The Supply Chain Matters blog provides a follow-up to our highlighting of ongoing developments that are likely positioning semiconductor fabrication and chip packaging supply networks for increased trade and industry tensions in the coming months and perhaps years.

In two prior Supply Chain Matters blog editorials, the latest being six days ago, Signs of Strategic Sourcing Changes Among Semiconductor Supply Networks, we have called high tech and consumer electronics supply network team’s attention to a unfolding shifting towards more risk-managed regional or domestic sourcing of deemed strategic high tech components, in-particular, leading-edge semiconductor fab and packaging products.

Late last week, an unfolding and obvious linked set of developments are a sure sign of pending change, as well as the possibility of even more escalated trade tensions.

TSMC Announcement

Late last week, as speculated by previous business media reports including The Wall Street Journal, Taiwan Semiconductor Manufacturing Company (TSMC) formally announced the company’s intention to build and operate an advanced semiconductor fab in the United States with the mutual understanding and commitment from the U.S. federal government and the State of Arizona.

According to this TSMC announcement, the facility, to be constructed in Arizona, will utilize TSMC’s 5-nanometer technology for semiconductor wafer fabrication, have a 20,000-semiconductor wafer per month capacity, and create over 1,600 high-tech professional jobs. The chip fabricator has already introduced 5-nanometer capabilities at its much larger fab facility in Taiwan with a planned capacity volume of 100,000 wafers per month.

Construction is planned to start in 2021 with production targeted to begin in 2024. By the time, this U.S. fab is operational, TSMC’s Taiwan based capabilities would likely be focused on next-generation process technology, which is 3-nanometer based.

TSMC indicates that total spending on this project, including capital expenditure, will be approximately $12 billion from 2021 to 2029. Not disclosed were what were any financial incentives negotiated to have this facility built in the United States.

Further noted:

This U.S. facility not only enables us to better support our customers and partners, it also gives us more opportunities to attract global talents. This project is of critical, strategic importance to a vibrant and competitive U.S. semiconductor ecosystem that enables leading U.S. companies to fabricate their cutting-edge semiconductor products within the United States and benefit from the proximity of a world-class semiconductor foundry and ecosystem.

Speculation continues as to why the announcement came so quickly, especially as the global semiconductor producer had indicated last week that while such a U.S. fab was being considered, there were no solidified plans.

In its reporting, both Reuters and the WSJ cited sources indicating that the U.S. Commerce Department has been spearheaded talks for over two years and that Apple was likely involved as well.

 

Parallel Announcements

On Wednesday of last week, President Donald Trump extended for another year a May 2019  executive order declaring a national emergency that bars U.S. companies from using telecommunications equipment made by firms posing a national security risk.

The U.S. Commerce Department then clarified such restrictions to now include foreign semiconductor manufacturers whose operations either utilize U.S. based software, or U.S. software-based manufacturing equipment, from shipping associated products to manufacturers posing a national security threat without securing a U.S. license.

On Friday, the same day as the TSMC announcement,  the Trump Administration issued new rules that would bar China based telecommunications equipment and smartphone manufacturer Huawei Technologies and its suppliers from using any U.S. based technology and software.

This was perceived as being yet another significant escalation in tensions among the two nations. According to reporting by the WSJ, the new rules could likely block the sale of semiconductors produced by TSMC to Huawei’s HiSilicon chip design business unit.

These associated rule changes will now insert added uncertainties to many U.S. based manufacturer’s currently supplying Huawei, who have likely been granted their final 90-day extension of export licenses to supply the China based telecommunications equipment provider.  The rule would conceivably also apply not to just U.S. companies, but possibly any company that utilizes U.S. based technology to produce microchips being sold to Huawei.

In its reporting, the New York Times quoted the Editor of the nationalist leading Global Times as indicating that China would likely activate that government’s “unreliable entity listing” to restrict or investigate U.S. companies such as Apple, Qualcomm, Cisco Systems, or suspend the future purchase of new Boeing aircraft.

 

What These Ongoing Developments Imply

U.S. and perhaps broader makers of semiconductors and associated manufacturing equipment are now caught in the middle of an escalating set of trade tensions, and the timing, in the throes of global economic shock brought about by the Coronavirus pandemic, is obviously not at all good. The threat of additional product demand and supply disruptions for certain high tech manufacturers now magnifies, depending upon China’s response to these new announcements.

With the U.S. Presidential election cycle scheduled to ramp-up in the summer, and through most of Q4, the Trump Administration is either positioning to make China bashing one of the key debating points for the U.S. electorate, or promote the Trump’s confrontational strategies as leading to broader industry supply chain self-sufficiency for other strategic sectors.

Such moves are bound to accelerate China’s already ongoing efforts to become more self-sufficient in domestic semiconductor design and fab manufacturing capability along with building deeper alliances with other non-U.S. strategic suppliers. Nikkei Asian Review recently reported a co-design agreement among Huawei with European based STMicroelectronics for the development of mobile and automotive focused microprocessors as a means to insulate the tech producer from escalating U.S. sanctions.

As noted in our earlier commentaries, if the goal is to build a more U.S. based, self-sufficient high-tech semiconductor and electronic supply network, the realities of needed supplemental capabilities and hefty financial investments will be the debate among U.S. based providers and political leaders for many months to come, and the dye is likely cast.

The goal of U.S. self-sufficiency in leading edge high-tech products is likely timely, but the Trump Administration’s heavy-handed tactics of confrontation have discernable side effects.

Now that TSMC is on-board with supplemental U.S. based fab manufacturing to protect its own existing business relationships, other industry associations and individual manufacturers will have to make their own decisions.

Meanwhile, existing supply networks and their multi-industry customers, which increasingly include automotive and other industry supply networks, will have to navigate a highly sensitized set of geo-political tensions and potential political mine fields over the coming decade.

 

Bob Ferrari

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