Taiwan were obligated to serve mandatory military service, where they experienced how it felt to stand sentry duty in the middle of the night. So when the engineers entered TSMC having completed their military service, “When I asked them to work overtime, they took it totally in stride, never complaining.” Turning to the U.S. executive, Chiang said, “Go ask your R&D engineers to work overtime at night and see what happens.”

But times have changed, and the advantages TSMC enjoyed yesterday could become disadvantages tomorrow.

Shifting Roles Require Global Recruitment

Most new-generation TSMC engineers completed the much-shorter alternate service, meaning that they were never required to stand guard. Their expectations towards work are also different from those who came before them.

TSMC’s status in the industry has also shifted from that of a follower to taking on a leading role in guiding the global semiconductor industry. Company breakthroughs in new materials and transistor structures have kept Moore’s Law moving forward. 

In a recent interview, Dr. Cliff Hou, senior vice president of technology development and corporate research at TSMC, offered a rare glimpse into TSMC’s future ambitions for expanding its R&D team. His statements captured the industry’s attention.

Dr. Hou related that TSMC currently recruits over 100 top-notch Ph.D.s every year, which is anticipated to rise steeply, to 250 to 300 holders of Doctorate degrees, a decade from now.

However, unless Taiwan’s government and institutions of higher learning step up their training of qualified talent, TSMC estimates that by 2030, Taiwan will only produce 300 Ph.D.s in semiconductor-related fields per year.

This is not the first time that TSMC has openly discussed Taiwan’s shortage of high-tech personnel. However, compared to a month ago, Mark Liu’s remarks at the investor meeting conveyed certain undertones.

Upon repeated questioning by several analysts concerning the company’s plans to establish a fab in the United States, Mark Liu responded, “Over the long term, rather than risk management, it would be more accurate to say it’s about utilizing global talent.”

“That was the first time I’d heard him say that,” said one former TSMC executive, who believes that TSMC could certainly establish an R&D base in the United States. “Because a large portion of the semiconductor personnel in the U.S. wouldn’t want to work in Taiwan.”

Seen from this perspective, setting up a wafer fab in Arizona puts TSMC in a nimble position.

From a passive standpoint, it can ease political pressure from the United States.

On a proactive level, TSMC can make the Arizona fab a starting point for establishing a U.S. R&D and manufacturing base, from which to expand efforts to recruit U.S.-based talent.

“Arizona is just a starting point,” offers the senior vice president of an American semiconductor company.

Have you read?
♦ Amidst Market Pessimism, Why Are Global Investors Bullish on TSMC?
♦ Can TSMC Continue to Supply Huawei?
♦ Taiwan’s Dominant Corporate Force: TSMC’s Five Keys to Success

Translated by David Toman
Edited by TC Lin
Uploaded by Judy Lu

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