According to a 2021 report by the Boston Consulting Group, Taiwan has more than 90% of the manufacturing capacity for the world’s most advanced semiconductors. Pictured here is a TSMC building in Taiwan on April 8, 2022.
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BEIJING – When it comes to semiconductors, China needs Taiwan more than the other way around.
Beijing halted some trade with the island this month after US House Speaker Nancy Pelosi’s controversial trip to Taiwan.
In particular, the bans did not affect electronics. According to a 2021 report by the Boston Consulting Group, Taiwan has more than 90% of the manufacturing capacity for the world’s most advanced semiconductors.
Pelosi’s itinerary included a visit to Taiwan Semiconductor Manufacturing Company, the world’s largest and most important chip maker. Its products are an integral part of everything from consumer products to military aircraft.
But only 10% of TSMC’s revenue comes from China, according to the company. More than half of its sales come from the United States.
“As we speak, the status quo is that these chip companies may not be as dependent on China as the other way around,” said Patrick Chen, head of research at CLSA in Taiwan.
“I think the real challenges for these companies are still end demand and not geopolitical developments,” he said.
American chipmakers Micron and Nvidia have warned of falling demand for products using their chips in recent weeks.
The crucial role of TSMC
Pelosi’s trip to Taiwan came despite warnings from Beijing, which considers the democratically self-governing island part of its territory with no right to independently conduct foreign relations. The US recognizes Beijing as the sole legal government of China while maintaining unofficial ties with Taiwan.
In addition to some trade bans, Beijing has stepped up military drills around the island of Taiwan, raising concerns about the risk of global access to critical chips.
Analysts stressed that chips made in Taiwan, especially those made by TSMC, are too important to the world and China to achieve major disruption on the chip front.
“If you look at the secular demand drivers, cloud infrastructure, electric vehicles and next-generation industrial equipment, they all require chips that are manufactured at TSMC,” said Mehdi Hosseini, senior tech hardware analyst at Susquehanna.
“If, God forbid, TSMC’s factories in Taiwan can’t function, I think the global economy would slow down more than Covid [to growth],” he said.
CLSA’s Chen described TSMC as “in a league of its own”, Taiwan’s semiconductor companies UMC and America’s GlobalFoundries as Tier 2 chipmakers, and China’s SMIC and Hua Hong Semiconductor as falling into Tier 3.
“In terms of competition from China, this is not a real, significant threat to be expected any time soon,” he said.
China’s chip manufacturers are still lagging behind
Beijing has ramped up its chip-building efforts in recent years, with supportive measures attracting a flood of private capital. The debt mountain and bankruptcy of state-owned chip company Tsinghua Unigroup shows how vulnerable the system was to waste, despite recent growth and technical development at another Chinese chip giant, Semiconductor Manufacturing International Corporation.
Still, it took SMIC 15 years to get where TSMC was 10 years ago, Hosseini said in a phone interview last week.
“China doesn’t have access to cutting-edge equipment,” he said. “It would take a long time to have the engineering know-how.”
Under the Trump administration, the US essentially banned Chinese tech giants Huawei and SMIC from using American technology, including their chip-making equipment.
That meant TSMC hasn’t been able to make semiconductors for Huawei since late 2020.
According to David Hsu, associate director at S&P Global Ratings, TSMC’s revenue in China grew to nearly 20% of total revenue between 2018 and 2020.
But in 2021, TSMC’s exposure to China fell to about 10% of total sales, similar to 2017, Hsu said. “After the Huawei ban [TSMC] has transferred its capacities to other companies.”
TSMC’s business continues to be strong. The company, which is a key Apple supplier, reported revenue of about $18 billion in the second quarter, up more than 40% year over year.
That shows how much larger TSMC is than SMIC, which reported revenue of $1.9 billion for the same quarter, also up more than 40% from a year ago.
A balancing act with the USA
The US is also trying to increase its access to critical semiconductor technology. US President Joe Biden signed the Chips and Science Act into law this month, giving chipmakers subsidies for manufacturing in the US
Bernstein analysts said in a report this month they expect a “lukewarm” impact for TSMC.
“TSMC is strategically ‘everybody’s foundry’ to diversify the customer base to reduce risk and increase scale, and will seek to remain neutral in competition with the US and China,” the report reads. “In view of this, we believe TSMC is likely to keep its overseas capacity expansion in check for the next few years, even with the incentive of the current CHIPS law.”
According to Bernstein’s fourth-quarter estimates, about 10% of TSMC’s capacity is in mainland China, compared to a much smaller proportion in the United States.
TSMC spends $12 billion to build factory in Arizona. On the Chinese mainland, the company operates in Shanghai and Nanjing.
However, CLSA’s Chen said the Arizona plant will focus on more advanced technology, while Taiwan’s restrictions on chipmaker investment in China mean manufacturing there will continue to focus on older, outdated technology — for which there is one on the mainland big market there.
– CNBC’s Michael Bloom and Arjun Kharpal contributed to this report.