As a leading global semiconductor foundry, TSMC’s production line development strategy was originally highly consistent with the company’s business model and technological development strategy. It was also quite clear and could even be described simply.
Simplicity is the ultimate sophistication, and for a semiconductor company like TSMC with this level of expertise and technology, there is no longer a need to expend a significant amount of energy and manpower dealing with the “trivial matters” that many other semiconductor companies face, such as financing, product planning, and customer compromises. With the firm development philosophy of not competing with customers and wholeheartedly providing chip manufacturing services, along with the favorable conditions in Taiwan, China, including timing, location, and people, TSMC can continuously expand its semiconductor foundry production lines in the northern, central, and southern regions of Taiwan to meet market demands. Simultaneously, it can expand a portion of its 16nm manufacturing process production line in mainland China, taking full advantage of the favorable conditions similar to those in Taiwan. With a primary focus on Taiwan and a secondary focus on mainland China, TSMC will continuously strengthen its technology and customer base advantages in the sub-28nm manufacturing process field, thereby maintaining or even enlarging its lead over competitors.
Before 2020, TSMC had been following the development strategy and path mentioned above. During that time, the company could dedicate all its energy and resources to providing chip manufacturing services to numerous customers, especially its top 10 clients, without much disruption. At most, they encountered minor issues like land use and utility supply in the Taiwan region, which didn’t require much effort or manpower from TSMC. The Taiwan government proactively resolved these issues because TSMC was a cornerstone of Taiwan’s technology and industry and received special attention. Moreover, TSMC was the sole recipient of such preferential treatment, highlighting its status.
Given the international trade and semiconductor industry landscape before 2020, TSMC (Morris Chang from TSMC: America’s bid for semiconductor manufacturing is wasteful and futile) never had plans to establish semiconductor fabs outside of East Asia because it was unnecessary. More importantly, concentrating all production lines in one region allowed them to pool various resources (human, material, financial, etc.) to efficiently excel in semiconductor foundry work and some packaging and testing services. This distribution of production lines and working status aligned with TSMC’s focus on providing excellent service to its customers. At that time, whether dealing with major U.S. clients (such as Qualcomm, Apple, AMD, NVIDIA), major Chinese clients (mainly Huawei), or major Japanese clients (like Sony), TSMC could effortlessly and efficiently provide them with chip manufacturing services, maximizing customer satisfaction and building strong customer loyalty.
Thanks to the combined effect of TSMC’s cutting-edge technology and its unwavering commitment to service, the company played a crucial role in propelling several major clients to historic heights. The most notable examples include Apple, AMD, and Huawei (Huawei Kirin 9000s, not from SMIC, Who made it?).
For Apple, recognizing the enormous potential of the iPhone’s development, TSMC ventured into packaging operations around 2015. This move was quite remarkable at the time, as some questioned whether the leading semiconductor foundry was diverting its focus from its core business. In reality, TSMC’s foray into packaging was aimed at better serving its customers. At the time, major OSAT packaging and testing companies couldn’t meet the high integration packaging needs of critical chips within the iPhone. Consequently, TSMC established its own InFO packaging line, making significant contributions to the high integration of main chips within Apple’s smartphones. It can be said that TSMC played an indispensable role in the global proliferation of Apple’s iPhones. Simultaneously, this marked the beginning of the widespread adoption of 2.5D advanced packaging.
In AMD’s case, they initially used GlobalFoundries for CPU and GPU production, but the results were lukewarm. After switching to TSMC, especially with the production of chips using the 7nm process, AMD’s products saw a noticeable increase in industry influence and market share, progressing by leaps and bounds each year. Today, their overall market share has risen from under 5% in earlier years to nearly 30%. The impact of TSMC during this period cannot be underestimated.
As for Huawei, before 2020, whether it was high-end smartphone processors or server CPUs for high-performance computing, TSMC’s 7nm process technology greatly enhanced Huawei’s product performance and power efficiency. This helped Huawei briefly surpass Apple in high-end smartphone market share. However, after losing TSMC’s support for semiconductor foundry services in 2020, Huawei’s high-end chips, whether for smartphones or servers, virtually disappeared from the market, and the high-end smartphone market share saw a continuous decline.
