The concentration of advanced semiconductor manufacturing in Taiwan has raised concerns in the United States about the vulnerability of this supply chain should China blockade or invade the island. The US CHIPS and Science Act seeks to address this vulnerability with $52 billion in subsidies to encourage semiconductor manufacturers to relocate to America.
But the legislation, as conceived, will not achieve its goal; it could even weaken Taiwan’s most important industry, further threatening the island’s security.
Today’s semiconductor industry is dominated by specialized companies located around the world. Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) TSM,
in Taiwan focuses only on contract manufacturing, mainly of high-end chips, while other equally important parts of the semiconductor ecosystem include U.S. companies such as Advanced Micro Devices Inc. AMD,
Nvidia Corp. NVDA,
and Qualcomm Inc. QCOM,
(who only design chips); the lithography specialist ASML Holding ASML,
ASML,
In the Netherlands; Tokyo Electron Ltd. 8035 of Japan,
(which produces chip manufacturing equipment); and the British Arm Holdings Plc ARM,
(which makes software used to design chips).
All this specialization offers two main advantages. First, it means that each part of the global supply chain can focus and improve on what it does best, to the benefit of other parts of the supply chain. Second, global capacity has increased across all segments of the supply chain, which has made the sector more resilient to demand shocks.
The cost of specialization is that the sector is vulnerable to supply shocks. While this problem is not limited to Taiwan – as all segments of the supply chain are potential choke points – no other segments are facing territorial claims from China. As a result, the United States and Japan have offered large subsidies to TSMC for relocation, and TSMC now plans to build new facilities in Kumamoto, Japan, and Phoenix, Arizona.
The plant in Japan will be completed as planned, and many TSMC suppliers will also settle there. But the Phoenix project is already substantially behind schedule, and few TSMC suppliers plan to locate there.
TSMC’s experience in Camas, Washington, (in the Portland, Oregon area) over the past 25 years casts further doubt on the promise of the Phoenix facility. Despite initial hopes that the Camas plant would become TSMC’s beachhead in the U.S. market, the company struggled to find the workers it needed to remain competitive. Even after a quarter of a century with the same training and equipment, production costs are 50% higher than in Taiwan. As a result, TSMC chose not to expand the Camas business.
The fundamental problem is that while U.S. workers are skilled in chip design, the U.S. lacks workers with the desire or skills needed to make chips. However, specialist skills are key in this sector. Workers must be meticulous, attentive to detail, and dedicated to consistency, perfection, and timely production. They must have a strong command of the operating principles of their equipment, many of which are highly advanced or customized, and of field data.
TSMC Phoenix will continue to struggle because there are simply too few U.S. workers with the skills needed to make semiconductors. Seeking economic security by offshoring semiconductor manufacturing to the United States is therefore a “costly exercise in futility,” as TSMC founder Morris Chang warned in 2022. The CHIPS Act’s $52 billion may seem like a lot, but it won’t be enough to create a self-sustaining semiconductor ecosystem in Phoenix.
Industrial policy can work, but only under the right circumstances. TSMC is a testament to this. Industrial planners in Taiwan explicitly chose a niche that built on existing strengths in the manufacturing sector. They have not attempted to replicate Intel Corp. INTC,
the leading semiconductor company at the time, because too few Taiwanese workers had the necessary design skills. Similarly, Japan’s subsidies to attract TSMC are likely to be successful, because Japan already has an ample supply of skilled manufacturing workers.
Like war, industrial policy has many unintended consequences. The availability of free money risks transforming TSMC from a company that has focused relentlessly on innovation into one more interested in securing subsidies. The longer TSMC tries to fix its problems in Phoenix, the less attention management will have for other issues. These problems are so large that they reportedly led to the resignation in December of TSMC President Mark Liu.
The CHIPS Act poses three major risks. For starters, if TSMC lost its focus on innovation, the biggest losers would be its customers and suppliers, most of whom are U.S. companies. The broader AI revolution, largely powered by chips made by TSMC, will grind to a halt. Additionally, TSMC may reduce its capacity investments in Taiwan, which will make the entire industry less resilient to demand shocks.
Ultimately, TSMC may lose its way to such an extent that another company will replace it as the leader in advanced semiconductor manufacturing. Many in Taiwan already see the CHIPS Act as an attempt by the United States to appropriate Taiwanese technology. Taiwanese have taken offense at statements by U.S. politicians that Taiwan is a dangerous place to do business, or that the United States should draw up plans to bomb TSMC facilities and fly its executives to the United States in case of Chinese invasion.
TSMC’s fall from its dominant position would further strengthen the sense that the United States ultimately does not care about Taiwan. However, if Taiwan’s economy and security were weakened, the damage done to American national security would outweigh any gains from achieving greater (and more expensive) semiconductor capacity in the United States. Taiwan’s security is ultimately America’s security.
While well-intentioned, the CHIPS Act is ill-conceived. Instead of creating a sustainable semiconductor manufacturing cluster in the United States, this is likely to cause long-term damage to TSMC and ultimately Taiwan’s economy. It would be much wiser for the United States to adopt an approach that protects its own economic security while strengthening that of Taiwan. Committing to defending Taiwan and building capabilities in countries like Japan (where operations are less likely to harm TSMC’s business) could be one such strategy.
Chang-Tai Hsieh is a professor of economics at the University of Chicago. Burn Lin, dean of the College of Semiconductor Research at National Tsinghua University, is a former vice president of TSMC. Chintay Shih, a professor at National Tsinghua University, is a former president of the Industrial Technology Research Institute.
This commentary is also signed by: Tainjy Chen, dean of the Taipei School of Economics and Political Science at National Tsinghua University and former minister of national development of Taiwan; Huang-Hsiung Huang, president of the Taipei School of Economics and Political Science Foundation, former chairman of the Transitional Justice Commission, and former member of the Control Yuan and Legislative Yuan in Taiwan; W. John Kao, President of National Tsinghua University; Hans H. Tung, professor of political science at National Taiwan University; and Ping Wang, professor of economics at Washington University in St. Louis.
This commentary was published with permission from Project Syndicate – How America’s CHIPS Act Hurts Taiwan.
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