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US News Why a Taiwanese chip maker is at the heart of US-China tech fight

03:10  24 may  2020
03:10  24 may  2020 Source:   qz.com

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a red and white sign on a pole: TSMC © Provided by Quartz TSMC

Taiwan Semiconductor Manufacturing Company (TSMC) has, since its founding in 1987, set out to be a global “committed corporate citizen” serving clients worldwide instead of focusing only on one region.

It succeeded. The contract chip maker is today the world’s largest semiconductor foundry. But now TMSC has been drawn into the increasingly fierce tech feud between the United States and China. Two incidents last week helped to illustrate the Taiwanese company’s awkward situation.

Firstly, TMSC, last Thursday, announced a plan to build a $12 billion plant in Arizona, which has been seen as a political win for the US president Donald Trump who promised to bring back manufacturing back home.

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Taiwanese firm TSMC is the world’s biggest contract chip maker . The move is a victory for the Trump administration, which has pushed for more hi- tech manufacturing to return to the US . Chinese Vice-Premier Liu He and US President Donald Trump signed the phase one trade deal in January.

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Secondly, a day after the TSMC announcement the US Department of Commerce unveiled a rule change that from September would bar global chip makers that use US equipment or technology, (effectively most global industry players including TSMC), from selling to Huawei, which accounts for around 14% of Huawei’s revenue, according to Credit Suisse analysts.

Why TSMC matters

At the core of the issue is the extreme importance of semiconductors, which are essential for internet and software companies, as well as being at the heart of many technologies used by militaries around the world. Chips are essential building blocks of modern technology supply chains. Chip factories, which need major capital investment and high tech equipment, are also proven to be an economic boon for the cities they are located. Thus, it is not an exaggeration to say whichever country masters the chip production and design know-how will have an upper hand in future competition on the technology front.

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Jan 12, 2020 San Jose / CA / USA - Taiwan Semiconductor Manufacturing Company (TSMC) headquarters in Silicon Valley; TSMC is the world's largest dedicated independent (pure-play) semiconductor foundry © Getty Jan 12, 2020 San Jose / CA / USA - Taiwan Semiconductor Manufacturing Company (TSMC) headquarters in Silicon Valley; TSMC is the world's largest dedicated independent (pure-play) semiconductor foundry

This means TSMC, the world’s largest contract chip maker and also one of the few chip manufacturers, including Samsung and Intel, that can produce the fastest chips in the world, is not just important, but vital in the global tech supply chain. Contract chip makers make products for clients to meet those clients’ specifications, and in this way TSMC differs from Samsung and Intel who reserve their best chips mostly for their own products.

Many of TSMC’s clients are semiconductor makers in their own right, who design the integrated circuit but don’t have the capacity to mass-produce them. TMSC is the most important source for a number of both US and Chinese tech giants, including Apple, Qualcomm, Broadcom , Nvidia and Huawei. Overall, the company generates 61% of revenue from the US, followed by China (17%) and Taiwan (8%), according to Bloomberg.

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The significance of TSMC’s new plant

Even China’s best chip makers are believed to be as much as a decade behind their international peers despite huge investment in the industry from Beijing. If Chinese tech champions like Huawei, are not allowed or being restricted to use TSMC’s chips then that will cause them major difficulties because the companies won’t be able to find alternative suppliers quickly. Although the new plant is expected to only contribute 3 -4% revenue to TSMC, according to analysts from Bernstein, its launch is still bad news for China if, as some say, it is a symbolic step demonstrating TSMC is leaning towards its US clients rather than its Chinese ones.

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The fact that TSMC is a Taiwanese company further complicates the matter. Beijing claims the self-ruling island democracy as part of its territory and so should be “re-unified” with the People’s Republic of China. The conflict between the two has been exacerbated by the new coronavirus outbreak, to which Taiwan has had one of the best public health responses to the epidemic worldwide.

What could happen next?

One direct consequence of the move of TSMC is it could accelerate China’s own development of semiconductors. However, it’s unlikely China could catch up with the US anytime soon. Even the country’s most advanced chip maker, Shanghai-based Semiconductor Manufacturing International Corporation (SMIC), has only recently launched its latest generation of 14 nanometer chips, some four years behind Intel and Qualcomm, analysts from Fitch Solutions, an affiliate of credit rating agency Fitch ratings wrote in a note.

“China has been throwing billions of yuan into semiconductor industry in the last few years trying to expand capacity, but it’s still not there yet,” says Bryan Mercurio, an expert on international trade law at the Chinese University of Hong Kong.

BUENOS AIRES, Dec. 1, 2018 -- Chinese President Xi Jinping R meets with his U.S. counterpart Donald Trump in Buenos Aires, Argentina, Dec. 1, 2018. President Xi attended a working dinner with President Trump in Buenos Aires on Saturday. (Xinhua/Li Xueren) (Xinhua/Li Xueren via Getty Images) © 2018 Xinhua News Agency BUENOS AIRES, Dec. 1, 2018 -- Chinese President Xi Jinping R meets with his U.S. counterpart Donald Trump in Buenos Aires, Argentina, Dec. 1, 2018. President Xi attended a working dinner with President Trump in Buenos Aires on Saturday. (Xinhua/Li Xueren) (Xinhua/Li Xueren via Getty Images) However, despite its still huge gap with international peers, Chinese chip makers could have a good opportunity by offering cheaper and less powerful products to emerging markets, where demand will be more practical home and office equipment instead of cutting edge equipment such as 5G bases. In this area, Chinese companies could supplant US brands within the next decade, say the analysts at Fitch Solutions.

As for TSMC, it remains to be seen whether its opening of a plant in Arizona is a firm move away from its valuable Chinese clients or more of a gesture to generate goodwill in Washington DC and with president Trump.

“The launch of this plant has to be a token gesture from TSMC. Would the company really want to risk losing all of its Chinese clients, not only Huawei, or being shut out of the China market just for a symbolic move like this? Probably not,” says Mercurio.

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