On a drizzly December morning in Taipei, the most pressing issue in Taiwan’s Legislative Yuan was not the dozens of Chinese military aircraft and vessels that had stalked through the Taiwan Strait the previous weekend, but a new semiconductor factory that was under construction an ocean away. 

Inside one of the Yuan’s austere meeting rooms, opposition politician Chiu Chen-yuan grilled foreign minister Joseph Wu about the latest unstoppable expansion of Taiwan Semiconductor Manufacturing Company (TSMC). Was the company under pressure to export its most sophisticated technology to its new plant in Phoenix, Arizona, Chiu wanted to know. Had the government inked a “secret deal” with the Americans to disadvantage Taiwan?

In the weeks before, conspiracy-tinged comments on Facebook, YouTube, the social networking app LINE and the Chinese microblogging site Weibo had snowballed, with Chinese state-affiliated media playing up the theme that Taiwan’s ruling Democratic Progressive Party (DPP) was “hollowing out” TSMC with U.S. help. With the discourse gaining traction, Chinese state media organizations also piled on, calling president Tsai Ing-Wen’s party an “accomplice” in shipping Taiwan’s national champion to the United States. By the time of Taiwan’s local elections on November 26, the idea had become the “main topic of information operations,” according to a report from Taipei-based Doublethink Lab, which tracks online misinformation. 

The DPP, which typically takes a hard line against Beijing, took a beating in the November elections, losing several mayoral elections including the capital Taipei, and although Tsai remains president, she has stood down as head of the party. Chinese media has not stopped hammering the theme, however. And as Chiu’s questioning weeks later showed, the fear has become pervasive and enduring: Is TSMC selling out to the United States?

Wu, the foreign minister, “unequivocally” denied any secret deals with the U.S. government. But the news the very next day undermined his assurances. 

Joe Biden tours the Arizona factory with TSMC CEO C.C. Wei (left) and Chairman Mark Liu (right), December 6, 2022. On the right, a clean room under construction. Credit: Michael Chow via USA TODAY NETWORK

On December 6, TSMC chairman Mark Liu used a tour of the new Arizona facility to announce a tripling of its investment in the United States. Flanked by U.S. president Joe Biden and a host of tech industry executives, including Apple’s Tim Cook, Liu committed $40 billion to the new factory, which will include upgrading its production to use a more advanced process when it begins operating next year and adding a new plant that will begin production of TSMC’s state-of-the-art 3-nanometer chips in 2026.

Semiconductors power everything from electric vehicles to advanced missile systems to the latest iPhones. Since Fairchild Semiconductor first commercialized the integrated circuit in the 1950s, tech companies have competed to develop the most advanced chips by cramming more and ever smaller transistors on silicon wafers. As electronics manufacturing steadily migrated to Japan and other parts of Asia, TSMC broke with much of the industry in the 1980s to specialize as a contract manufacturer for other firms, rather than competing with its own clients to produce chips designed in-house. That move coincided with the birth of the ‘fabless’ manufacturing model, where chipmakers forgo expensive semiconductor foundries and focus solely on chip design.

Most of the leading U.S. chip companies have sold off their fabricators altogether, with Intel Corp the major exception, and TSMC became a world-beating business by virtue of its ability to squeeze more transistors onto a chip than anybody else. It currently makes up 56 percent of all chip sales globally, according to market researcher TrendForce, and its 3-nanometer process is currently the world’s most advanced.

After Liu’s announcement in Arizona, Biden said triumphantly, “American manufacturing is back, folks.”

In Taiwan, however, America’s gain smacked hard of Taiwan’s loss.

“Just think about it: if TSMC is turning into USMC, what’s in it for Taiwan? What will we get?” one commenter posted in response to a Taiwanese news article the day after Biden’s factory tour. The same turn of phrase was echoed in an opinion piece published in Global Times, a Chinese state media outlet that often amplifies Communist Party talking points. A few weeks after Chiu’s comments in the Legislative Yuan, members of the Kuomintang, Taiwan’s biggest opposition political party, held a press conference accusing the DPP of “giving TSMC away” to the U.S., warning that rivals like Intel would obtain its technology or poach staff with offers of higher salaries.

TSMC is Asia’s most valuable company and the ninth-biggest worldwide; its $461 billion market capitalization exceeds that of corporate titans like JPMorgan Chase & Co, Visa and Exxon Mobil at the time of writing. For Taiwan, which has just 23 million people, it is a source of considerable local pride, and its billionaire founder Morris Chang is feted as a national hero. The company estimates it accounted for 5.7 percent of the island’s gross domestic product in 2021.