01
Unknown Variable of TSMC
TSMC originally intended to steadfastly pursue the development strategy and path outlined above to concentrate all its efforts and resources, maximizing its ability to provide chip manufacturing services to customers. However, contrary to their intentions, the situation became increasingly unfavorable after 2020 due to strong intervention by the U.S. government. TSMC found it challenging to maintain control over their development strategy, and from that point onwards, they encountered a series of issues that required significant time and resources, issues they had not originally anticipated.
Between 2019 and 2020, amid industry rumors, TSMC’s founder, Morris Chang, repeatedly stated that building semiconductor fabs in developed countries, especially in the United States, didn’t align with commercial logic, as it would be difficult to turn a profit. Nevertheless, following strong U.S. government intervention, TSMC announced the construction of a 5nm process semiconductor fab in Arizona in 2021. In response, Morris Chang reluctantly commented that globalization was dead. This indicated that TSMC had to deviate from its original fab development strategy and distribute resources across a broader global spectrum, causing the advantage of favorable timing, location, and human resources to significantly diminish.
Currently, TSMC has confirmed the establishment of fabs in the United States, Japan, and Europe (specifically Dresden, Germany). The U.S. fab focuses on advanced processes, starting with 5nm in 2021 and moving to 4nm, with plans for 3nm and potentially 2nm processes in the coming years. In Japan and Europe, the focus is on 28/22nm and 16/12nm processes.
As of now, TSMC faces the most challenges with its U.S. fab expansion. Due to differences in work culture, local U.S. workers have struggled to adapt to TSMC’s overtime and night shift practices. Even before formally starting work in 2022, many expressed discontent during the training period. To showcase efficient progress on the new fab construction, the U.S. government arranged a ceremony in late 2022 marking the completion of the building and the initial equipment relocation, which President Biden attended. However, after the ceremony, the reality was quite different—the building was not completed, and the equipment remained outside, far from being moved into the unfinished facility.
To expedite the construction of their fabs, particularly the cleanroom facilities for semiconductor wafer production, TSMC planned to relocate 500 skilled workers from Taiwan to the United States. However, this move stirred discontent among labor unions in Arizona. They believed that local workers were more than capable, and TSMC’s decision was driven by cost-cutting motives, suggesting that the 500 workers from Taiwan would negatively impact local employment. Consequently, the local labor unions strongly opposed the relocation of Taiwanese workers to the United States.
As the construction of the semiconductor fabs continued, various challenges arose, and the difficulties to be faced during the production phase proved hard to anticipate. Losing the advantages of favorable timing, location, and human resources raised unprecedented problems and challenges for TSMC in terms of managing dispersed resources for fab construction and ensuring the quality of chip manufacturing services for customers worldwide.
While issues in the U.S. fab were still unresolved, discordant voices emerged from the European fab.
Just this week, on August 28th, GlobalFoundries, a semiconductor foundry with a long-standing presence in Germany, complained to the European Union due to dissatisfaction with the substantial €5 billion subsidy provided by the German government to TSMC for its fab establishment.
Saam Azar, General Counsel of GlobalFoundries, expressed in an interview with the latest issue of the German magazine Der Spiegel that TSMC, being more than ten times larger in scale than GlobalFoundries, was now planning to produce chips near its major customers, competing with GlobalFoundries while receiving significant subsidies. He questioned whether this move was fair and appropriate. Azar further stated that GlobalFoundries had filed a complaint with the European Commission, requesting a review by the competition authorities to determine the legality of the subsidies granted to TSMC.
Germany serves as the largest production base for GlobalFoundries in Europe, where the company has operated for 25 years. TSMC’s total investment in its German semiconductor fab project exceeds €10 billion, with government subsidies amounting to €5 billion. This substantial subsidy has left GlobalFoundries uneasy, as the amount it received from the German government amid the subsidy wave was less than half of TSMC’s subsidy. GlobalFoundries CEO Tom Caulfield had previously expressed his concerns about the German government’s actions, warning of potential risks such as overreliance on a single supplier, market foreclosure, and reduced supply chain resilience if the subsidy disproportionately benefited a dominant company.
TSMC’s semiconductor fab project in Germany was only recently finalized in August, with key partners including Bosch, NXP, and Infineon. Even before the project has commenced construction, challenges have emerged.
However, compared to the issues faced in the United States, the challenges encountered in the German project could be considered minor setbacks, and they are unlikely to have a significant impact on TSMC’s fab construction. The true challenges lie ahead in the future, and their exact nature remains difficult to predict at this time.
