Following previous controversies of supplying 7nm chips to Huawei through proxies, TSMC is rumored to be requested by the U.S. Department of Commerce to suspend shipments of all its 7nm or more advanced chips to the AI/GPU clients in China, starting from today (November 11), according to the reports by the Financial Times and Reuters.

Though the information has yet to be confirmed, neither does TSMC make a clear statement to its clients, market sources seems to increase the credibility of the matter. A report by TechNews, therefore, compiles the development and the possible impact of the incident, providing further insights into the current situation. Please read below for the report’s analysis on four key aspects:

Why Now?

According to Reuters, the Department of Commerce sent an “informed” letter to TSMC to make the request, enabling the U.S. to bypass lengthy rule-making procedures and swiftly impose new licensing requirements on specific companies. The action comes shortly after TSMC told the Department that one of its chips had been found in a Huawei AI processor.

The move, in some way, reportedly indicates growing concerns from both Republican and Democratic lawmakers about the effectiveness of export controls on China as well as the U.S. authority’s enforcement of these regulations.

Earlier in July, the Biden administration reportedly drafted new rules targeting chipmaking equipment exports and aimed to add around 120 Chinese companies to the restricted entity list. However, despite initial plans for an August release, the rules have not yet been issued, according to Reuters.

Current Scenario of TSMC and Its Clients in China

However, things aren’t as bad as they seem, as sources tend to indicate that TSMC is not truly halting supply of 7nm and below advanced processes to China, but is instead required to conduct individual project reviews for each customer wishing to place orders. Production will only proceed after obtaining the necessary permits, according to TechNews.

According to another report by TechNowvoice, the main focus of the current restrictions would be on AI chips, which means products such as GPUs will be closely monitored. On the other hand, mobile and automotive chips may be excluded from the restrictions.

The TechNowvoice report further suggests that within the AI chip category, those responsible for training will be the key target of the restrictions, while chips used for AI inference may have a chance of passing the review.

Criteria for Export Restrictions

According to TechNowvoice, market speculations indicate that there are four criteria for evaluation, including transistor count (exceeding 300 billion), chip size (exceeding 300mm²), HBM incorporation, and whether the chip leverages CoWoS packaging.

Given these standards, it will be increasingly difficult for AI chips based on current mainstream architectures to pass the review and obtain approval from the U.S. Department of Commerce, the report indicates.

The report further suggests that the move will likely impact the four major cloud computing companies in China, including Huawei, Baidu, Tencent, and Alibaba. While Huawei has already been included in the blacklist, the other three companies, which have been collaborating with TSMC on AI chip development, may also require further reviews in the future.

What Would the Impact Be?

TSMC’s decision would be a major blow to China’s AI ambition, as AI and GPU companies in China will no longer have access to TSMC’s advanced process, which could lead to higher costs and longer time-to-market, and significantly impact their product performance and market competitiveness.

A supply chain reshuffle is likely to follow, as Chinese chip design companies may need to seek alternative foundries, according to TechNews.

According to the latest research report by TrendForce, if the policy takes effect, it could impact TSMC’s revenue performance and utilization rates of its 7nm and below advanced process capacity, while also affecting the future development of China’s AI industry.

For the first three quarters of 2024, TSMC’s revenue distribution shows that advanced nodes accounted for 67% of its total revenue—a key revenue source. However, TrendForce highlights that the major clients for TSMC’s 7/6n, 5/4nm, and 3nm processes are primarily from the U.S., Europe, and Taiwan. Consequently, even if regulatory actions impact business some Chinese clients may be lost, TrendForce expects other customers to offset this loss, limiting the potential effect on advanced process utilization rates.

TSMC’s revenue from China has remained steady at 11% to 13% for the full year of 2023 and the first three quarters of 2024. If regulatory scrutiny of TSMC’s advanced processes intensifies, or if certain Chinese clients are added to the Entity List—particularly affecting Chinese AI-related IC design companies, IP providers, third-party design services, or other businesses that depend on TSMC’s advanced processes for project initiation, tape-outs, and mass production—TSMC could face a revenue impact of approximately 5% to 8%.

However, strong global demand for AI chips and TSMC’s planned price increases for advanced process clients are expected to help mitigate some of this impact, according to TrendForce.

Read more

• [News] TSMC Reportedly to Halt 7nm and Below Chip Shipments to China’s AI Firms Next Week
• [News] TSMC Reportedly Halts Shipments to Chinese Firm Sophgo After Chip Found in Huawei Processor

(Photo credit: TSMC)