But TSMC offers more than just bragging rights and economic might. The company is the leader in an industry that has long been viewed as a pillar of Taiwan’s defense against an invasion from China, which considers the self-governing island a renegade province and has never renounced force in its quest to take control of the young democracy. In his 2001 book Silicon Shield: Taiwan’s Protection Against Chinese Attack, journalist Craig Addison laid out the case that Taiwan’s electronics sector is so crucial in providing the chips needed for advanced weaponry that it creates significant incentives for allied nations to come to its defense — much as in the Gulf War, when Kuwait’s oil exports drew swift military intervention against Iraq. 

As recently as 2021, Taiwanese president Tsai invoked the ‘silicon shield’ framework, writing in Foreign Affairs that the island’s semiconductor industry “allows Taiwan to protect itself and others from aggressive attempts by authoritarian regimes to disrupt global supply chains.” The KMT used the same phrase to explain the risks around DPP’s handling of the chipmaking sector in December. And, given TSMC’s centrality to the industry, local media have dubbed the company “the sacred mountain that defends the nation” — 護國神山.

TSMC must now consider not only the efficiency of its own production processes, but also demands from customers and other countries.

Chris Miller, author and professor at Tufts University

Hence why a new factory in Arizona seemed to cause more panic on the island than passing Chinese warships — many in Taiwan fear it represents cracks in the shield.

After the disruptions of the Covid-19 pandemic, the U.S. government is seeking to promote domestic chipmaking through the CHIPS and Science Act, a $52.7 billion package of subsidies for research, development, manufacturing and workforce development, priming the pump for chipmakers like TSMC as it expands its Arizona fab. Although TSMC has operated fabricators in China, a subsidiary in Washington state and joint ventures in Japan and Singapore, the Arizona plant marks its biggest facility outside of its home market yet. The company has also said it is considering opening additional factories in Japan and Europe. 

“TSMC must now consider not only the efficiency of its own production processes, but also demands from customers and other countries,” says Chris Miller, a professor at Tufts University and author of Chip War: The Fight For The World’s Most Critical Technology. The company “faces substantial pressure to become a more globalized company in terms of its manufacturing footprint.”

It also faces pressure not to stretch itself too thin. With demands around the world, playing defense at home, and the ever-present pressure of the cut-throat chip industry, TSMC — once a master of giving clients what they want — may be giving away too much.

GROWING PAINS

In northwestern Taiwan, about an hour’s drive from Taipei, TSMC sits at the center of a sprawling high-tech ecosystem. The island’s main R&D center, the 1,342 hectare Hsinchu Science Park, hosts not just the company’s headquarters and several of its biggest chip foundries, but also campuses for several universities and the Taiwan Semiconductor Research Institute, where new engineers train to use TSMC’s advanced lithography tools and other chip making equipment. A high-speed rail line connects the R&D center to the southern city of Tainan, which hosts a second campus and several more fabricators, each of which cost tens of billions of dollars apiece and rank among the most expensive factories on Earth.

In between Hsinchu and Tainan, surrounded by little else except strip malls, the rail stops near a patch of mostly-vacant grassland that houses a 351-room dormitory complex made from sustainable construction materials and covered in solar panels. It’s here that the company is housing many of its new American engineers for training before they head to Arizona. Some have been lured by $100,000 starting salaries, subsidized accommodation, and the security of a three-year contract, the first half of which is spent in Taiwan. Others are drawn to the adventure of working for the world’s most advanced chipmaker. 

Instead, they find themselves chain smoking to manage the stress or exercising constantly to blow off steam after 12-hour workdays. 

On a warm evening in January, many could be found consoling each other at a local dive bar, grousing about the demanding work requirements of their local supervisors. Some of the new recruits hinted that they already want to leave. None of the workers spoke on the record, but experiences matching theirs are easily found online. Posts on Glassdoor, an anonymous company review site, describe a culture of micromanagement and frustrations adapting to Taiwanese work practices, pointing out that the environment is decidedly different to, say, Intel. “Certainly not for everyone,” says one of the more positive comments. 

For starters, unlike at many American companies, engineers at TSMC work in shift patterns and overtime is quite common. “That’s why TSMC can operate 24 hours a day without any temporary equipment shutdown,” says Lucy Chen, vice president at Isaiah Research.

Taiwanese engineers, brought up in the TSMC ecosystem and ethos, are often prepared for this lifestyle. But watching their new American counterparts struggle to keep up has prompted a culture clash on the factory floor and in the dormitories. On the anonymous Taiwanese bulletin board PTT, an open-source message board similar to Reddit, some complain that the U.S. engineers are “babies.” And Chen, at Isaiah Research, notes that TSMC is having an easier time recruiting Taiwanese engineers to work in its new Japanese plant than its Arizona one, in part because of “culture adaptability.”

“Employees are TSMC’s greatest asset and we continue to invest in our employees to ensure they keep growing with the company,” a company spokesperson told The Wire. “To create an open, diversified and inclusive working environment, TSMC offers cross-cultural communication and collaboration training as well as related management courses.”

