Geopolitical factors are driving countries to actively establish semiconductor manufacturing locally and offer subsidies. According to TSMC’s annual report, subsidies received from Japan and China amounted to NTD 47.545 billion in 2023, signaling a 5.74-fold increase from the previous year, reaching a record high. In contrast, the report also suggest the subsidies from the US government have yet to materialize.

TSMC did not specify the individual amounts of subsidies from the Japanese and Chinese governments. However, estimations cited by the report suggest that the Japanese government, aiming to revitalize the semiconductor industry, subsidized TSMC’s Kumamoto plant with up to JPY 476 billion, likely serving as the primary driver behind the substantial increase in TSMC’s subsidies in 2023.

The construction of TSMC’s Kumamoto Fab began in April 2022, with full assistance from the Japanese central and local governments. Recently, the opening ceremony was held, and trial production has commenced, with mass production expected in the fourth quarter of this year.

The subsidies from the Japanese and Chinese governments to TSMC are mainly used to subsidize the costs of real estate, buildings, and equipment purchases, as well as some of the costs and expenses associated with building construction and production operations.

On the other hand, TSMC’s US fab began construction in early 2021, with a grand tool-in ceremony held in December 2022, attended by the US President. Initially planned to invest USD 12 billion, the facility aims to build a N5 process fab with a monthly capacity of 20,000 wafers. Construction was scheduled to commence in 2021, with mass production slated to begin by the end of 2024, creating approximately 1,600 job opportunities in the local area.

However, it was previously reported by the TechNews that 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. Subsequently, the production schedule has been pushed from this year to next year.

Despite the US government’s declaration to reinvigorate manufacturing and the introduction of the “CHIPS Act,” totaling USD 52 billion in subsidies, only three US companies have been subsidized so far.

These include BAE Systems, Microchip, and the third-largest foundry, Global Foundries, with Global Foundries receiving the most substantial subsidy of USD 1.5 billion. As of now, subsidies for TSMC have yet to be finalized.

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(Photo credit: TSMC)

In response to the high demand for AI chips, TSMC has once again initiated a large-scale expansion in northern, central, and southern Taiwan. This expansion includes the first tool-in and the construction of 2-nanometer fabs and advanced packaging plants.

Industry sources cited by the Liberty Time News have suggested that investing in eight to ten facilities may be necessary for the next-generation 1-nanometer technology in Taiwan.

Hot Demand for AI Chips Sparks Ongoing Installation and Production

As per the report citing industry sources, last year, TSMC’s pace of building factories in Taiwan slowed down due to the downturn in the semiconductor industry. However, with the industry’s recovery this year and the high demand for AI chips, expansion efforts in the north, central, and southern regions have become more active.

In April, first tool-in will be commenced at the Baoshan 2-nanometer plant (Fab 20) in the Hsinchu Science Park. Additionally, the 2-nanometer plant (Fab 22) in Kaohsiung is under construction, with plans for a third plant underway. TSMC’s 2-nanometer process is scheduled for mass production in 2025.

AI chips, emphasizing computational power, universally adopt advanced processes. The surge in demand for AI chips is driving the need for advanced packaging technologies like CoWoS.

Currently facing overwhelming demand, TSMC is expanding its advanced packaging facilities in Zhunan, Central and Southern Taiwan Science Park, with plans to start tool-in and join production lines this year. The advanced packaging facility in Chiayi is also commencing construction this year.

Generation of One-Nanometer Fabrication Plants: 8-10 Facilities Needed

According to the report from Liberty Time News citing sources, Intel’s construction of fab typically takes about five to six years. On the other hand, TSMC’s construction and first tool-in in Taiwan are estimated to be completed within two years.

With a monthly installation capacity of 200 units per month for a two-nanometer plant, TSMC reportedly plans to advance to 1.4-nanometer and 1-nanometer advanced processes after the two-nanometer.

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(Photo credit: TSMC)

According to the Economic Daily News, the AI wave is ushering in a demand for updated specifications in CMOS Image Sensors (CIS), with the global CIS leader, Sony Corporation, aggressively positioning itself to take advantage of this trend. As part of the semiconductor industry’s move towards localized production, Sony has placed significant orders with TSMC’s new Kumamoto plant in Japan, boosting the production volume for the fourth quarter and rapidly increasing the new plant’s capacity utilization.

