Washington, DC, August 8, 2023 --  

A new semiconductor plant in Phoenix serves as an insurance policy against Chinese aggression.

The Arizona factory is a long way from TSMC’s industrial base on Taiwan, something that creates great benefits and challenges alike.  The biggest benefit is security.  Should mainland China make good on its threats to seize Taiwan by force, all of TSMC’s production facilities on the island and most of the world’s advanced chip manufacturing will probably shut down overnight.  

Having most of the world’s advanced chip fabs within 100 miles of threatening communist Chinese military bases is unacceptably dangerous.  But this was not always so.  

Back in 2012, when Hu Jintao was still leading mainland China’s manufacturing boom and increasing integration with the West, there was no problem.  TSMC’s  dominance in advanced chip manufacturing had been built over the prior two decades, starting well before mainland China became the manufacturing center of the world.  Taiwan’s modern infrastructure, educated workforce and relatively low labor costs enabled TSMC to outcompete chip manufacturers in Japan and South Korea, ultimately delivering the highest quality at the lowest cost.  

Those advantages continue to this day.  But the world’s geopolitical situation has changed markedly. After Xi Jinping took power in China in 2012, relations with the West deteriorated quickly. He violently cracked down on freedoms within China, donned a Mao suit to a Communist Party conference, militarized the South China Sea, began a huge military buildup and started making regular threats toward Taiwan. The past few years have seen repeated cycles of communist Chinese navy ships and fighter aircraft approaching the island in attack formations.

Taiwan’s TSMC is still the world leader in making cutting edge high quality chips at low cost. But not figured into those costs is the risk of an immediate and catastrophic end to the supply chain should China’s communist dictatorship decide to attack the island. Taiwan’s semiconductor plants, as incredible and efficient as they are, have become utterly unreliable.

Hedging this risk by building factories overseas sounds like an easy answer.  But economics make it an uphill battle. Critics of the push to build the new Arizona factory note that it takes much longer and costs much more to build a plant in the U.S. than in Taiwan and recruiting the necessary labor force will be difficult.¹ Assuming these hurdles are overcome, the chips produced will not be cost competitive with those produced in Taiwan. Without huge subsidies from America’s federal government, the project would never have even gotten off the ground.

TSMC has faced similar problems with its other plants overseas. A plant in Singapore also faces higher labor costs that hurt productivity. And expansion plans at an existing small plant north of Portland have been delayed for years because labor and construction costs make it uncompetitive the company’s plants in Taiwan. TSMC's retired founder Morris Chang has called efforts to rebuild a chip industry in the United States an "exercise in futility".²

But the fact that overseas fabs will never be as efficient as fabs in Taiwan doesn’t really matter, given the strategic threat that Taiwan faces from the menacing giant next door. If the day comes where China attacks Taiwan, any TSMC chip that cost twice as much to produce in Singapore, Portland or Phoenix will still be in intense demand. As the West shifts to a war footing, those plants’ production will go first to military customers and anything that remains will get rationed. A crash effort will certainly begin to build even more plants to eventually meet demand. But achieving that the will take years, and likely will never match Taiwan's curent level of efficiency.

Or course, it is always possible that a communist Chinese attack on Taiwan won’t happen. If cooler heads prevail and the island retains at peace, then the new plant in Phoenix will end up being a waste of time and money. But the same can be said for any money spend on any insurance policy that doesn't pay out. Insurance exists precisely because we don’t know what the future will bring, and we must protect ourselves against the worst.

In hindsight, it was foolish to ever let so much of the world’s critical industrial production shift to China -- and to the first island chain that is easy striking distance from China’s shores. 20 years ago, globalization’s boosters would have rightfully argued that China was likely to become more democratic as a result of its economic growth. Tragically, that never happened, and it’s unlikely to happen any time soon. The sad truth is that the world needs an insurance policy against Taiwan’s menacing giant next door.

Notes:

1. Economist, America is building chip factories. Now to find the workers, August 5, 2023

2. Oregon Tech, TSMC’s Morris Chang Explains WaferTech’s Failure in Camas, Calls Push for U.S. Chip Revival an 'Exercise in Futility', April 2, 2022.