The Arizona expansion is causing more than just personnel headaches for the company, however. The construction cost can be four to five times higher in the U.S. than for an equivalent facility in Taiwan, TSMC told analysts in January, because of the cost of labor, permits, occupational safety and health regulations, as well as the learning curve for new people.

And the demands to diversify its supply chain aren’t stopping with Arizona. TSMC invested $36.3 billion last year into capital expenditures and expects to spend a similar amount this year. In January, TSMC said it is considering building a second fabricator in Japan as well as possibly expanding in Europe. 

In the semiconductor industry, taking on such huge costs is risky. Chip manufacturing itself is extremely capital intensive, and companies need to show that they are generating high returns to be able to attract new funding and maintain R&D. TSMC boasted net margins of 47.3 percent in the final quarter of last year, which is one way it attracts investors. But maintaining that degree of profitability may be challenging: That was its highest level in at least a decade, compared with the average 37 percent margin it has reported during the past five years. 

“The government incentives [for geographic diversification] and the business incentives are not at all aligned,” says Jan-Peter Kleinhans, who researches technology and geopolitics for Stiftung Neue Verantwortung, a think-tank in Berlin. 

To align them, TSMC is hiking its prices. It warned clients to expect a 6 percent price increase this year, according to Taiwan’s official news agency. But not everyone is convinced it will be enough. 

“Global semiconductor revenue has entered a recession,” analysts at Morgan Stanley wrote in a research note. “We believe 2023 will be a slow year for TSMC.”

Compounding the problem is the issue of oversupply. Stockpiles of semiconductors are already piling up, the investment bank’s analysts said, with surplus inventory requiring around four months to clear, the most sluggish pace of demand in at least a decade. 

Part of the oversupply stems from weak demand in the U.S., slower growth in China prior to the end of its Covid-19 restrictions and subsequent reopening of the country’s economy, and the fact that device manufacturers are already well-stocked, particularly makers of TVs, smartphones and networking equipment. 

But an inescapable factor is sheer manufacturing capacity: in 2019, TSMC produced 10.1 million 12-inch silicon wafers; in 2022, it made 15.3 million. And that’s before the Arizona facility is due to come online next year.

“We’ve seen inventory levels going through the roof,” says Kleinhans. “In terms of pure resiliency, it’s the right thing [to do]. If there is another lockdown in Shanghai or another blocked ship in the Suez channel, we know how easily global supply chains can be disrupted. But investors are not happy about it.”

Even with the semiconductor industry currently oversupplied, TSMC is betting on demand surging in the future, justifying its investments now in overseas plants. It forecasts a $1.5 trillion sales opportunity within five years of mass production of its 3-nanometer chips alone. As the industry leader, the company is expected to benefit from demand for chips for electric vehicles, artificial intelligence and virtual reality headsets. The additional demand from commercializing OpenAI’s ChatGPT alone could exceed 30,000 chips and spur the start of an arms race in the industry, according to an estimate from TrendForce.

Perhaps seeing this upside, insurer Berkshire Hathaway — run by America’s most famous investor Warren Buffett — disclosed in November that it had taken a $4.1 billion stake in the company. But Berkshire subsequently disclosed that by the end of the same year, it had cut the value of its stake by $3.5 billion to $617.7 million. Berkshire Hathaway declined to comment, but it appeared an unusual move for an investor who typically invests for long periods of time.

The prospect of seizing the world’s most valuable semiconductor fabs and becoming a silicon hegemon could at some point this decade tip Beijing in favor of an invasion.

Jared McKinney, assistant professor of international security studies at Air University

It’s a testament to TSMC’s technical prowess that it has successfully forced its clients to pay for its overseas expansion, but that doesn’t change the fact that the company has little choice but to endure these growing pains and accede to clients’ demands. To them, the new fabs represent an insurance policy — against pandemics, supply-chain logjams and the event of war in the Taiwan strait. For the island’s people, however, that’s not quite so reassuring. 

SILICON SHIELD?

A few weeks after TSMC’s loyalties to Taiwan were questioned at the Legislative Yuan, TSMC hosted media on a tour of its latest 3-nanometer factory in Tainan. For a company that is typically highly secretive, the tour felt like an open love letter to Taiwan; the company set off fireworks as the factory’s final beam was signed and hoisted into place, and lion dancers frolicked near a table decked with sacrificial offerings of fruit and other foods.

“TSMC is maintaining its technology leadership while investing significantly in Taiwan, continuing to invest and prosper with the environment,” chairman Mark Liu told reporters at the ceremony. 

Although the 3-nanometer process will be used in the Arizona plant eventually, the lavish event underscored the fact that Taiwan had got there first.

