As chip-making business returns to US, Washington - and Arizona - dangle subsidies in race against China

On a dusty patch of desert north of Phoenix, Arizona, three security guards in hard hats sit under an open tent in the blistering sun as a coyote lopes across the dirt road.

"I can't say anything. You're not allowed in here," barks one, ambling out of the shade, as scores of construction cranes, cement trucks and diggers nearby race to build a US$12 billion semiconductor manufacturing fabrication line, or fab, for Taiwan Semiconductor Manufacturing Company (TSMC), the world's leading chip producer.

Fifty miles (80 kilometres) to the southeast, the American multinational Intel Corporation is investing US$20 billion in two fabs, bringing its total to six in the Phoenix area. It is also adding two more in Ohio and an additional two in Germany. Elsewhere, South Korea's Samsung is building a fab in Texas, TSMC is investing in one in Japan and Korea's SK Group said this week that it would invest US$15 billion in the US chip sector.

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The once sleepy semiconductor industry is on a tear - spurred on by mounting US-China tensions, explosive demand for "smart" products and a global race to safeguard chip supply for national security - pushing top makers TSMC, Intel and Samsung, among others, into a searing geopolitical spotlight.

"The semiconductor industry as a whole has gone from just a nerdy corner of the economy to be front and centre," said Scott Kennedy, an analyst with the Centre for Strategic and International Studies in Washington. "It's a much more global chessboard that the companies are thinking about."

Fuelling the melee is China's race for chip primacy, outlined in its "Made in China 2025" road map, sparking fears that Beijing's ambition and leverage over supply chains could threaten strategic sectors from cellphones to F-15 fighter jets.

While China remains well behind global leaders in making advanced chips, it has spent an estimated US$150 billion trying and has a history of going all out for Communist Party-backed objectives. Last year, it spent more on chip imports than on foreign grain and crude oil combined.

"China already hated its dependence on foreign chips 20 years ago," said Roy Chun Lee of the Chung-Hua Institution for Economic Research in Taipei. "I think definitely in the long run they can catch up. If it's the national agenda, they don't worry about economic costs."

Washington's blood pressure rose recently when analyst Techinsight reported that China's state-owned Semiconductor Manufacturing International Corporation had produced a chip well beyond expectations and a close copy of TSMC technology.

This follows a nearly two-year struggle to pass the Chips and Science Act in Congress, which includes US$52 billion aimed at rebooting domestic semiconductor manufacturing and potentially billions more for scientific research. The United States has seen its global share fall to 12 per cent from 37 per cent in 1990, according to the Semiconductor Industry Association. "We need this in America," Commerce Secretary Gina Raimondo said last week.

While the legislation passed in the Senate and House this week with strong bipartisan support, it had been embroiled in squabbling over a larger China competition bill and politics leading up to the November midterm elections - feeding into Beijing's narrative that decisive authoritarian states are superior to democracies.

"The Chips Act, in my view, is going to advance the nation's competitiveness and our technological edge," President Joe Biden said on Tuesday, adding that China pressed US companies to lobby against the bill. "Taiwan produces 90 per cent of the leading-edge chips; we produce zero. China is moving ahead of us in manufacturing these sophisticated chips as well."

The legislation would provide subsidies for firms producing chips in the US, tax credits and funding for semiconductor research and development.

Critics say the legislation amounts to a government handout for highly profitable companies and risks involving Washington in economic meddling that it condemns in China. Supporters counter that Asian costs are significantly less, requiring subsidies to match those offered by Japan, Korea and China.

"As much as we may want to take a hands-off policy, as the US has typically had, many countries do have a hands-on policy," said Ganesh Moorthy, chief executive of Microchip Technology. "The objective of the Chips Act is to close that competitive gap at a national level."

"We have to decide, do we have an industrial policy," he added.

While foreign companies are eligible for subsidies under the act, given its goal of encouraging world-class manufacturing, still unanswered is how much Washington will distribute to foreign-based firms and whether the US has the patience and commitment to build the networks and supply chains required to support cutting-edge fabs.

"The American definition of supply chain resilience for semiconductors can be summed up in four words: move that stuff here," said Kennedy, who recently visited TSMC's Hsinchu headquarters south of Taipei. "It's important for the US to come to a better understanding of what its goals are."

China, meanwhile, has little doubt about its goals, despite blown deadlines and US-led efforts to restrict exports of sophisticated chip-making equipment.

Recently, it announced 28 new fab projects totalling US$26 billion and is projected to double its global share over 2020 levels - mostly of less powerful chips - to 17 per cent by 2024. Still, it remains far short of its earlier ambition of becoming 40 per cent self-reliant by 2020.

Growing concern over economic vulnerability and supply chain disruptions, amplified by recent auto industry woes, have seen Japan, Washington and the European Union offer competing subsidies and jockey to attract TSMC and its contractor network.

"It's the queen bee," said Chris Camacho, chief executive of the Greater Phoenix Economic Council, who helped convince TSMC to choose Arizona over other states. "And behind TSMC are another two dozen suppliers."

Added to the calculus is Taiwan's uneasy geopolitical status, with some viewing TSMC as insurance - it has been dubbed Taiwan's "silicon shield" or "spiritual mountain" - that Washington will defend the island should mainland China invade. Beijing considers self-governing Taiwan part of its territory to be reunited by force if necessary.

