Published 18 May 2020 | 2 minute read
With the US and China likely headed for a managed decoupling of their economies, TSMC’s Arizona plant could be a sign of things to come, as the US government entices and cajoles companies to produce more in the US.
The recently announced decision by Taiwanese semiconductor giant TSMC to build a $12 billion production facility in the state of Arizona could be an early indication that strategic considerations and security of supply imperatives will increasingly trump economic efficiencies. As the world continues to grapple with the fallout from the COVID pandemic and rising trade and geopolitical tensions between the US and China, governments will be less inclined to allow market forces to dictate supply and production decisions and more inclined to intervene to reduce dependency or strategic risk. And businesses will seek to mitigate threats to their business model that emerge as a result of geostrategic rivalries.
On the surface at least, there does not appear to be a compelling economic rationale for the Arizona facility. The US lacks the “industrial commons” of associated manufacturing capabilities which is so essential in facilitating semiconductor production. The lack of such a manufacturing supply cluster raises production costs, especially compared to TSMC’s facilities in Taiwan, where the bulk of its manufacturing is done. Although exact details are unconfirmed, it seems apparent that some combination of political pressure and government financial inducements overcame the economic disincentives.
Over-dependence on Asia supply chains
The Trump Administration has been steadily warning of the risks of being over-dependent on Asian supply chains for semiconductors and has been forthright in its desire to repatriate elements of vulnerable supply chains wherever possible. US Trade Representative Robert Lighthizer went so far as to declare last week in the pages of the New York Times that the “era of offshoring is over” in the US, as businesses recognize that over-extended supply chains expose them to unacceptable risk.
The TSMC facility would be, at least in appearance, a concrete step towards a more US-based high technology supply chain. But there might actually be less to the proposed plant than meets the eye. By the time it is operational in 2024, it is expected to produce semiconductors based on existing rather than next generation technologies, and it will lack capacity to produce at a game-changing scale. The 20,000 silicon wafers the Arizona plant is expected to produce each month is only one-fifth the capacity of the larger Taiwan-based fabrication facilities.
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Strategic considerations
Broader strategic considerations were undoubtedly at play in the decision. From TSMC’s perspective, a new US facility would presumably provide it with more clout in the halls of US government, as the US weighs extraterritorial restrictions on semiconductor sales aimed at Huawei which could have a big impact on TSMC’s global operations. Taiwan’s position as a global supplier of chips – as well as a highly sensitive geo-political flashpoint in US-China relations – means that TSMC is inevitably caught up in the technology and strategic rivalry between the US and China.
As the trade war and pandemic continue to unfold, the establishment of a new TSMC facility in the US might ultimately prove to be an important bellwether. Governments are becoming more likely to utilize interventionist policies to foster higher levels of domestic production, reduce foreign dependence, and ensure greater supply chain security during a time of intensifying geopolitical tensions. And companies will do what they need to do in order to avoid getting caught in the crossfire.
© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).
From 2014 to January 2024, Mr. Olson was a Senior Research Fellow of the Hinrich Foundation. Mr. Olson began his career in Washington DC as an international trade negotiator and served on the US negotiating team for the NAFTA negotiations.
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