TSMC is riding high. The Taiwanese chipmaker—sole supplier of artificial-intelligence (AI) chips to Nvidia, the world’s most valuable chip designer—has seen sales more than double since the start of 2020. While other semiconductor firms fret about cooling demand for gadgets and cars, TSMC believes demand for AI is just gearing up. Investors agree, propelling its market capitalization towards $1trn and into the world’s ten most valuable firms.

As a critical supplier to American tech giants based on an island claimed by China, TSMC is in an awkward spot. But until recently it profited even from the Sino-American rivalry. Chinese companies, barred by Uncle Sam from using Nvidia’s chips, turned to TSMC to build their own. Recent events, though, suggest geopolitical constraints are starting to bind.

Last month TSMC revealed that chips it had made for a Chinese customer had been incorporated in specialist AI silicon for Huawei, a Chinese telecoms giant which since 2020 has been barred by American sanctions from working with TSMC and Western suppliers. Huawei denies breaching the sanctions. Nonetheless, TSMC told its Chinese customers that from November 11th it would no longer make AI chips for them using its most advanced manufacturing technology.

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TSMC Makes Most of the World’s Advanced Chips

This will hurt China’s Ai chip designers and startups; TSMC makes most of the world’s advanced chips. The damage to TSMC itself, though, will be small, at least initially. TrendForce, a research firm, estimates that closer regulatory scrutiny or the banning of more customers could threaten 5-8% of sales.

But China is not the only source of worry for TSMC. Taiwan’s government has become more vocal about maintaining its chipmaking supremacy. This month a minister said that TSMC was required by law to keep its most advanced technology at home, according to the Taipei Times. TSMC is due to launch its newest production process, which it calls N2, in Taiwan next year.

A source close to the company notes that Taiwan is TSMC’s home research hub, so new technologies are always introduced there first. In Arizona, where the company is building three chip factories, the previous generation of its technology, N4, is now operational. The company expects N2 to reach America only around 2030. The timing of the minister’s comments probably reflects concern that TSMC could come under pressure to bring its most advanced technology to America ahead of schedule.

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Trump Accuses Taiwan of ‘Stealing’ America’s Chip Industry

The government’s unease is not baseless. Donald Trump, America’s president-elect, has accused Taiwan of “stealing” America’s chip industry, and has slammed the CHIPS Act, a $50bn package of subsidies and tax credits to lure chipmaking to America. TSMC, which is spending around $65bn to build factories in the country, is in line for $6.6bn in grants and $5bn in loans. Mr. Trump has argued that tariffs on chips would be more effective than subsidies in boosting domestic production.

That is doubtful. For one, tariffs would need to be steep to make production in America appealing, considering it is a third more expensive to do so there than in Taiwan. The cost would be borne chiefly by American firms such as Apple, Google and Nvidia which design chips and have them made abroad. And meeting all demand domestically is a tall order. The Semiconductor Industry Association, a lobby group, estimates that chipmakers’ capital spending in America between now and 2032 will exceed $640bn. Even that would leave America with less than a third of global advanced chipmaking capacity, far short of its demand.

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Intel and Samsung, the only other makers of leading-edge chips, have delayed plans for their own factories in America because of financial difficulties. That leaves TSMC as the go-to supplier for American companies. And they, in turn, account for two-thirds of TSMC’s sales. America thus needs TSMC as much as TSMC needs America. Even so, balancing the demands of powerful governments looks as delicate an act as wiring billions of microscopic transistors.

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By The Economist
Syndicated through The New York Times Licensing
Copyright © The Economist Newspaper Limited, 2024