While Taiwan wants the economic benefits and prestige associated with making the world's most advanced chips, it faces pressure from foreign allies keen to safeguard their own defence and economic interests by having their own TSMC fabs.

TSMC, Intel and Samsung have tried to finesse these competing pressures by producing less advanced chips in overseas factories while keeping top-end products at home.

"All three are trying to play the US and China," said Xiaomeng Lu, Eurasia Group's geo-technology director. "I don't know if TSMC is truly placing a bet in US, or mostly on Taiwan. That's their strategy."

TSMC makes only older generation chips in China - Taiwanese law requires that Chinese semiconductor production remain two generations behind. But it is not giving the US its best either.

When it opens in 2024, its Phoenix fab is expected to produce chips well behind what it will be making in Taiwan and even further behind its projected 2025 output.

Intel has likewise produced less advanced chips in China. Last year, when it proposed a major fab expansion in China involving more advanced technology, Washington nixed it on national security grounds.

TSMC's arrival has been lauded in Phoenix, but Intel, Microchip and others have long had a substantial manufacturing presence here. "Intel hates the fact that TSMC is getting all the spotlight," said one industry executive.

TSMC's Arizona investment, its largest outside Taiwan, has required some adjustment. At home, it enjoys a direct pipeline to the government, is a media darling and commands the country's best talent. If it wants a water pipe under a major highway, it is promptly done, said Camacho. A similar request in Arizona requires a revised capital improvement plan.

TSMC, which unlike other companies only sells chips to other companies including Apple, not consumers, is known for its understated ways. It grants few press interviews, tightly controls access and limits its lobbying presence in Washington, confident that superior technology and Pentagon support will argue its case.

But the Arizona fab and potential Chips and Science Act subsidies have exposed it to Washington politics and Arizona scrutiny over pollution and water use as it grapples with higher US salaries, choosier workers, a less robust manufacturing culture and different work ethic than Taiwan's.

"If you see the workers in Hsinshu, most have master's degrees from top universities even working on the front line," said Lee. "Taking off these dust-free suits is time consuming, so they have a seven-hour no-toilet ban. Not too many Americans would agree to that."

TSMC's arrival has also intensified local competition for engineers and technicians, good news for recent graduates like Zachary Garrett, who majored in computer science at Arizona State University.

Garrett said he liked TSMC's reputation as global leader but was daunted by its reputation for working people very hard, and he ultimately chose Intel because of its work-life balance. "I'm very comfortable with a company like that," he said.

Taiwanese workers often work longer shifts and in a more hierarchical environment than Americans, amounting to some 200 more hours per year, according to Taiwanese and Organisation for Economic Co-operation and Development data.

"The work culture in Taiwan is really different," a person identified as a TSMC Arizona fab equipment engineer wrote on Glassdoor, a website where current and former employees anonymously review companies. "TSMC will have to change to an eight-hour workday five days a week."

As more tech companies since 2010 have relocated to Arizona, which boasts one-third lower production costs than California, engineering enrolment at Arizona State University has quadrupled to 28,000 students.

The hiring challenge for TSMC outside Taiwan is balancing corporate tradition and local cultures, where it must actually compete for top talent, said the dean of Arizona State's engineering department, Kyle Squires. "It's much more about the company proving itself."

One long-time Intel engineer who asked not to be identified, citing personnel concerns, said he applied to TSMC last year but stayed put after realising how small Arizona was in TSMC's overall orbit. Intel has struggled, he said, but seems to be regaining momentum. "We'll try and get even with TSMC. But to surpass them, they're already doing so well," he said.

Some TSMC workers in Taiwan are balking at Phoenix assignments, analysts said, viewing with some reluctance the prospect of time in the desert city making second-tier chips, prompting the company to increase its incentives.

"What I've heard is that serving in Arizona is part of your career ladder," Lee said, "in order to get promoted when you return to Taiwan."

TSMC did not respond to a request for comment about personnel challenges. But retired founder Morris Chang, 91, has not minced words, suggesting in interviews that the United States lacked sufficient talent and manufacturing chops to build a world-class chip sector, even as he played down the role of semiconductors in any US-China military clash.

"Right now you're talking about spending only tens of billions of dollars of money of subsidy. Well, it's not going to be enough. I think [efforts to jump-start manufacturing] will be a very expensive exercise in futility," he said in April. "Frankly, if there is a war in Taiwan Strait, then I think the United States will have more than chips to worry about."

Back at Intel's sprawling 700-acre Ocotillo campus, where company golf carts buzz along streets named Data Drive and Transistor Terrace, the company sees its corporate culture as a selling point in retaining workers, with employees noting that managers seemed eager to spread Chang's critical comments about American workers.

Arizona communications director Linda Qian points out the facility's water recycling centre, community engagement programmes and on-site doctor, dentist, cafe, prayer and nursing rooms. While Intel competes with TSMC, it also buys its top-end chips.

"It's wonderful to have another world-class technology manufacturer in the state," she said. "They're our supplier on some of our products."

The US will need to stay the course if it wants to compete, said Camacho.

"Don't get complacent," he said. "China's commitment has forced the US to decide what kind of future it wants."

This article originally appeared on the South China Morning Post (SCMP).

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