02
Opportunities and Challenges of TSMC
For TSMC, breaking away from its decades-old fab development strategy by establishing semiconductor fabs in the United States, Japan, and Europe may initially pose challenges they are not fully accustomed to. However, given the current global landscape, it appears that they have little choice. Moreover, these countries and regions represent hubs for major semiconductor players, with significant demand for production capacity. Importantly, these large companies in the United States (such as AMD, NVIDIA, Qualcomm), Europe (STMicroelectronics, Infineon, NXP), and Japan (Sony, among others) generally welcome TSMC’s initiative to build fabs in their regions.
In the coming years, as these new fabs become operational, localized procurement will likely increase, which can be beneficial for TSMC in securing more orders.
Mr. Akira Amari, Chairman of the Liberal Democratic Party’s Semiconductor Strategy Promotion Association in Japan, has stated that TSMC’s decision to establish a fab in Kumamoto, Japan, goes beyond subsidies. It signifies that TSMC recognizes a new turning point in semiconductor development. He emphasizes that TSMC’s commitment to research and investment in Japan goes deeper than initially anticipated. This indicates that, since building fabs in the United States, Japan, and Europe is now inevitable, TSMC is already delving into long-term plans for fab construction in these regions.
The future presents both opportunities and greater challenges. It is precisely due to these significant challenges that TSMC maintained a centralized fab development strategy for several decades. Now, they must confront these formidable barriers.
No one understands the existing or forthcoming issues and challenges better than TSMC. Their awareness of these challenges is profound. In their annual report, TSMC outlined ten major challenges that come with building fabs worldwide, including cost increases, labor shortages, natural or man-made disasters, limited industrial land, local regulations, cybersecurity threats, government subsidies, cultural differences in work ethics, intellectual property protection, and various tax regulations in different countries.
Shortages of labor, disruptions in the materials supply chain, and construction issues could all affect the progress of fab construction, leading to significantly increased costs for TSMC and potential delays in their capacity expansion plans. The U.S. fab has already faced some of these issues, with its production start date pushed from 2024 to 2025, and whether further delays may occur remains uncertain.
TSMC’s future capacity expansion plans may be constrained by limited industrial land availability, potentially leading to an inability to fully execute their plans. They could face the risk of penalties for non-compliance with local regulations and the challenge of managing different information technology infrastructures across multiple operating sites. There’s also the risk of third-party cyberattacks. These are precisely the reasons why TSMC concentrated its production lines in one location for the past several decades – it allowed for efficient management and reduced the probability of cyberattacks. However, in regions as expansive as the United States, Japan, Europe, and Asia, such guarantees become challenging.
Another noteworthy aspect is the potential for unfavorable changes in local government subsidies and other incentive programs. This has already been observed in the United States with the construction of the new fab. After construction began, the U.S. government sought a portion of TSMC’s future profits from the fab, a demand not previously disclosed, and also required TSMC to cover housing and education expenses for the employees at the fab. This has presented unexpected challenges for TSMC.
To address these challenges and issues, TSMC has devised a series of contingency plans, but implementing them in practice is no easy feat.
03
Conclusion
In the first half of 2023, amid a challenging global environment for the electronic semiconductor market, semiconductor foundries worldwide faced difficulties, and TSMC was no exception. However, even in such circumstances, TSMC managed to achieve a historical high with a 60% global market share in semiconductor foundry capacity in the first quarter. This achievement underscores TSMC’s exceptional technological prowess and competitive edge, particularly when compared to its competitors grappling with similar adverse conditions. It is a testament to the confidence TSMC has in its ability to expand on a global scale.
Simultaneously, maintaining a high gross margin (above 54%) has become an increasingly important metric for TSMC’s top management. This metric is determined by their technological capabilities and is a shared concern among shareholders, especially in recent years when they have been investing heavily in advanced process semiconductor fab construction, with expenditures ranging from $32 billion to $40 billion annually. With such substantial investments, sustaining a high gross margin has become a significant challenge and adds pressure to TSMC.
Building semiconductor fabs globally introduces additional costs and uncertainties, making it a challenge for TSMC to maintain a high gross margin. Therefore, securing more subsidies from local governments becomes crucial. Perhaps in the coming years, we may witness more negotiations between TSMC and governments in the United States, Japan, Europe, and other regions as they vie for financial incentives.
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