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What a difference a year makes. When Taiwan Semiconductor Manufacturing Company held its 2020 annual shareholders’ meeting, the company had yet to confirm it would go ahead with plans for a chip factory in the US.
Now, not only is construction under way for TSMC’s new $12bn fabrication plant, or fab, in Arizona, but the company is also in advanced discussions over a factory in Japan and even considering manufacturing in Germany.
The shift marks the end of an era in the semiconductor industry. Since its founding almost 35 years ago, TSMC has had almost all of its capacity in Taiwan.
That focus helped make TSMC the world’s largest contract chipmaker, with output that now amounts to more than half of all made-to-order chips globally. In turn, that scale has made the company highly profitable: it has gross margins of about 50 per cent.
It also freed up semiconductor companies from the US, Europe and Japan to focus on areas other than manufacturing and create value without the huge investments chip fabs nowadays require.
But under pressure from governments in Washington, European capitals and Tokyo, the company’s management is taking the screwdriver to the well-oiled machine that is TSMC. Company chair Mark Liu told investors this month that “the new geopolitical environment” called for distributing TSMC’s fabs more widely beyond its home base.
John Lee, a technology analyst at the Mercator Institute for China Studies in Berlin, says the push for reshoring semiconductor manufacturing in various geographies has been “really a state-driven thing”.
The resulting changes will most likely affect the time-tested symbiosis between TSMC and the other parts of the semiconductor supply chain. In other words, scattering fabs around the world has a price that TSMC’s customers will have to pay.
According to a report by Boston Consulting Group and the Semiconductor Industry Association (BCG/SIA) published in April, the total cost of ownership of a fab in the US is between 25 and 50 per cent higher than in Asia.
In Europe, there is a 30-40 per cent “cost disadvantage” in chip manufacturing compared with production in Asia, according to Greg Slater, Intel’s regulatory affairs executive.
“It is very hard to imagine that the funds that are being stumped up now will be enough to bridge that 40 per cent gap,” Lee says of the subsidies western governments are promising TSMC and other chip manufacturers if they build fabs in their countries.
According to the BCG/SIA study, financial support from governments in China, Taiwan and South Korea accounts for 40 to 70 per cent of the cost advantage chip manufacturers enjoy in those countries compared with the US.
TSMC has already made clear that its customers will have to shoulder part of the cost. “[We] face manufacturing cost challenges . . . Therefore, we are firming up our wafer pricing,” chief executive CC Wei said earlier this month.
The question is what will really be gained by the changes.
Initially, the US government, the first to push for chip capacity reshoring, did so to reduce the dependence of its defence supply chain on foreign sources, particularly those vulnerable to interference from China.
But in the course of the past year, under the shock of the global chip shortage which temporarily disrupted production at some car manufacturers, governments have lobbied for new TSMC capacity to shield their industry from such bottlenecks in the future.
Industry experts say that it will be next to impossible to meet both national security goals and supply chain resilience goals by onshoring chip capacity in a number of countries. Lee believes that the case for locations in EU countries may be even weaker than that for the US or Japan.
And in a worst-case scenario, the efforts to mould the chip supply chain to various countries’ industrial policy goals could damage or even break it.
Morris Chang, TSMC’s founder who retired three years ago, recently warned that the chip reshoring efforts amounted to “turning back the clock” on the semiconductor supply chain.
Speaking as Taiwan’s envoy to the Asia-Pacific Economic Cooperation forum, Chang said: “What may happen is that after hundreds of billions and many years have been spent, the result will still be a not-quite-self-sufficient and a high-cost supply chain.”