China vs. USA – Insurance Policy

Higher costs are a necessary insurance policy.  

• The announcement of $11.6bn in government assistance for TSMC is not really new news but it does further highlight that higher-priced chips made in the USA are probably a worthwhile insurance policy.
• The US has announced a preliminary deal with TSMC such that it will receive $6.6bn in grants and $5bn in loans in return for agreeing to build a 3^rd fab in Arizona that will come online by 2030.
• By that time, leading-edge manufacturing is likely to be on the 2nm process and the intention is that this fab will offer 2nm.
• Despite this announcement, the USA is still miles behind Taiwan as TSMC is planning to switch on 2nm manufacturing in Taiwan in 2025.
• The idea here is that clients such as Nvidia, Qualcomm and so on will be able to choose where they want to have their chips made or specify that a certain percentage of their production to come from fabs based in the USA.
• Although there has been no mention of price, I strongly suspect that chips made in the USA will cost more than the same chips made in Taiwan and it will be many years before this playing field can be levelled.
• This is for two reasons.
  • First, state subsidies which have become an integral part of the economics of semiconductor manufacturing.
  • When selecting a site for a fab, the incentives offered by the state in which the fab is to be built can have a dramatic impact on the economics.
  • For example, a 2020 study by Boston Consulting Group supported by the SIA concluded that as much as 29% of the difference between the 10-year TCO of manufacturing chips in Taiwan and the USA was due to the amount of subsidies offered.
  • This also highlights just how wary everyone has been of building advanced fabs in China as from purely an economic perspective, China would be the no. 1 choice for every semiconductor manufacturer.
  • Curiously, no one has built an advanced fab there for years with the most advanced foreign fab being TSMC’s Nanjing fab which operates at 16nm.
  • Even with the CHIPS Act, the USA remains more expensive from a TCO perspective than almost anywhere else which is a sign that on economics alone, the CHIPS Act is not enough.
  • Hence, I would be surprised to see the size of the total budget for US subsidies increase at some point.
  • Second, ecosystem where TSMC has, over several decades, built a large ecosystem of locally present suppliers and partners.
  • The value of this cannot be underestimated and it makes the development and manufacturing of chips faster and easier than in fabs that are overseas.
  • This also has a significant impact on TCO but my suspicion is that government subsidies are by far the single biggest factor.
• The net result is that someone is going to have to swallow the increased costs of manufacturing advanced semiconductors in the USA and the degree to which consumers are willing to pay a premium for a device with a US-manufactured chip is very uncertain.
• However, the move to manufacture advanced semiconductors in the USA and Europe is not about economics but about geopolitics.
• All advanced semiconductors are currently made in Tawain or Korea both of which are seen as high risk in today’s climate given their proximity to China.
• This is particularly the case for Taiwan which China views as part of China and has said that it will achieve reunification one way or another.
• Hence, it is easy to see more expensive manufacturing in Europe or the USA as an insurance policy and given the calamity that would ensue if advanced manufacturing were lost, it would appear to be a worthwhile price to pay.
• I expect that the likes of Nvidia and Qualcomm will specify a proportion of each product run to be made in the USA and then spread the cost over all of the chips meaning that there is no difference in the price based on where the product was made.
• This would reduce the problems of different costs based on where the chip is made but it does mean that electronic devices are going to cost a little bit more than they do now.
• This seems to be inevitable but with a generally higher unravelling of the value of fiat currencies against fixed assets, perhaps no one will notice.