Chip industry’s virtuous circle made vicious by Biden’s policy- Forcing chip foundries to turn over internal files is a lose-lose proposition

First posted in Asia Times. A report of this posted appeared in China Daily. Chinese version posted in Sing Tao Daily. I commented on this subject in China Economic Net. Same piece also appeared in China Daily. Some years ago, before my retirement, I offered the observation that the semiconductor industry had become a remarkably virtuous circle across the world. As everyone knows, in a virtuous circle, all participants win. True enough, semiconductor technology was discovered and developed in California’s Santa Clara county, south of San Francisco, which is how it became known to the world as “Silicon Valley.” There Intel Corporation pioneered the advances in its microprocessor technology and created the mega personal-computer industry. Other entrepreneurs in the valley soon followed Intel, either to compete with better circuit designs or to develop complementary integrated circuits to expand the use of semiconductors in a multiplicity of applications. Thus the role of semiconductors proliferated into everyday use, and they now serve many essential functions not conceived by the original inventors. A recent example is the dependence on microchips to execute many functions in automobiles. A worldwide shortage of chips for cars has brought the manufacture of autos to a near standstill. The severe economic consequences of this stoppage have given US President Joe Biden’s administration the excuse to take unprecedented action; more on that later in this article. As the industry evolved, the mantra was to design and make every generation of chips faster, cheaper and smaller. The complexity of each generation raised the cost of making them exponentially. Today, the cost of fabricating (the industry’s term for producing chips) the most advanced devices is in the billions of dollars. Soon, companies in the US dropped out of making their own chips because of the escalating capital investment required to keep up. The techno-entrepreneurs concentrated on designing new devices for new applications. All that required was some computer-aided design stations and a group of smart circuit designers. TSMC fills a need Taiwan Semiconductor Manufacturing Company saw this developing industry trend and decided to concentrate on fabrication technology and kept committing the capital investments needed to keep up with the advances in process technology. TSMC’s strategy was to serve as everybody’s foundry and offer semiconductor fabrication as a service for a fee. To be credible, it promised strict confidentiality, to protect the client’s trade secrets and never to make its own devices to compete with its customers. The “fabless” companies rushed to Taiwan to take advantage of this win-win business arrangement. As a matter of self-interest, these companies willingly shared their know-how with TSMC to improve the manufacturing process so that TSMC steadily improved its fabrication techniques. The fabless companies received their proprietary chips at reasonable cost in a timely manner without a heavy capital commitment. Very quickly, TSMC became the world’s leading semiconductor foundry service company. Others followed suit and copied the TSMC model, but the Taiwanese company captured more than 50% of world’s chip-foundry business and maintained its grip as the leader of semiconductor manufacturing technology. Companies that have enjoyed great success taking advantage of the TSMC business model include Apple, Nvidia and Huawei. Apple designed proprietary chips for all of its product lines across the board and has them made in third-party foundries, mostly by TSMC. Nvidia is the world leader in designing chips for complex computational tasks such as in computer games, machine learning and artificial-intelligence applications and even for mining cryptocurrencies. TSMC is a major supplier of Nvidia’s chipsets. Huawei relied on TSMC’s advanced fabrication technology to make the Chinese company’s proprietary chips for its smartphones and, of course, for its fifth-generation (5G) telecommunication equipment. US, Taiwan and China form a virtuous circle For a while, this was a virtuous arrangement. Apple took its designs to Taiwan and assembled its chipsets into iPhones, iPads and computers in China and sold them worldwide. Nvidia had its chip designs made in Taiwan and also enjoyed worldwide sales. But then Huawei got too successful and became the world leader in 5G and a major supplier of smartphones. The former Donald Trump administration in the US thought the one way to stop Huawei was to deny it access to TSMC’s foundry services and also to any American-owned semiconductor technology. Trump’s successor Joe Biden has gone a step further by becoming the Godfather of the worldwide semiconductor industry and make an offer the foundries cannot refuse: Turn over your confidential files to the US Department of Commerce (DOC) or else we will stop you from operating. The foundries were given 45 days to comply after the September announcement, and it appears that the leaders, TSMC and Samsung, will comply and others will follow suit. Neither Taipei nor Seoul can stand up to Washington and fight this strong-armed unethical outrage. The US has long envied China’s ability to set industry policies in accordance to national priorities. Apparently, the latest DOC edict is Biden’s attempt to mimic Beijing and favor domestic industry, namely Intel, with policy and financial subsidy. TSMC will lose TSMC’s position in the industry will no doubt be diminished. It will not able to collaborate in the manner it was used to and now will only be able to serve its customers in China with great difficulty, if at all. Its covenants with its customer is in tatters. If TSMC relocates some of its facilities to the US to please Washington, it will face the same set of comparative disadvantages of having to operate in America that caused Intel to fall generations behind. Cutting off China will force that country to accelerate the development of indigenous semiconductor technology. It will be stymied for an interim period but in the end, China will have its own semiconductor production and market. As TSMC loses its luster, skilled management and technical personnel will seek opportunities elsewhere. Some might migrate to the US but more are likely to look for jobs in China, where they will not be penalized for language or cultural disconnect. It’s not at all certain that Intel can catch up to TSMC thanks to Washington’s assistance. Besides policy and financial subsidy, doing so will also require people with motivation and skillsets. In that respect, China far outnumbers the US. Washington seems to think its is playing a win-lose game. It doesn’t seem to appreciate that by cutting China off, American companies will be deprived of access to the largest market in the world. When the world’s semiconductor market is split into two, the halves will be less than the whole. Thus a virtuous circle will become dysfunctional, and everybody will lose.