TSMC does not comment on individual customers or orders. Industry sources point out that the CIS component market previously faced an inventory adjustment issue for over a year. Recently, with clients restarting stock replenishment in anticipation of a recovery, coupled with the AI effect, various end-use applications are adopting lenses developed specifically for AI applications. This shift is expected to drive a new wave of demand for replacing old lenses with new ones to capitalize on AI lens opportunities.

Sony is optimistic about future opportunities in automotive and consumer sectors, and intends to extensively utilize TSMC’s 22nm process for producing CIS components and Image Signal Processors.

Furthermore, to seize the AI business opportunities, Sony has launched Digital Signal Processors (DSP) equipped with AI algorithms, which are expected to enhance applications such as human motion analysis, image processing enhancement, or human tracking. Especially with Sony securing large orders from clients, it is poised to become a major product line in the AI era.

TSMC’s new Kumamoto plant in Japan recently opened and is in the equipment installation phase, with production expected to start as early as the fourth quarter, focusing on 40, 28/22 nm processes for automotive and industrial clients.

The joint venture company for TSMC’s Japan plant, JASM, includes Sony as the largest shareholder besides TSMC. Sony has been a major client of TSMC for outsourced wafer production for many years. With the Kumamoto plant set to start production by the end of the year, Sony is almost certain to secure a significant share of wafer capacity, becoming a major client that fills the capacity utilization rate of TSMC’s Kumamoto plant.

(Image: TSMC)

The annual AI event, NVIDIA GTC (GPU Technology Conference), is set to take place on March 17th, as H200 and the next-generation B100 will reportedly be announced ahead of schedule to seize the market. According to Commercial Times’ report citing sources, H200 and the upcoming B100 will adopt TSMC’s 4-nanometer and 3-nanometer processes respectively. H200 is expected to be launched in the second quarter, while it’s rumored that orders for the B100 adopting Chiplet architecture have already been placed for production.

Sources cited by the report also indicate that NVIDIA’s orders are robust, pushing TSMC’s 3 and 4-nanometer production capacity to near full utilization, making the first quarter, traditionally a slow season, unexpectedly busy.

Regarding the matter of NVIDIA’s next-generation chip orders overwhelming TSMC’s advanced processes, TSMC stated that details regarding production capacity remain consistent with the previous earnings call and will not be elaborated further.

Still, Commercial Times further cited industry sources, revealing that TSMC, in response to anticipated capacity constraints by 2023, is accelerating its efforts. Particularly focusing on advanced packaging like CoWoS, they’ve not only relocated equipment from the Longtan facility but also swiftly activated the AP6 plant in Zhunan.

Another industry sources reportedly indicate that the planned construction of the Tongluo
facility, initially slated for the second half of this year, is now scheduled to commence in the second quarter. The aim is to ramp up 3D Fabric capacity to produce 110,000 12-inch wafers per month by the first half of 2027.

Meanwhile, TSMC’s advanced processes remain fully utilized, with capacity utilization exceeding 90% in February, driven by sustained AI demand.

NVIDIA, on the other hand, recently emphasized that computational-intensive tasks like Generative AI and large language models require multiple GPUs. From customer purchase to model deployment, it takes several quarters. Thus, this year’s inference applications stem from GPU purchases made last year. As model parameters grow, GPU demand is expected to expand.

In addition to increasing GPU quantities, NVIDIA’s GPU efficiency is poised for a significant boost this year. The Blackwell series, notably the B100, is hailed as NVIDIA’s next-generation GPU powerhouse by the market.

Not only is it the first to adopt TSMC’s 3-nanometer process, but it’s also the pioneer in Chiplet and CoWoS-L packaging among NVIDIA products. This tackles high power consumption and cooling issues, with projected single-card efficiency and transistor density expected to surpass AMD’s MI300 series set to debut in the first quarter.

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(Photo credit: Kioxia)

According to a report by TechNews citing an article from the international column Project Syndicate, Burn Lin, former R&D Vice President of TSMC, Chintay Shih, former President of the Industrial Technology Research Institute, and Chang-Tai Hsieh, an Academia Sinica member and economics professor at the University of Chicago Booth School of Business, collaborated on an article titled “How America’s CHIPS Act Hurts Taiwan.”

