Due to escalating geopolitical risks, Tesla is reportedly requesting its suppliers to begin manufacturing components and parts outside of China and Taiwan as early as 2025.

According to a report from Nikkei News on May 23rd, citing sources from the supply chain, suppliers of printed circuit boards, panels, and electronic controllers for models sold outside of China have recently received requests from Tesla to avoid China and Taiwan. The reason cited is the increasing geopolitical risks in the Greater China region prior to the U.S. presidential election. The objective of this move is to create alternative supply sources for markets outside of China to avoid disruptions in the supply chain.

Reportedly, a Taiwan-based supplier of Tesla revealed that Tesla wants all components to be OOC, OOT, meaning ‘out of China’ and ‘out of Taiwan.’ Allegedly, they hope this proposal can be implemented in new projects next year. Tesla is said to have made this request before the US government increased tariffs on Chinese electric cars fourfold to 100%.

Nikkei News’ report also indicates that Tesla has discussed this issue with suppliers in Japan, South Korea, and other Asian countries. A component supplier source cited in the same report mentioned that his company has responded to Tesla’s request by expanding production in Thailand. The source claimed that for many customers like Tesla, the “China Plus One” strategy—which involves diversifying investments beyond China into other countries—also includes avoiding Taiwan.

The report further cited sources, indicating that American car manufacturers such as General Motors and Ford are also instructing their suppliers to explore on relocating their electronic production lines away from China and Taiwan. However, they have not formally made requests similar to Tesla’s.

Another source cited in the report remarked that Tesla is the most proactive among American automakers in wanting to avoid risks associated with China and Taiwan, but implementing the OOC and OOT strategy is indeed challenging and costly.

Tesla has previously placed orders with TSMC for numerous chips related to electric vehicles. For instance, the supercomputer chip “D1” is utilizing TSMC’s 7nm technology along with advanced packaging processes.

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In October 2022, the U.S. imposed a new wave of chip controls on China, but TSMC ultimately received an extension of its exemption permit from the U.S. Department of Commerce for one year. This exemption is set to expire on May 31, potentially impacting the shipment schedule of the Nanjing plant.

TSMC stated that in October last year, the company applied for an indefinite exemption from the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce, and the process is still ongoing. As per a report from Commercial Times, industry sources have noted that if a new permit is not obtained, the Nanjing plant will need to apply for export permits on a case-by-case basis for certain items sourced from the U.S. starting June 1.

The U.S.-China trade war, which began in 2018, saw the U.S. impose stricter export controls in October 2022 on certain high-performance computing chips and semiconductor production items when exported to specific countries. While South Korean semiconductor companies like Samsung have received indefinite extension exemptions for semiconductor equipment controls in China, TSMC’s Nanjing subsidiary only secured a one-year exemption from the U.S. government, drawing significant attention.

Currently, TSMC operates 12-inch fabs in both Nanjing and Songjiang, Shanghai, along with 8-inch fabs, catering to local chip design companies. The most advanced process is at 16 nanometers. Over the past five years, TSMC’s revenue share from China has gradually declined from 20% in 2019 to 12% in 2023.

The latest news from TSMC indicates that it has obtained “Validated End User (VEU)” authorization, according to Commercial Times. However, according to TSMC’s annual report, there is no guarantee that the authorization obtained will not be terminated in the future.

TSMC emphasizes that while global trade barriers may increase the company’s production costs, its operations have not been significantly impacted so far. However, with the deepening of global trade tensions, related regulations, laws, and measures may still have negative effects on its business and operations. TSMC also reiterates its commitment to continue monitoring changes in trade policies and measures among major economies and taking corresponding measures based on subsequent developments.

Industry sources cited by the same report predict that the need for TSMC’s Nanjing plant to apply for export permits on a case-by-case basis in the future will inevitably increase operational procedures and extend the wafer shipment schedule in that region.

Additionally, on June 4th, TSMC’s shareholders will hold a comprehensive election for the board of directors. One of the independent directors, Ursula Burns, also serves as the Vice Chair of the Supply Chain Competitiveness Advisory Committee for the U.S. Department of Commerce. Orders from specific countries will undoubtedly receive close attention from the board of directors in the future.

Besides China, TSMC’s global expansion has also reached locations in the United States, Japan, and Germany, solidifying its goal of being a “long-term and trustworthy provider of technology and capacity.”

TSMC’s Kumamoto Plant in Japan held its opening ceremony in February, with mass production expected to begin in the fourth quarter. Meanwhile, as per a previous report from Reuters, TSMC will start construction of its first chip plant in Europe in Dresden, eastern Germany. The project is scheduled to commence in the fourth quarter of this year, with production expected to begin in 2027.

In contrast, the construction progress of its Arizona plant in the United States has been relatively slow. Due to the delay in the first phase’s production timeline from the end of 2024 to the first half of 2025, the production schedule for the second phase will also be postponed to start after 2027.

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(Photo credit: TSMC)

Sources have revealed that major Chinese chip manufacturers such as SMIC (Semiconductor Manufacturing International Corporation) and CXMT (ChangXin Memory Technologies) are striving to localize the supply of critical chip materials and chemicals. This move is expected to counteract U.S. export controls and could potentially exclude global suppliers from the Chinese market.

