China vs. USA – Taiwan buys Insurance

A $165bn insurance policy

• The more TSMC invests in the USA, the more secure Taiwan becomes because if Taiwan, for some reason, goes offline then the TSMC fabs in the USA will become the most expensive paperweights in history.
• This is why I view the $100bn commitment by TSMC as being more about incentivising the USA to defend Taiwan against invasion than it is about avoiding tariffs.
• TSMC has announced that it will invest a further $100bn on top of the $65bn already earmarked to build advanced semiconductor manufacturing in the USA.
• This will mean a further 2-3 advanced fabs as well as facilities for back-end processing before the chips are shipped to end clients.
• This is widely being seen as a move to placate the new US administration and avoid tariffs, but I think that there is more to this than meets the eye.
• This is because the most complicated and proprietary parts of TSMC’s offering are the recipes (methods and machine settings) that it uses in its fabs to make chips for its clients at high yield and therefore, high margin.
• These recipes are closely guarded secrets and are located in Taiwan meaning that all of the foreign fabs are effectively run out of Taiwan.
• This is the equivalent of having a computer based in the USA that checks a server in Taiwan every day for the day’s updates and adjustments to firmware settings.
• If for some reason the server in Taiwan goes offline, then the computer in Uthe SA will stop working and this is precisely what is likely to happen with TSMC’s fabs located in the USA.
• The US administration is offering no further subsidies beyond the Chips Act which is unusual in a situation like this meaning that something else could be at play.
• Even if the USA were to put tariffs on Taiwan, they are unlikely to affect TSMC very much because most of its chips are not imported into the US but are sent elsewhere for assembly into products which are then imported.
• Consequently, there has to have been some other form of motivation, and I think some form of informal security guarantee is the most likely option.
• This is not dissimilar to the materials deal that the USA is proposing in Ukraine as US jobs, manufacturing and ability to produce technology will be impacted should TSMC’s operations in Taiwan go offline for any reason.
• Advanced semiconductor manufacturing is very sensitive to vibrations or disturbances meaning that if China were to invade Taiwan, the odds are very high that TSMC would go offline.
• This would mean that the US Fabs stop working creating an incentive for the USA to ensure that this does not happen.
• Consequently, the more operations that TSMC has in the USA or elsewhere, the greater the incentive is for those territories to ensure that TSMC in Taiwan continues to operate as normal.
• This is of far more importance to Taiwan where the overwhelming majority does not want to become part of China even though it is by far its largest trading partner.
• China has promised that it will seek reunification by any means which, with an intransigent population, can only mean a take-over by force.
• The big question for China is whether the US would intervene to defend Taiwan and the more that TSMC is entwined with the US economy, the greater this probability is.
• US involvement will be a big factor in China’s decision whether or not to seek reunification by force and so this looks to me like $100bn well spent.
• These new fabs will be away from the Taiwan ecosystem and so the cost to make chips in the USA is likely to be higher than it is at home.
• However, I expect that this extra cost will be spread evenly over all of the silicon that TSMC produces meaning that there is likely to be an increase in the price that TSMC charges to cover the extra cost of manufacturing overseas.
• TSMC growing closer to the USA will cause China to increase its efforts to become self-sufficient and further accelerate the bifurcation RFM Research and Alavan Independent see coming in the technology industry.
• Dual standards and multiple and incompatible networks are good for no one as the value creation from technology will be lower as a result.