This, says Johnson Liang, co-founder of Taiwanese fact-checking network Cofacts, is an underappreciated pattern: In the past, TSMC’s international expansions have touted advanced technology when they were first announced, but they were all eclipsed by its domestic fabricators by the time they came online.

The narrative circulating in Taiwan that “TSMC is being hollowed out and extracted from Taiwan,” he says, “fails to mention” significant contextual information, such as the fact that by the time 4-nanometer chips are made in America, smaller 3-nanometer chips will have been rolling off the production lines in Taiwan for some time. 

Currently, the company produces all of its most advanced chips in Taiwan — and it will stay this way, the company says, for the foreseeable future.

“We continue to invest in Taiwan to support the market, and we target to enter 2-nanometer volume production starting in 2025,” the TSMC spokesperson said.

Taiwan’s government remains committed to keeping it this way as well. The island, which is the size of Maryland and Delaware combined, accounts for 92 percent of the world’s most advanced chipmaking, with the remainder in South Korea, according to a 2021 report from Boston Consulting Group and the Semiconductor Industry Association. Overall, Taiwan represents a staggering 64 percent of the global chip foundry business.

Taiwan’s government has worked hard to support the industry over the years — TSMC was originally founded with state backing — and in the wake of U.S. and European subsidies, it is still doubling down. Taiwan recently passed a package of tax breaks for research and development, intended to ensure its most advanced manufacturing stays at home. And President Tsai used a new year’s address to announce a review of core industries, including semiconductors, as part of her government’s plan to “consolidate Taiwan’s key role in the global supply chain.” As TSMC founder Morris Chang told speaker Nancy Pelosi, according to Politico, the U.S.’s one-off infusion of government spending may not be enough to keep up with the rapid advances in the industry.

The Taiwanese government is also luring companies who want to be closer to the industry leader: On February 8, Merck Group, a German supplier of chemicals and materials used in chipmaking, held a groundbreaking ceremony for a new facility in the southern city of Kaohsiung, as part of a planned €500 million investment in Taiwan. 

While all these maneuvers should assuage the Taiwanese public that TSMC and the ‘Silicon Shield’ are not going anywhere anytime soon, China has an incentive to sow discord on the island and to reduce Taiwanese trust in TSMC. Jerry Yu, one of the authors of the Doublethink report, notes that the ongoing Chinese misinformation campaigns “both denigrate TSMC and attack the United States for hollowing out Taiwan, all while promoting anti-American sentiment.”

U.S. government intervention in the chip industry, after all, has been disruptive for just about everyone. In its effort to thwart China’s technological and military rise, the U.S. has taken aggressive steps to cut off China from chip supplies, including banning “U.S. persons” from working at Chinese chipmakers. TSMC, and Taiwan more broadly, are forced to deal with the knock-on effects of this ‘chip war,’ but some analysts say the overall effect could morph Taiwan’s Silicon Shield into a Silicon Magnet. 

“The prospect of seizing the world’s most valuable semiconductor fabs and becoming a silicon hegemon could at some point this decade tip Beijing in favor of an invasion,” says Jared McKinney, assistant professor of international security studies at Air University, the U.S. Air and Space Force’s center for professional military education. As China gets shut out of the semiconductor supply chain, it may become more desperate — and aggressive.

Most analysts agree that as much as China might want to possess TSMC’s capabilities, taking the island by force would immediately leave the company unable to produce chips. The physical devastation, ensuing sanctions, and lack of access to chipmaking equipment sold by the U.S. and its allies would effectively decimate TSMC’s operations. Over time, China could potentially restore some of its manufacturing capacity, but TSMC would likely be one of the first casualties of any conflict.

If Taiwan wasn’t such a powerhouse in advanced semiconductor manufacturing it would probably already have been subsumed within the People’s Republic.

Craig Addison, journalist and author

“If Beijing decides to use force against Taiwan it will be a political decision” — not a chip decision — says Bonnie S. Glaser, managing director of the Indo-Pacific program at the German Marshall Fund of the United States. “For the CCP, Taiwan is connected to the party’s legitimacy, and therefore it will be willing to pay a high economic cost to prevent its separation from the mainland.”

Addison, the author of Silicon Shield, concedes that the role of the semiconductor industry in Taiwan is more ambiguous now than when he coined the term in 2000. But still, he says, the bottom line is it’s better for Taiwan to have such a valuable and geopolitically important export than to not have it.

“If Taiwan wasn’t such a powerhouse in advanced semiconductor manufacturing it would probably already have been subsumed within the People’s Republic,” he says. After all, “there’s no such thing as a pineapple shield.”

Ultimately, that may be why threats to TSMC seem capable of producing such visceral fear. Taiwan sought to avoid becoming a pawn on the global chessboard by making itself indispensable to both the U.S. and China; now, as that rivalry pries apart the global tech industry, many on the island are waking up to discover the game has changed.

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