How Biden’s CHIPS Act Hurts TSMC?

The US CHIPS Act, known for its overt strategic goal of choking off Chinese mainland’s high-tech industry, appears to be poorly designed as to avoid collateral damage on its allies, such as TSMC, one of the most advanced Taiwanese Chipmaker.
March 1, 2024
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Chintay Shih
Former president of the Taiwan island’s Industrial Technology Research Institute

The US CHIPS Act, known for its overt strategic goal of choking off Chinese mainland’s high-tech industry, appears to be poorly designed as to avoid collateral damage on its allies, such as TSMC. The undeniable cost inflicted on the world’s leading semiconductor manufacturer based in Taiwan island, is inviting suspicions from within the island on the underlying intentions of the CHIPS Act. In the following article, industry stakeholders from Taiwan are raising reasonable question on whether the Act is, in effect, an attempt by the US to dampen TSMC’s competitive edge. Please note that this article is an excerpt and edited version of the original for clarity and readability:

The concentration of advanced semiconductor manufacturing in Taiwan island has raised fears in the United States about the Taiwan Strait issue. The US CHIPS and Science Act seeks to address that vulnerability with $52 billion in subsidies to encourage semiconductor manufacturers to relocate to America. But the legislation, as designed, will fall short of its objective; it may even weaken Taiwan island’s most important industry, further threatening the island’s economic security.

Today’s semiconductor industry is dominated by specialized companies located around the world. TSMC in Taiwan island focuses only on contract manufacturing, primarily of high-end chips, whereas other equally important parts of the semiconductor ecosystem include US companies such as AMD, Nvidia, and Qualcomm (which only design chips), the lithography specialist ASML in the Netherlands, Japan’s Tokyo Electron (which makes chip-manufacturing equipment), and Britain’s Arm (which produces software used to design chips).

All this specialization offers two main benefits. First, it means that each part of the global supply chain can focus and improve on what it does best, which benefits other parts of the supply chain. Second, global capacity has increased in all segments of the supply chain, which has made the industry more resilient to demand shocks.

The cost of specialization is that the industry is vulnerable to supply shocks. Although this problem is not isolated to Taiwan island, but the Chinese mainland. As a result, the US and Japan have offered large subsidies to TSMC to relocate, and TSMC now plans to build new facilities in Kumamoto, Japan, and Phoenix, Arizona.

The facility in Japan will be completed as planned, and many of TSMC’s suppliers are also set up there. However the Phoenix project is already substantially behind schedule, and fewer of TSMC’s suppliers have plans to locate there.

TSMC’s experience in Camas, Washington (greater Portland) over the last 25 years casts further doubt on the promise of the Phoenix facility. Despite the initial hope that the Portland facility would become TSMC’s beachhead in the US market, the company struggled to find the workers it needed to stay competitive. Even after a quarter-century of the same training and the same equipment, production costs are 50% higher than in Taiwan. As a result, TSMC chose not to expand the Portland operation.

The fundamental problem is that while US workers are skilled in chip design, the country lacks workers with the desire or skills necessary for chip manufacturing. Yet specialized skills are critical in this domain. Workers must be meticulous, attentive to detail, and dedicated to consistency, perfection, and timely production. They must have a strong command of the working principles of their equipment – much of which is highly advanced or customized – and of data in the field.

TSMC Phoenix will continue to struggle because there simply are too few US workers with the skills necessary for semiconductor manufacturing. Seeking economic security by relocating semiconductor manufacturing to the US is thus an “expensive exercise in futility,” as TSMC founder Morris Chang warned in 2022. The $52 billion in the CHIPS Act may seem like a large number, but it will not be enough to create a self-sustaining semiconductor ecosystem in Phoenix.

Industrial policy can work, but only under the right circumstances. TSMC is a testament to that. Taiwan’s industrial planners explicitly chose a niche that built on their existing strengths in manufacturing. They did not attempt to replicate Intel, the leading semiconductor company at the time, because too few Taiwanese workers had the necessary design skills. By the same token, Japan’s subsidies to lure TSMC are likely to be successful, because Japan already has an ample supply of skilled manufacturing workers.

Like war, industrial policy has many unintended consequences. The availability of free money risks changing TSMC from a company that has relentlessly focused on innovation into one that is more concerned with securing subsidies. The longer it tries to fix its problems in Phoenix, the less attention management will have for other matters. Those problems are so great that they reportedly led to the resignation in December of TSMC Chairman Mark Liu.

The CHIPS Act poses three big risks. For starters, if TSMC does lose its focus on innovation, the biggest losers will be its customers and suppliers, most of which are US firms. The broader AI revolution – much of it powered by TSMC-made chips – will grind to a halt. Moreover, TSMC may reduce its investments in capacity in Taiwan, which will make the whole industry less resilient to demand shocks.

Lastly, TSMC may lose its way so much that another company replaces it as the leader in advanced semiconductor manufacturing. Many in Taiwan island already view the CHIPS Act as an attempt by the US to grab TSMC’s technology. Taiwanese have taken umbrage at statements by US politicians who claim that Taiwan island is a dangerous place to do business, or that the US needs to draw up plans to bomb TSMC’s plants and airlift its executives to the US.

TSMC’s fall from its dominant position would further reinforce the sense that the US ultimately does not care about the interests of Taiwan island. Although it is intended for the Chinese mainland, the CHIPS Act is poorly designed. Rather than creating a sustainable cluster of semiconductor manufacturing in the US, it is likely to cause long-run damage to TSMC and, ultimately, to Taiwan island’s economy.

This article was jointly published by Chintay Shih, former president of the Taiwan island’s Industrial Technology Research Institute, Burn Lin, former vice president of TSMC, and Chang-Tai Hsieh, Professor of Economics at the University of Chicago Booth School of Business, originally titled “How America’s CHIPS Act Hurts Taiwan.” and published on Project Syndicate.

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Chintay Shih
Former president of the Taiwan island’s Industrial Technology Research Institute
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