According to a report from Nikkei News, since last year, SMIC has accelerated its efforts to require customers to help monitor, verify, and adopt local suppliers. This adoption covers a range of materials used in the chip manufacturing process, including wafers, chemicals, gasses, and other essential materials. Since being added to the U.S. entity list at the end of 2020, SMIC has been continuously exploring local supply alternatives.

Reportedly, CXMT is also actively launching a similar initiative to investigate local suppliers to replace foreign sources.

These actions indicate that China’s latest localization efforts extend beyond merely increasing the use of local chip manufacturing equipment. They now encompass hundreds of chemicals, materials, and gasses, which could potentially push foreign suppliers out of the local market.

Another source cited in a report from Nikkei news mentioned that chip manufacturers are maintaining ties with global suppliers of chip chemicals to avoid sudden impacts on production quality. However, strong incentives are stimulating the development of Chinese material suppliers. For example, National Silicon Industry Group is growing into a competitor against industry leaders like Shin-Etsu Chemical, Sumco, and GlobalWafers.

Chinese chip manufacturers are also expanding their use of local sputter targets, polishing pads, slurry, and ultra-high purity chemicals and gasses. These critical chip manufacturing materials markets have traditionally been dominated by foreign suppliers such as 3M, DuPont, and Sumitomo Chemical.

Sources cited in Nikkei’s report further indicate that these actions initially apply to less advanced chip manufacturing processes, such as 55nm and 40nm, but will eventually extend to processes below 28nm.

However, as per another report from Economic Daily News, some Taiwanese companies have indicated that the impact is limited. The areas that Chinese manufacturers can capture are mostly lower-end products, while mid-to-high-end products still heavily rely on foreign suppliers for the time being.

Taiwanese companies cited by Economic Daily News point out that China has been promoting the localization of its semiconductor supply chain for many years. While policy does provide some momentum, the key issues remain quality and yield rates. Customers are said to be reluctant to frequently adopt new suppliers, making it difficult to achieve comprehensive replacement.

Industry sources cited in the same report further note that China’s localization efforts in semiconductors are primarily focused on mature processes, with more noticeable progress in the mid-to-low-end sectors. For advanced materials like photoresists and polishing slurry, products from Japan and Western countries still hold a competitive advantage in terms of yield.

Additionally, industry sources mention that China is advancing its localization efforts more rapidly in the area of small-sized silicon wafers, which are mainly used for testing rather than production. However, for 8-inch and 12-inch silicon wafers, the market is still predominantly controlled by major foreign manufacturers.

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Previously, the U.S. Department of Commerce revoked Intel and Qualcomm’s export licenses to Huawei, leading to speculation that they are now prohibited from collaborating with Huawei. According to a report from TechNews, Qualcomm anticipates that after 2024, it will no longer receive product revenue from Huawei but will continue to collect patent royalties.

As per a report from global media outlet tom’s Hardware, on May 7, 2024, the U.S. Department of Commerce informed Qualcomm that it was revoking the company’s license to export 4G and certain other integrated circuit products, including Wi-Fi products, to Huawei. a nd its affiliates and subsidiaries, effective immediately.Consequently, Qualcomm expects no product revenue from Huawei after this year.

According to TechNews, while Qualcomm used to provide processors to Huawei for use in its smartphones, Huawei’s HiSilicon division has developed its own chipsets, Kirin 9000 and 9010, therefore barely needing the support from Snapdragon processors.

Qualcomm reportedly noted in another statement that Huawei has recently launched new 5G-supported devices using its own IC products. Although Qualcomm can still sell IC products to Huawei under the current license, it does not expect to receive any product revenue from Huawei after this year.

Despite having its own processors, Huawei lacks the alternative for Intel’s Core or Xeon CPUs from PCs and servers, and will likely continue using them for the foreseeable future, according to tom’s Hardware. Meanwhile, Qualcomm may continue to collect patent royalties from Huawei and other Chinese smartphone manufacturers.

Qualcomm also mentioned that it has recently extended, renewed, or signed licensing agreements with several major OEMs. Negotiations are ongoing with key OEMs, including Huawei, for agreements set to expire at the beginning of fiscal year 2025.

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To strengthen its semiconductor supply chain, the Chinese government is reportedly requiring domestic automakers, including BYD, to expand their procurement of locally-produced chips. The goal is to increase the proportion of domestically-sourced automotive chips to 25% by 2025.

According to a report from Nikkei on May 16th, the Chinese government has instructed major local automakers to increase the proportion of domestically-produced automotive chips they procure to 25% by 2025 from 10% currently. The Chinese authorities hope that by raising the procurement ratio of Chinese-made chips, they can accelerate the pace of independence for the country’s semiconductor supply chain.

As per the same report, the Chinese Ministry of Industry and Information Technology (MIIT), which is responsible for national automotive industry policy, has asked major Chinese automakers to increase the local procurement ratio of automotive chips to 20-25%. This request targets not only the major electric vehicle manufacturer BYD but also SAIC Motor, Dongfeng Motor, GAC Motor, and FAW Group.

However, this requirement is not mandatory; instead, it encourages automakers to expand their procurement of local chips through incentives. An industry source cited by the same report revealed that ultimately, the goal is for all automotive chips to be locally sourced.

The report further indicates that though the conflict between China and the U.S. in the semiconductor sector continues to intensify, manufacturing technologies used for automotive chips are usually not the most advanced, and therefore not subject to U.S. export controls.

This means that Chinese semiconductor manufacturers will be able to procure manufacturing equipment from overseas, bolstering their automotive chip businesses.

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