TL;DR Last week President Trump called for the termination of the U.S. CHIPS Act, calling it an unnecessary waste of taxpayer money. His statement reignited a debate on the merits of the Act, which was designed to spur investment in U.S. semiconductor manufacturing. Advanced chips are crucial for powering the latest AI systems and the majority of electronic devices. This industry is both complicated and capital-intensive, currently dominated by TSMC, a Taiwan-based manufacturer. TSMC’s strategic position in Taiwan puts it at significant risk due to escalating tensions with China, highlighting the massive stakes of U.S. semiconductor policy.
Key Dynamics to Watch
- Chipmaking Complexity: Semiconductor manufacturing is incredibly complex, dealing with structures as small as 2 nanometers; human fingernails grow at the rate of one nanometer per second! Nanometer precision requires advanced equipment including lithography machines costing over $300M, highly refined processes and rare-earth minerals.
- Intel’s Decline: Once the dominant force in semiconductors, Intel has fallen behind due to a series of strategic missteps. Declining a contract to manufacture iPhone chips is a classic example of Intel’s cultural inflexibility, lack of sustained investment and focus on in-house manufacturing.
- TSMC’s Dominance: TSMC has emerged as the global leader in semiconductor manufacturing, commanding 65% of the global foundry market. The company makes virtually all advanced AI chips for companies like Nvidia and Google. Its success is largely attributed to its “open foundry” model, which allows it to make massive capital investments and optimize processes over decades, financed by profits from its older, fully depreciated lines.
- China and Taiwan: Taiwan is 100 miles from mainland China, which considers Taiwan a part of its territory and has not ruled out the use of military force for reunification. Taiwan’s defense, dubbed the “silicon shield,” hinges on the fact that disrupting chip production would have catastrophic effects on China and the global economy.
- CHIPS Act progress: The CHIPS Act allocates over $280B in payments and loan guarantees to invest in domestic chip production. In addition to public funds, private companies have committed almost $450B in investments. To date, 23 projects have been announced across 14 states and 8 major companies. If successful, these projects will help the U.S. grow its share of global semiconductor manufacturing from 10% to 14% by 2032.
- CHIPS Act challenges: TSMC’s building of a new manufacturing plant in Arizona, a key win for the act, exposed an array of issues in “on-shoring”. The facility has been delayed multiple times and TSMC has had to send hundreds of experienced workers from Taiwan to meet deadlines. Some estimates say TSMC’s Arizona chips could cost ~50% more to produce than in Taiwan, its most advanced R&D and processes remain in local facilities. Finally, in even a best-case scenario more than half of chip volume will come from Taiwanese fabricators.
My Take
In the 1980 film “My Bodyguard,” Clifford (a nerd) does homework in exchange for protection from a bully played by Matt Dillon. The power dynamic begins as transactional but evolves into mutual friendship. Initially, Clifford deliberately avoids teaching study skills to maintain his value in the relationship.
Taiwan’s TSMC is our real-world Clifford, the brilliant kid who dominates the global semiconductor market. China is the bully whose invasion of Taiwan would cripple the global economy given TSMC’s critical position. Nearly every device including toasters, iPhones, automobiles and fighter jets, plus the data centers powering AI models depend on TSMC-manufactured chips.
When Iraq invaded Kuwait in 1990, a global coalition led by the U.S. intervened to repel Saddam Hussein and stabilize oil markets. Today, we need a similar preventive approach for Taiwan’s semiconductor industry. A successful strategy requires investing in manufacturing capacity across the U.S. and allies like Samsung, engaging in diplomacy to deter Chinese military action, and coordinating globally to slow China’s manufacturing progress.
Looking at the CHIPS Act in isolation misses these nuances. It is expensive, but it’s just one piece of our semiconductor homework. If we investing in domestic chip production and work with our peers, we can avoid a potential crisis that would devastate AI development and global technology. Sometimes the hardest homework assignments are the most important ones to complete.
Dad Joke: Why did the microchip go to therapy? It had too many processing issues!
Articles
The CHIPS Act: Rebuilding America’s technological infrastructure
“Taiwan manufactures 90 percent of the world’s most advanced processors. Over the last 30 years, the world has put almost all of its silicon eggs into one basket: a single company called the Taiwan Semiconductor Manufacturing Company (TSMC). It’s now the world’s biggest chip-maker.
The biggest risk is geopolitics. Miller said, ‘As tensions between China and Taiwan escalate, there is more and more concern that China could try to disrupt chip supplies out of Taiwan by blockading the island, or even attacking. The economic impact would be felt over many years, and the cost would be measured in the trillions of dollars.‘
Since the 1990s, the United States’ share of global chip-making has dropped from 37% to 12%. Today, American companies like Apple, AMD, nVidia and Qualcomm design their own chips, but they all hire TSMC to make them. TSMC even makes some of the chips for Intel, the American company that pioneered the semiconductor.”
Who’s Leading the Semiconductor Race?
“In Q3 2024, TSMC dominated the global semiconductor foundry market with a 64.9% share. TSMC’s dominance in the foundry market is undisputed. As the world’s largest contract chip manufacturer, it produces chips for companies like Apple, Nvidia, AMD, and even Intel. TSMC’s ability to maintain high market share stems from its leadership in cutting-edge process technology.
This dominance means that any disruptions in TSMC’s operations could have ripple effects across the industry. Businesses that rely on TSMC should consider diversifying their suppliers, especially given geopolitical tensions surrounding Taiwan.”
TSMC’s US expansion struggles with costs and regulations
“TSMC is facing significant challenges in bringing its most advanced chip technology to its new Arizona plant, the company’s CEO, C.C. Wei, said. Complex regulatory hurdles, labour shortages, and supply chain gaps have slowed progress, making it unlikely for the US factory to match Taiwan’s production timeline for cutting-edge chips. Wei noted that the Arizona project has already taken twice as long as similar facilities in Taiwan.
TSMC is investing $65 billion in three massive factories in Arizona, with support from the US government, including a $6.6 billion grant. However, Wei highlighted the high costs of compliance, including $35 million spent on establishing regulatory guidelines, as well as the logistical strain of shipping essential chemicals like sulfuric acid from Taiwan. Labour shortages have further complicated the project, requiring the relocation of workers from Texas and driving up costs.“
Taiwan chip pioneer warns US plans will boost costs
“Morris Chang of Taiwan Semiconductor Manufacturing Corp. said he supports U.S. efforts to slow China’s development of chip technology on security grounds. But Chang said he can’t understand why Washington wants to move so much manufacturing from efficient Asian sites to the United States. TSMC has estimated chip costs in Arizona at 50% above its flagship production line in Taiwan, but the real level looks closer to double, said Chang.”
More TSMC Fabs in the U.S., Taiwan’s Trump Card
“Once the company made the commitment to Arizona it made sense to continue expanding its operations there, to gain leverage on labor if nothing else. To that end, the company is on pace to build one fab for each process in the U.S., and that fab is going to be consistently two processes behind Taiwan.
The fact of the matter is that Taiwan’s single biggest trump card — no pun intended! — is TSMC; leading edge processes — and, for that matter, leading edge R&D — will not be allowed abroad so easily.“