In the article, they collectively elucidated how US semiconductor subsidies weaken TSMC’s strength, rendering the entire semiconductor industry more vulnerable. Additionally, they expressed concern that if China were to blockade or invade Taiwan, the supply chain would become compromised.

The US CHIPS and Science Act, aiming to address this issue with a USD 52 billion subsidy, seeks to encourage semiconductor manufacturers to relocate to the United States. However, according to the report addressing on the design of the bill, its objectives may not be achievable and could even weaken Taiwan’s most crucial industry, posing a threat to Taiwan’s security.

Concerns Arise Over Chip Act Threatening Taiwan’s Security

Currently, the semiconductor industry is dominated by specialized companies distributed globally. TSMC specializes in contract manufacturing, focusing primarily on high-end chips. Other important companies include AMD, NVIDIA, Qualcomm, ASML, Tokyo Electron, and Arm.

Specialization in the industry offers two major benefits.

Firstly, each part of the global supply chain can concentrate on its core expertise and advance further, benefiting other supply chains. Secondly, the production capacity of each link in the global supply chain increases, enhancing resilience against demand shocks.

The cost of specialization is that the industry becomes vulnerable to supply shocks. This issue is not unique to Taiwan; all segments of the supply chain face potential bottlenecks.

However, unlike other segments, Taiwan is reportedly confronted with territorial claims from China. Therefore, the United States and Japan have offered substantial subsidies for TSMC’s relocation. TSMC is constructing new factories in Kumamoto, Japan, and Phoenix, Arizona, in the United States.

Currently, Fab 1 in Kumamoto has been completed according to plan, and many of TSMC’s suppliers have also set up shop there. However, the Arizona plant is substantially behind schedule, and fewer TSMC suppliers have followed suit to establish operations in the United States.

Moreover, TSMC’s experience at its Portland plant in Washington state over the past 25 years has raised doubts about the prospects of the Arizona plant. TSMC struggled to find competitive workers there; even with identical training and equipment, production costs in the U.S. were still 50% higher than in Taiwan. Therefore, TSMC chose not to expand its Portland plant further.

Still, the fundamental issue lies in the fact that while American workers are skilled in chip design technology, they lack the skills required for chip manufacturing, which is crucial in this field.

The article further mentions that TSMC’s Phoenix plant will continue to struggle because there is a shortage of American workers with the skills necessary for semiconductor manufacturing.

As warned by TSMC’s founder, Morris Chang, in 2022, seeking economic security by relocating semiconductor manufacturing to the United States is an expensive exercise in futility. Furthermore, while the USD 52 billion subsidy from the United States may seem substantial, it is insufficient to establish a self-sufficient semiconductor ecosystem in Phoenix.

Additionally, the article points out that Taiwan’s industrial planners have deliberately chosen a niche market built upon existing manufacturing advantages, without attempting to replicate the model of the leading Intel at that time, due to the scarcity of Taiwanese workers with the necessary design skills. Similarly, Japan’s subsidies for TSMC are likely to succeed because Japan already possesses an ample supply of skilled manufacturing workers.

The article also highlights three major risks brought about by the US chip act at the end:

Firstly, if TSMC shifts its focus and loses its investment in innovation, the biggest losses will be incurred by its customers and suppliers, most of which are American companies.

Moreover, it may hinder AI development, as this field largely relies on TSMC-manufactured advanced chips. Consequently, TSMC may reduce its investment in production capacity in Taiwan, reducing the entire semiconductor industry’s ability to withstand demand shocks.

Lastly, TSMC may lose its way and risk being replaced by other companies, losing its leadership position in the field of advanced semiconductor manufacturing.

Well-Intentioned US Chip Act with Poor Design May Ultimately Harm Taiwan’s Economy

The commentary suggests that despite the well-intentioned nature of the US chip act, its design is flawed. Instead of establishing a sustainable semiconductor manufacturing cluster in the United States, it may result in long-term damage to TSMC and ultimately harm Taiwan’s economy.

A better approach for the United States, per the report, would be to protect its own economic security while strengthening Taiwan’s, committing to defend Taiwan, and building production capacity in countries like Japan. This strategy may be more prudent in the long run.

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(Photo credit: TSMC)