Tim Culpan

TSMC Chose the US. Now It Must Handle China

As recently as three years ago, Taiwan Semiconductor Manufacturing Co. was trying to sit on the increasingly thorny fence between the US and China. The former is a much bigger buyer of chips, the latter is growing faster, and both are important markets for the world’s most advanced manufacturer of semiconductors.

Any semblance of neutrality disappeared this week, when Chairman Mark Liu and founder Morris Chang met with Nancy Pelosi, alongside Taiwan President Tsai Ing-wen, during the US House Speaker’s geopolitically charged trip to Taipei. As much as TSMC might want to claim that it was a mere courtesy to see a visiting dignitary, the Communist government across the Taiwan Strait surely won’t see it that way.

These two women rank near the top of China’s growing list of enemies, with Beijing responding to Pelosi’s visit to the democratically governed island by announcing its most extensive military drills since lobbing missiles over Taiwan in 1995. Back then, President Lee Teng-hui’s trip to the US was the pretext for Beijing conducting war games and raising tensions that prompted Washington to dispatch two US aircraft carrier groups.

Tsai represents a political party that eschews unification with the People’s Republic of China. Pelosi has long been an annoyance. In 1991, two years after the violent crackdown on protesters at Tiananmen Square, she unfurled a banner there that read, “To those who died for democracy in China.” This week, she met with pro-democracy activists while in Taipei. In response to her visit, China announced economic sanctions against Taiwan that initially banned food imports from more than 100 suppliers, and followed up with curbs on fish and fruit. More than 2,000 items are now blocked.

Tellingly, chips have so far escaped sanctions. If Beijing truly wanted to put politics before economics, it would ban semiconductors from TSMC and peers that include United Microelectronics Corp. and MediaTek Inc. That would be foolhardy and unlikely, though, because China needs Hsinchu — the home of all these chip companies — even if it wants to punish Tsai’s government in Taipei. For all the money Beijing has pumped into the sector — by some accounts, more than $100 billion — it still trails Taiwan and the US in chipmaking.

Washington wants to keep it that way, while also holding TSMC close and on its side. That’s because the Taiwanese foundry makes the world’s most advanced computer chips, coveted for everything from iPhones to advanced weaponry. It has long tried to stay apolitical and avoid taking sides — making chips, friends, and lots of money, but not enemies. Taiwan’s largest company, which counts the government as its biggest shareholder, has been pretty good at playing Switzerland. “We are everybody’s foundry,” is a fond saying.

In reality, though, TSMC’s loyalties were sealed well before Pelosi stepped off SPAR19 Tuesday night, even if the company itself doesn’t see it that way. Sales to China, including from fabs in Taiwan, have already been curbed. TSMC’s revenue from the country plunged 30% last year after a Trump Administration rule, continued under President Joe Biden, prevented it from making advanced semiconductors for Huawei Technologies Co., China’s premier networking and communications supplier that up until 2020 was one of the company’s largest clients.

Then there is its decision to build a new factory in Arizona, which will commence operations as early as 2024 at the 5-nanometer process node. On the surface, this doesn’t seem political. But starting with 5nm, a manufacturing technology around a decade ahead of anything the company deploys in China, shows where its priorities lie. In fairness, TSMC’s hands are somewhat tied. Taiwan and US government restrictions mean it cannot use anything more advanced at fabs in Nanjing or Shanghai, and there’s no economic sense to use older nodes at an expensive new factory in the US.

Passage of funding for the CHIPS Act through the House last week — presided over by Pelosi — helped cement TSMC’s position with Team USA. Congress allocated $39 billion to “strengthen semiconductor advanced test, assembly, and packaging capability in the domestic ecosystem.” The Taiwanese company has made clear that its business model, and future expansion, in the US is dependent on subsidies. That alone doesn’t guarantee its fealty — after all, companies are quite adept at taking welfare from different governments without any pledge of allegiance.

But provisions within CHIPS, and its funding bill, do prevent companies that receive US money from engaging in “any significant transaction… involving the material expansion of semiconductor manufacturing capacity in the People’s Republic of China.” An exception is provided if such investment is for “legacy semiconductors,” defined as being at the 28-nanometer geometry or older, technology that TSMC debuted in 2010 and now accounts for only 10% of revenue.

Since TSMC is almost certain to take money allocated by the CHIPS Act, it will be bound by those restrictions. That means an expansion in China would be for extremely old technology, which local rivals that include Semiconductor Manufacturing International Corp. are already adept at providing. Such investment would hardly move the needle on Beijing’s plans to catch up with the rest of the world, and likely wouldn’t be very lucrative for TSMC, given that there’s plenty of competition in the market for legacy chip capacity.

That doesn’t mean China will give up. If it can’t entice TSMC to expand in the country through subsidies and the promise of lucrative orders, it may resort to other means. Beijing has a record of getting what it wants by using sanctions, fines, and prosecution on charges such as tax evasion and antitrust violations. In 2015, Qualcomm Inc. was hit an almost $1 billion fine for violations of China’s anti-monopoly laws. TSMC will be all too familiar with that case and will need to handle the coming years with kid gloves.

The end result of all this geopolitical disruption is an environment where TSMC and China can offer little to each other. For sure, Beijing would love to capture some of the Taiwanese company’s technology — poaching staff and intellectual property are part of the arsenal — but the door is otherwise closing. TSMC’s size and prowess will ensure it remains everybody’s foundry. Except China’s.