TSMC (NYSE:TSM), the world's largest contract chipmaker, recently announced plans to build a new $12 billion plant in Arizona by 2024. The facility will hire 1,600 people and produce up to 20,000 wafers per month with its 5nm manufacturing process.
The announcement might seem like good news for Taiwan-based TSMC and Arizona, but it also indicates the company is becoming entangled in the escalating trade war. Let's see how this deal could affect TSMC's business, and whether or not it's becoming a pawn in the messy tech war between the U.S. and China.
It's all about Huawei
TSMC is one of three chip foundries that produce the world's most advanced chips, alongside Samsung (OTC: SSNLF) and Intel (NASDAQ:INTC). Most of the world's chip orders are split between TSMC and Samsung, since Intel's foundry mainly produces in-house chips.
TSMC's top customers include AMD, NVIDIA, Apple (NASDAQ:AAPL), and Chinese tech giant Huawei. It doesn't disclose the names of its top customers, but noted that 23% and 14% of its revenue came from its largest and second-largest customers, respectively, in fiscal 2019.
Apple is widely believed to be TSMC's largest customer, while Huawei's HiSilicon subsidiary likely ranks second. Huawei's HiSilicon unit designs a wide range of chips aimed at replacing American chips from Qualcomm, Intel, and AMD.
Last year, the U.S. Department of Commerce attempted to curb Huawei's progress by placing it on an "entity list" that barred U.S. companies from selling their technologies to blacklisted firms without a special license. However, the ban didn't affect Huawei's relationship with TSMC, which isn't an American company.
Noticing that loophole, the Commerce Department asked all non-U.S. chip manufacturers that use American chipmaking equipment, intellectual property, or design software to apply for special licenses before shipping chips to blacklisted firms. That order forced TSMC to stop taking orders from Huawei in mid-May.
Therefore, the announcement of the new Arizona plant, which came just a few days after TSMC reportedly halted Huawei's orders, seems like a consolation prize from the U.S. government.
The Arizona plant sparks fresh questions
TSMC traditionally manufactures its most advanced chips in Taiwan, while its plants in mainland China manufacture older chips. Those silos prevent Chinese companies from stealing its newest chip designs. TSMC's other American plant in Washington state -- a former joint venture which it took full control of 20 years ago -- also manufactures older chips.
TSMC's Taiwanese plants produce 7nm chips, which generated 35% of its wafer revenue last quarter. The latest Apple, AMD, and NVIDIA chips are all manufactured on this high-end node. It started producing 5nm chips in limited quantities last year, and expects the new node to generate about 10% of its wafer revenue this year as it enters mass production.
TSMC's new Arizona plant will also manufacture 5nm chips, but it won't come online until 2024, when those chips have already aged into the previous generation. TSMC has already started producing its next-gen N5 chips in limited batches.
However, TSMC's decision to produce more chips in the U.S. raises fresh questions. The Chinese government, which considers the U.S. Commerce Department's bans against Huawei to be acts of aggression, could retaliate against TSMC's plants in Shanghai and Nanjing for halting Huawei's orders.
If TSMC shifts its production of older chips to the U.S., higher labor costs will also throttle its margins. Meanwhile, the Chinese government could ramp up its investments in SMIC, its biggest domestic chipmaker. SMIC still hasn't passed the 14nm node yet, but TSMC's decision to strengthen its ties with the U.S. could be a wake-up call that lights a state-backed fire under the business -- which could spell trouble for TSMC.
Stuck between a rock and a hard place
TSMC faced plenty of political threats before. Taiwanese leaders have questioned its ties to China, and China is wary of its tech sector's dependence on a Taiwanese chipmaker.
But aligning itself with the Trump Administration, which is arguably using TSMC as a pawn against Huawei, could permanently alienate its Chinese customers, boost its operating expenses, and tilt the scales in SMIC's favor. It also exposes TSMC to additional restrictions from the U.S. government.
TSMC's move might please the Trump Administration and Taiwan's independence-leaning ruling party. However, TSMC's decision to cut off Huawei and open a U.S. plant could hurt the chipmaker over the long run.