The TSMC Arizona Plant is a $12 Billion Capitulation

Sam Reynolds

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

Taiwan Semiconductor Manufacturing Company TPE:2330 is reportedly setting up a 5nm fab in Arizona, according to recent reports. Should the reports be true, it would be an about-face from the company's prior stance where it resisted the idea on the basis of cost and necessity

In TSMC's view, the need to have such a facility in the US for defence projects and other sensitive customers is a moot point. TSMC's own internal security mechanisms are enough to thwart industrial espionage attempts from China (after all, China is home to other chip fabrication companies that TSMC would count as a rival). It would be painstakingly difficult to plant in a hardware backdoor into chips at the hardware level, as they would come up in the validation process (when the physical circuits are compared against the designs sent by the client) at TSMC or upon delivery to the client.

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Considering the low volume of chips used by the defence sector, the number of different steps in the photolithography and masking process where original designs are compared against final output, it would just be too difficult to slip a backdoor in without detection. The bigger concern for defence officials should be the integrity of the source code being used for critical defence systems, as its leak to an adversary would have real consequential harm, but this is not a concern for TSMC as it's in the hardware business. And, after all, if TSMC's operations in Taiwan could be penetrated what's to say that a facility in Arizona would be intrinsically more secure?

There's also the issue of cost. The US already has a strong semiconductor fabrication industry (but not necessarily the pure-play outsource model) and competing for talent would be an expensive venture. But with discussions of cost come also talk of jobs. TSMC practically invented the pure-play foundry model and it fits in line with Taiwan's broader industry of contract manufacturing. TSMC's success with this industry inspired AMD NASDAQ:AMD to do the same for GlobalFoundries when it was spun off in 2008. TSMC would still likely to most of its fabrication for consumer goods at its main facilities in Taiwan, as the pricing model might not make sense to move that to the US. As public sector/government contracts have much more flexibility in the pricing, so that would be a better fit.

You can't bring up TSMC's move to Arizona without also thinking about Foxconn's TPE:2354 Wisconsin gambit. Lured by billions of dollars of tax incentives, Foxconn promised to build facilities that would employ 13,000 people. These buildings are largely empty, and Foxconn's original plan to turn Wisconsin into the capital of LCD manufacturing pivoted as the market faced a glut of panels. Now, the company says it's facilities in the state are all about an “AI 8K+5G ecosystem.” Whatever that means.

In the end, TSMC's decision to build this Arizona plant is about playing politics. It's a capitulation. Executives at the company believe that the decision will be well received by the White House, and future regulatory decisions will be made with this move in mind so that they are in the end favourable to the company. TSMC doesn't think its a necessary move, and in fact, cited it as a risk factor in a recent earnings report:

It's unlikely that TSMC's operations in Arizona will be the 'white elephant' that was Foxconn's move into Wisconsin, as demand for semiconductors seems to be perpetual. But you can't help but questioning the necessity of it all.




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