“Congratulations on the TSMC factory that is coming to Arizona. I can tell you that there are 49 other governors who are a little jealous at this point.” This effusive statement was made not, as one might assume, by an economic development official but by US national security advisor Robert O’Brien.
At first glance, the deal simply appears to be another FDI success; in fact, the US views it as a geopolitical coup that gives the country a huge boost in its economic war with China.
TSMC (Taiwan Semiconductor Manufacturing Company) may not be a household name but within the sphere of semiconductors and high-tech, it is renowned as the world’s largest and most sophisticated foundry – a company focused exclusively on the manufacturing of computer chips under contract to companies around the world, including Huawei and Apple. TSMC reported net revenue of $35.8bn for 2019.
Headquartered in Hsinchu, Taiwan – where the bulk of its facilities are located – TSMC has operations on three continents, including a small existing semiconductor fabrication plant (fab) in Camas, Washington and design centres in Texas and California.
“It’s great for our national security to bring our supply chain home, especially when we are dealing with critical technology, computer chips, dual-use chips, that are not only important to our civilian world but also to our military,” says Mr O’Brien.
It comes at a time when semiconductor production capacity in the US has slumped to just 12% of global capacity, according to SEMI, the global association representing the electronics manufacturing and design supply chains. Also at a time when Intel – long the world leader – has announced a year’s delay in deploying its next generation of chips and a possible move to outsourced production.
Hopes for jobs
Despite the eye-catching level of committed investment, the fab to be built in Arizona will be small by TSMC standards. Its cost, $12bn, spread over eight years, is dwarfed by TSMC’s planned $16bn-$17bn capital spending budget for 2020 alone – $1bn more than originally announced. It will produce 20,000 wafers a month – a fraction of the 100,000 a month its average fab yields – with advanced 5-nanometer technology.
The company promises it will create more than 1600 professional jobs directly, plus “thousands of indirect jobs in the semiconductor ecosystem”. Construction will begin in 2021 and production in 2024. The plant will allow TSMC to better support its customers and attract global talent, it said.
TSMC, however, has repeatedly stated publicly that the deal will only take place if the cost differential between Taiwan and Arizona can be eliminated, calling “a globally competitive environment” crucial to the success of this project. Such policies, it added, would give it and its suppliers confidence to move ahead with future investments.
TSMC chairman Mark Liu said in a call with industry analysts on July 16 that pending US legislation that would close the cost gap made the difference.
Bipartisan support in Congress is expected for the Creating Helpful Incentives to Produce Semiconductors for America Act, which would give manufacturers a 40% refundable investment tax credit for facilities and equipment.
In addition, amendments to the National Defense Reauthorization Act, if adopted, would establish a new grant programme for manufacturing, research and development and promote the semiconductor industry in the US.
The state’s development agency, Arizona Commerce Authority, refused to comment.
“Typically, incentives have made up 10-15% of the overall project budget in the US for semiconductor foundries in general,” says Brett Simpson, co-founder and semiconductor equity analyst at London-based Arete Research. They are especially important to TSMC, which enjoys a 40% operating profit margin and has a business model that dictates a 20% return on equity, he adds.
Lack of specifics
Some sceptics wonder, however, whether the deal is TSMC’s way of placating the US government. The Taiwanese company has a similarly sized plant in China – the latter is building its own semiconductor industry from scratch. “The fact that there are no specifics about a site and the start date is so far out makes me think this is an announcement of a fab they hope they never have to actually build,” says Scotten W. Jones, president of cost modelling company IC Knowledge.
Brian Matas, vice president for market research at IC Insights in Scottsdale, Arizona, has similar doubts. He is adopting a “wait and see” approach. “If it does come to fruition, it will be a big deal,” he notes.
But SEMI chief executive Ajit Manocha thinks there’s a reason TSMC is starting small with the Arizona fab. “I think they will go into a phased approach. They will add more capacity as demand dictates and as a function of time,” he said.
Mr Manocha believes the industry incentives created by the bills before Congress will put the US on a more level playing field with other countries that already subsidise their domestic semiconductor companies, including China and Taiwan. “The fundamentals of the industry here are very strong, and it will double in size and recover in the next 10 to 15 years. I think demand will dictate what TSMC and other companies do in the US,” Mr Manocha predicted.
US secretary of state Mike Pompeo has touted the creation of highly skilled sub-industries or clusters around the new TSMC plant. But whether TSMC will attract additional FDI to Arizona has not been determined.
Arizona already has the nucleus of a semiconductor industry – including an Intel plant – but Mr Matas at IC Insights notes that a lot of their suppliers are global in nature with headquarters in South Korea, Japan and Europe. He does not expect a small plant like TSMC’s to attract many new suppliers. However, at least one company, Taiwan Specialty Chemicals Corp, has plans to build warehouse facilities nearby to support its major client.
With Intel and other fabs in the area, it would make sense for TSMC to piggyback on the infrastructure that already exists, agrees Mr Simpson at Arete Research. “There will be some infrastructure investment from overseas, but they will also leverage what is already there. That’s typically why you build fabs in clusters: to reduce costs by having engineers on site.”
Two things are clear. Arizona now has a stronger foothold on the global semiconductor map; and competition between the US and China is getting even hotter.
This article first appeared in the August - September edition of fDi Magazine. View a digital edition of the magazine here.