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TSMC’s CHIPS Act Grant: Has Arizona Reached A Tipping Point?

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The Department of Commerce CHIPS Program Office announced a $6.6 billion grant to the Taiwan Semiconductor Manufacturing Company (TSMC) this morning. As part of the announcement, the company said it will build a third semiconductor chip fab in Arizona, and that it will also bring its most advanced manufacturing processes to the U.S. This is on top of the $40 billion the company is already spending for the first two fabs, which was the largest foreign direct investment in the history of Arizona. The first two fabs will have a combined capacity of 50,000 wafers per month, and the second fab will offer the company’s 3 nanometer (nm) process in 2026. The third fab will cost many billions more. Here are three takeaways about this announcement.

Bringing TSMC’s most advanced technology suggests the Arizona cluster might have reached a “tipping point”

The Phoenix area has long had a semiconductor industry. Motorola set up a solid state electronics research center there in 1949, with its first plant following in 1956. Intel INTC set up there in 1979, and it established its first high volume 300 mm wafer production fab in Chandler in 2000. In 2001 there were ten semiconductor manufacturers with a total of 21 fabs, but with the high investments needed to stay at the leading edge of technology, manufacturers like NXP (who merged with Freescale – the 2003 spin-off of Motorola’s semiconductor business) increasingly chose to go “fab-lite,” meaning they continued to make some chips locally but they outsourced the more advanced ones to Asian fabs like TSMC. Intel was still in Arizona of course, along with smaller specialists like Microchip Technology MCHP and ON Semiconductor. But a lot of the excitement shifted to Asia and Taiwan in particular.

Meanwhile TSMC has been building two fabs in Kumamoto, Japan, and it celebrated the opening of the first two months ago. Richard Thurston, the company’s retired general counsel speaking at a DigiTimes webinar, commented that TSMC was more comfortable operating in Japan than in the U.S. because the country still had many leading edge equipment companies and producers of critical materials like photomasks. Also, the company had entered into a joint venture there with customers including Sony and Toyota, who ensured demand for the output. There was a cluster of companies, research institutes, partners, and capabilities that TSMC could tap into and work with.

TSMC’s new additional investment in Arizona suggests that the company is getting more comfortable with the U.S., and that the state may have reached a tipping point on its semiconductor cluster. Intel is constructing a $20 billion expansion in Chandler, Amkor Technology AMKR announced that it would build an advanced packaging and test facility in Peoria, Arizona last November, and an increasing number of suppliers are setting up shop in the area. The more companies come, the more attractive it is for suppliers to locate there as well, assuming you can get enough skilled workers.

Most of TSMC’s top customers are based in the U.S.

The second point is that most of TSMCs largest customers are based in the U.S. The company’s annual report (their 20-F, the foreign equivalent of a Form 10-K) for 2023 is not available yet, but in 2022, 68% of their revenue came from North America, 11% from China, 11% from Asia not including China and Japan, 5% from Europe, and 5% from Japan. Apple AAPL is their largest customer, accounting for around 23% of the total in 2022, and Nvidia is apparently now #2. AMD, Qualcomm QCOM , Intel, Broadcom AVGO , and Marvell are among the others. These are all major American companies who make products we all use every day, and they in turn are also key suppliers for companies like Microsoft MSFT , Google GOOG , Amazon, and automakers.

The AI spending boom in the U.S. is driving demand growth

The rapid rise of generative AI and applications like ChatGPT is fueling arms race level spending for chips and data centers, and this boom is centered in the U.S. These systems use large language models, and they consume a tremendous amount of computing power for every query. Companies are racing to build data centers to support this demand, which one firm estimated were growing at a compound annual rate of 44% over the next six years. It seems like we will run out of electricity before that happens, but it is driving insatiable demand for chips in the meantime.

Historically smartphone chips have been the largest “platform” for TSMC. The company positions a platform as a collection of process recipes that chip customers in a sector use. Smartphone chip customers – including Apple, Qualcomm, and the Taiwanese company MediaTek, tend to use the most advanced processes. This drove 48% of TSMC’s revenue in 2020 but dropped to 39% in 2022. The other top platform is high performance computing, which uses the most advanced nodes as well as older processes. The products in this category include the processor chips used in PCs and datacenter servers, graphics processor units (GPUs) from Nvidia and AMD, as well as field programmable gate arrays, and high-speed networking chips. This platform grew from 33% of TSMCs revenue in 2020 to 41% in 2022, and it probably grew considerably more last year.

With increasing concerns for supply chain resilience, domestic supply will be attractive as long as the price is competitive. Hopefully that will come with time, as TSMC knows it will have to fill those fabs after completing them.

While $6.6 billion is a lot of money, it is a relatively small fraction of what TSMC is committed to spending in Arizona. It’s also about 17% of the CHIPS budget for subsidies, so it again illustrates Commerce Secretary Gina Raimondo’s strategy of using CHIPS grants to leverage private investment. She may succeed in building a pretty strong cluster in Arizona in the process.

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