Tim Culpan

US Focus on Chips Could Prove to Be a Fatal Flaw

US politicians, business leaders and think-tank analysts seem to believe that locally made chips will fortify the nation’s technology supply chain at a time when global tensions are running hot. They’re mistaken, and that error could push the US into even greater dependence on foreign manufacturers.

Passage of the $52 billion CHIPS Act in August is rightly hailed as a landmark move to rebuild America’s role in the semiconductor industry. Chipmakers, both in the US and overseas, are incentivized to set up more facilities on local soil and many are doing just that. Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. announced expansion plans, and made clear that such projects will depend on government money.

The challenge for the US is that a 12-inch slice of silicon — layered with chemicals at microscopic dimensions by $150 million machines in $10 billion factories — isn’t very useful. In fact, a completed wafer doesn’t do anything — it cannot play a video, process an image or guide a warhead. Yet that’s all a semiconductor fab churns out, with great difficulty and at high cost. TSMC is currently the only company in the world that can produce the most-advanced chips, and does so with an annual capex budget of $36 billion and $5 billion in R&D.

Once out of the clean room, these wafers are likely to be loaded onto an aircraft and sent to the other side of the world — straight back to the very geographies that US lawmakers were hoping to wean themselves off.

The life of a chip doesn’t actually begin until the silicon wafer has been sliced into squares, tested for quality, and then packaged inside a ceramic casing with wires attached.

ASE Technology Holding Co. in Kaohsiung, Taiwan, is the world leader in outsourced semiconductor assembly and testing. US-made chips may also find their way to facilities ASE runs in China, Malaysia and Singapore. There’s a handful of other packaging and testing companies too, while TSMC and Intel Corp. are among those that also undertake some of this work. To its credit, Congress recognized the importance of packaging and allocated $2.5 billion in the CHIPS Act to help build more local capacity.

Still, it’s a grave miscalculation to believe that having greater, or even full, control over a nation’s semiconductor needs makes its entire supply chain resilient. Dozens of companies produce connectors, cables, display screens, and partially completed devices (called modules), and the vast majority are not in the US.

If there’s one company the world is most reliant on, apart from TSMC, it’s Foxconn Technology Group. While the Taiwanese firm is best known for making iPhones and iPads for Apple Inc., it actually provides thousands of different components from USB sockets to radio antennas that are assembled into millions of gadgets every year. There’s hardly a device on the planet that doesn’t have Foxconn inside.

Even as Apple tries to diversify its supply chain to a broader array of vendors and geographies, it still relies on Foxconn to produce as much as two-thirds of its iPhones. A decade ago, every single one of these smartphones was made in China. Today, Apple has deepened its globalization with Brazil, India and Vietnam now hubs of manufacturing — albeit with Foxconn as a primary partner.

What this means for the US is that even a complete transfer of TSMC’s capacity to American soil, and 100% control over its semiconductor needs, wouldn’t provide independence. The notion that Washington would evacuate TSMC engineers from Taiwan in the event of war, as has been recently floated, would do little to save the American supply chain.

Foxconn’s foray in Wisconsin — with big dreams that were never fulfilled — has shown just how challenging it is to get device assembly up and running in the US. The high costs, coupled with a lack of labor and supply-chain infrastructure make the US an unlikely place to churn out iPhones. Even semiconductor facilities — that have a lower labor component than device assemblers — are estimated by Goldman Sachs Group Inc. to cost 44% more than in Taiwan.

By focusing on chips, the most expensive and complicated piece of the puzzle, US leaders are kidding themselves into believing that semiconductors are the holy grail of technology manufacturing. Such an attitude risks policy laziness and makes the nation no less dependent on overseas suppliers, yet leaves people blinded into believing that enough has been done to make itself resilient.