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The logo of Taiwanese chip giant TSMC is seen at southern Taiwan science park in Tainan, Taiwan.
TSMC gets billions to build in Phoenix
Taiwan Semiconductor Manufacturing Company will receive as much as $6.6 billion from the US government to expand its chip-making complex in Phoenix, Arizona. As part of the deal, TSMC will also receive $5 billion in loans and invest $65 billion to build a third factory in the complex. It’ll receive the money if it complies with due diligence requirements set forth by the 2022 CHIPS and Science Act, a $200 billion investment in America’s domestic semiconductor infrastructure.
TSMC, based in Taiwan, has become perhaps the world’s most important chip fabrication company. Chip designers like AMD and Nvidia — the two companies at the forefront of made-for-AI graphics chips — contract with TSMC to make their chips.
The government also sees its investment as a job-creator, with TSMC set to hire 20,000 people for construction and 6,000 for manufacturing, and $50 million of the grant will be set aside for job training programs.
The US sees chip infrastructure as a matter of huge national importance. “It’s a national security problem that we don’t manufacture any of the world’s most sophisticated chips in the United States,” Commerce Secretary Gina Raimondotold reporters. “Now, because of this announcement, these chips will be made in the United States."
TSMC remains at the heart of Taiwan's “Silicon Shield,” the protection that semiconductor dominance provides the island nation by giving the United States good reason to protect it from Chinese attack. Could shifting more of TSMC’s production to Arizona eliminate that incentive?
That's unlikely, says Xiaomeng Lu, a director of Eurasia Group’s geo-technology practice. "TSMC will always keep their most advanced capacity in Taiwan, and their pledge of making 2nm chips is not legally binding," she says. So while "it may run the risk of thinning the silicon shield if fully materialized, weakening it is less likely."
Sam Altman’s wish on a $7 trillion star
Sam Altman, CEO of OpenAI, needs more chips. He needs a lot more chips. The only thing stopping his $100 billion startup — if you can still call it a startup — may be the current supply of powerful chips.
The semiconductor fabrication process is notoriously slow and expensive, and the global supply chain runs through a few big, highly specialized firms. There are only a small number of companies that actually design chips made for generative AI — AMD, Intel, and Nvidia. And they’re pricy: Nvidia, which is set to take 85% of the market next year by one estimate, sells its H100 chips for about $40,000 a pop.
Naturally, Altman wants to make his own chips, but to make that dream a reality, he’s asking for an obscene amount of money.
How much does Altman want to raise?: According to the Wall Street Journal, Altman is deep in talks with investors with the goal of raising $5-7 trillion for a new chip venture.
“The dollar amount he’s reportedly trying to raise — $7 trillion — eclipses not just the semiconductor investments made by governments, including the United States’ $39 billion investment in chip manufacturing, but also the size of the entire semiconductor industry,” says Hanna Dohmen, a research analyst at Georgetown University's Center for Security and Emerging Technology. “It cannot be overstated how massive this sum of money is.”
Eurasia Group’s Director of Geotechnology Alexis Serfaty calls the sum “preposterously high and also seemingly arbitrary,” and says while it helps that OpenAI would be a built-in customer for this new chipmaker, the semiconductor industry is a difficult one with a propensity for demand gluts and supply chokepoints at every turn. Also, it would require strong leadership. “There are only so many people in the world with the expertise and experience to run an advanced fab, let alone the 300 [facilities] that $7 trillion would buy,” he adds.
Money can buy a lot — but it might not be able to solve the problems that every chipmaker already faces.
Who’s going to give him all that money? Altman has reportedly met with Masayoshi Son, CEO of the influential Japanese investment company SoftBank, and officials from Taiwan Semiconductor Manufacturing Company, one of the world’s largest chip fabrication companies, about investing in his new venture. Altman reportedly wants to “raise the money from Middle East investors and have TSMC build and run” new chip fabrication plants.
