Taiwan Semiconductor Manufacturing Co is among the world’s most important technology companies. It is irreplaceable, and the service it offers to hundreds of clients is crucial to how the modern world functions, from smartphones and satellites to factory automation.
And yet TSMC’s ability to choose its own destiny is slowly being whittled away by a growing tide of national interest, security worries and local concerns. Revenue fell for a third straight quarter while profit dropped the most in four years, the Hsinchu, Taiwan-based company said Thursday. Shipments plummeted 27%, the biggest decline in at least six years, as China’s recovery proceeds slower than expected and global clients continue to digest stockpiles built up during Covid-19.
This past week offered a snapshot of the many challenges the company has faced over the past few years. They’re not short-term crises to be handled and forgotten, but part of long-term trends shaping global trade and investment.
On Tuesday, the company canceled plans for a new factory at Longtan in Northern Taiwan after protests by local residents who didn’t want the project and complained about having their land appropriated. Now, the company must look for a new plot on which to expand.
Then the US Commerce Department published updated rules on semiconductor trade with China, which include closing prior loopholes that let TSMC clients such as Nvidia Corp reconfigure the design of advanced chips in order to skirt previous regulations. Washington is increasingly concerned that American technology could be used against it by Beijing and other rivals, so cutting access through embargoes has become a tool of US national security policy. With 59% of revenue coming from leading edge nodes — smaller than 7 nanometers — these curbs will inevitably impact customers and TSMC, though executives said Thursday this will be limited and can be managed.
Meanwhile, its plans for US production are fraught with drama, including a shortage of the type of labor needed to build its fab, and a union backlash against workers being imported from Taiwan to help get the project back on track. In July it announced that commencement would be pushed back from 2024 to 2025.
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TSMC wasn’t exactly eager to put down US$40 billion to build factories in Arizona, but geopolitical winds are currently stronger than business logic. It has since added Japan and Germany to its plans to create a global footprint. These moves will raise costs, stretch its engineering teams, and create new logistical challenges while bringing no discernible financial or business benefit.
Morris Chang, who founded the company 36 years ago and retired in 2018, has been vocal in his disdain for what’s happening in the world. An avid reader with a solid grasp of history, Chang last weekend reiterated previous observations that globalization in the chip sector is dead. The company’s foreign expansion doesn’t negate his thesis, but rather bolsters it: Nations want their own chip sector, and they all need a TSMC fab to make it happen.
CEO CC Wei and chairman Mark Liu have made clear that overseas expansion is not entirely within TSMC’s control. These decisions are based on customer needs and necessarily levels of government support, Wei told investors on the earnings call, reiterating previous statements. Clients, including Apple Inc. and Nvidia, have publicly stated a desire to have their chips made in the US, even though there’s no cost or operational reason for it. It’s largely a marketing exercise as brands try to show they take seriously the risk of Taiwan’s uncertain security situation.
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Firings and layoffs at TSMC are almost unheard of, a track record most peers cannot claim. But in a new era where its workforce is spread across the globe, the economic viability of those higher-cost sites is yet to be proven. Job cuts may need to become part of its business strategy if the company is to maintain strong earnings and the cash flow needed to shell out more than US$30 billion annually on new equipment. This could have flow-on effects that TSMC would want to avoid: Every engineer who departs becomes a potential asset to a growing band of rivals keen to tap into that expertise.
China, whose chip sector is built around Shanghai-based Semiconductor Manufacturing International Co, has a penchant for luring staff away. Intel Corp is now getting into the made-to-order business and already has a facility in Arizona. CEOPat Gelsinger would gladly vacuum up any staff TSMC lets go.
Then there’s the simple economics of an increasingly expensive chip business with a shrinking list of clients that need bleeding-edge capacity. The current boom in generative artificial intelligence is helping fill a gap left by waning demand for smartphones, but that won’t last forever. Such boom-and-bust cycles have been an integral part of the semiconductor industry for decades. TSMC has been adept at managing these changes because it had full control over where it built, how much it spent, and the level of staffing required to keep servicing clients.
It’s still calling the shots, even amid the current global uncertainty, but there are many more stakeholders pulling it in different directions. That’s a new normal TSMC will need to face. - Bloomberg Opinion
