TSMC Hedges Against a CHIPS Act Fail
America needs to stop dragging its feet
The much-lauded CHIPS Act is not going well. And TSMC, which is supposedly to be one of the Act’s biggest beneficiaries, is starting to hedge against a failing industrial program.
Since its passage 16 months ago, the Act’s implementation led by the Commerce Department has done very little to restore US leadership in semiconductors. Specifically, on subsidizing and supporting advanced chips manufacturing, the program has only made two relatively inconsequential grants so far – $35 million to BAE Systems, $162 million to Microchip Technology – both for making mature (meaning old, not advanced) chips that are commonly used in the defense industry.
There is, of course, nothing wrong with supporting defense contractors and companies that supply the defense industry; onshoring the production of chips that our military relies on is important for strengthening national security. However, if the reason why we needed the CHIPS Act was to onshore advanced chips manufacturing by leading foundries – TSMC, Intel, Samsung – all of which have been lured to building more fabs in the US under the assumption of receiving sizable government subsidies, this industrial program is simply not delivering.
In TSMC’s Q4 2023 earnings call earlier this week, Mark Liu, the company’s outgoing chairman and point person in driving its expansion into America, gave us some clues to how TSMC really feels about the situation.
Mark’s Last Words
In his prepared remarks for probably his last earnings call, Liu shared this progress update for investors on TSMC’s Arizona fabs:
“In Arizona, we are in close and constant communication with the U.S. government on incentive and a tax credit support and making strong progress in facility supply chain infrastructure, utility supply and equipment installation for our first fab. We continue to work closely and develop strong relationships with our local union and trade partners in Arizona, including recently signed an agreement with Arizona Building and Construction Trades Council on a new framework for cooperation….
We are well on track for volume production of N4 or 4-nanometer process technology in the first half of '25 and are confident that once we begin operations, we will be able to deliver the same level of manufacturing quality and reliability in Arizona as from our fabs in Taiwan.”
While the delay in operationalizing TSMC Arizona’s first fab to 2025 has been widely reported, this is the first time the company shared a more precise timeline for volume production – first half of 2025. It also looks like TSMC’s tense relationship with local unions has come to a steady state, where at least work will move forward and not be stalled by possible strikes or more public relations complaints and campaigns. Furthermore, the CHIPS Act subsidy is still being haggled over with the US government. TSMC is reportedly seeking $15 billion in tax credits and subsidies (out of a pool of $39 billion). But negotiations have been difficult because the Commerce Department is attaching a lot of strings to the money, including compelling the sharing of confidential information about operational details and customers, which is just a big no-no for the foundry business model that TSMC pioneered. (Samsung has raised similar objections to this condition.)
But this is not the hedge; these issues have been widely anticipated (and still unresolved). The hedge against the CHIPS Act came when Liu was asked about the second fab that TSMC plans to build in Arizona. Here is what he said when an analyst asked about it:
“The second fab shell is under construction. But what technology in that shell is still under discussion, and I think that also has to do with how much incentives that fab -- the U.S. government can provide…there will be a gap, at least current planning is '27 or '28…that will be the timeframe...
All the fabs in overseas, what's actually being loaded, what technology is being set up, really, it's a decision of customers' demand in that area…so nothing is definitive.”
The 2027/2028 timeline is a further delay from the previously shared 2026 deadline. Reading between the lines of Liu’s diplomatic answer, if the CHIPS Act subsidies do not come through as promised, TSMC doesn’t plan to put its best technology and capability in the second fab. And it is in no hurry to complete it until all the pieces are figured out to make sure this second fab will be a profitable one. If that does not happen until 2028, that is also about the time the CHIPS Act program expires (it is a five-year program).
What a shame, and fail, that would be.
Dream Unfulfilled
Whether it is the first half of 2025 or some time between 2027 to 2028, Mark Liu will not see the fruit of either of the Arizona fabs; he is scheduled to officially retire this summer when TSMC’s shareholders meeting will take place to elect the company’s next chair. One might think that he would want to witness this project – this dream – somewhat fulfilled, if the timeline is to stick around for another 18 months or so. Alas, even with the high-profile honor of introducing President Biden at the fab’s tool-in ceremony a year ago and guaranteed accolades when the first fab finally reaches volume production, it was not enough for Liu to stay. He likely did not imagine dealing with Commerce Department bureaucrats as how he would close out his illustrious 30-year career at TSMC.
The thing is, of all the incredible difficulties and complexities that go into setting up a new advanced chips fab in America, receiving the CHIP Act subsidies was supposed to be the easy part. During the same tool-in ceremony, TSMC’s founder, Morris Chang, gave a short but sobering speech, where he talked about the death of globalization and recounted all the challenges he encountered when trying to set up TSMC’s first US fab in Camas, Washington in 1995. Chang was more hopeful of Arizona’s success rate in no small part because TSMC could count on support from US governments of all levels – federal, state, local – which he didn’t have 27 years ago.
That hope now looks foolishly misplaced. Meanwhile, Taiwan passed its own version of the CHIPS Act in early 2023 that is just as generous as the American one, if not more. More recently, South Korea announced a whopping $471 billion investment plan for the next 25 years to boost Samsung and SK Hynix to make South Korea the center of advanced chip making for the world. TSMC revealed in its earnings call that it is also having productive discussions with the Japanese government to receive support to build more advanced fabs there.
So it’s not like the few billions we’ve allocated is the only game in town; not even close! TSMC’s hedge is the first noticeable sign from a major industry player to signal that the CHIPS Act may not be what it is all cracked up to be. It won’t be the last, if America keeps dragging its feet.
Great update, thanks. Do you have a view on whether the US or China is more dependent on TSMC, and how the opening of the Arizona plant would affect that calculation?
Great article! I am simply surprised by the following: "sharing of confidential information about operational details and customers." - The CHIPS Act is way more beneficial for the US than for TSMC (at this point), so why does the US government believe they have leverage? Taiwan might need some military protection in the future, but the company behaves as a "protective dome" until China becomes self-sufficient in microchip production. Until then, the US should pour the money first and ask later.