But the real eyebrow-raising potential investor isn’t in East Asia; it’s in the Middle East. In recent weeks, Altman has reportedly met with Sheikh Tahnoun bin Zayed al Nahyan, the United Arab Emirates’ security chief, to discuss the venture. OpenAI already struck a deal in October with the Emirati technology company, G42, to bring AI solutions to the Middle Eastern market, laying the foundation for additional business support from the wealthy nation.
This is going to cause geopolitical headaches, right? Almost definitely. Washington is extremely touchy about foreign investment in US companies and even more hesitant when it comes to scarce critical infrastructure such as semiconductors.
“While the US government is eager to bring chip manufacturing to the United States, it would likely be reluctant to do so with the involvement of the UAE government given existing concerns about Emirati companies’ relations with Chinese counterparts,” says Dohmen, who notes that, under US law, companies need licenses to even export certain semiconductors to the UAE.
America’s number one concern is China. Not only has the Biden administration invested heavily in the US chip industry, but it has launched a no-holds-barred campaign to prevent China from getting its hands on chips or even cloud-based AI. Over the past few years, the Biden administration has exacted stringent export controls that seek to prevent any global semiconductor technology, if it’s made with US parts, to do business with China, who it fears will use AI to supercharge its military. Dohmen adds that lawmakers are worried that G42 is already “dealing with blacklisted Chinese firms.”
Simply put, Serfaty says, “Altman’s partnerships with foreign governments could conflict with this US national security strategy.”
Could the US take action against this new venture? Yes. The US government has taken the extraordinary step to block foreign investment in chip companies. In 2018, the Trump administration blocked the sale of the US-based Qualcomm to the then-Singapore-based Broadcom, citing national security concerns. (Broadcom has since moved its headquarters to the US). That administration also blocked the sale of Lattice Semiconductor to a US private equity firm funded by Chinese capital.
Altman could be inviting antitrust scrutiny, as well. If he controls both the country’s most important generative AI company and the chip supply chain it relies upon, he’ll raise eyebrows with any antitrust regime — even if it’s not the current tech-hungry one overseen by the FTC’s Lina Khan and the DOJ’s Jonathan Kanter. The government is already starting to look into Microsoft’s $13 billion investment in OpenAI.
In short, all eyes are on OpenAI. The ChatGPT maker and its once-embattled, now-emboldened chief have their sights set on global AI domination. Whether it’s $7 trillion or far less, they’re due to make a real attempt to solve the chip problem that appears to stand in the way of true unbridled success.
Semiconductor chips on a circuit board.
Crunch time for chipmakers
The Biden administration wants to supercharge US chip manufacturing, which is why the 2022 CHIPS Act allotted $280 billion for the domestic chipmaking sector. But Republicans in Congress just halted a key provision of the administration’s plan.
Under the latest iteration of the National Defense Authorization Act, Republicans blocked a line item that would have allowed semiconductor companies building new plants to bypass the typical environmental permitting process. It’s something that Commerce Secretary Gina Raimondo had pushed for as a means of streamlining and speeding up the process. “We are not in any way suggesting that we should do anything that hurts the environment,” she insisted in Senate testimony. Republican Ted Cruz and Democrat Mark Kelly championed it in the Senate, and more than 100 lawmakers signed a letter advocating for it to be included in the final version of the bill.
But House Republicans, who largely oppose the permitting process in general, weren’t so concerned over whether the plants would uproot some Gila monsters. Rather, they say they are dismayed over what they called a permitting “carve-out” for the chip industry.
This exclusion could mean a major slowdown for domestic and foreign chipmakers looking to pour money into US building projects, namely Taiwan Semiconductor Manufacturing Company, Intel, and Samsung, which are building new plants in Arizona, Ohio, and Texas respectively.
Blinken meets Xi in Beijing
Ian Bremmer's Quick Take: Hi, everybody. Ian Bremmer here, and Tony Blinken is not. No, he's coming back from Beijing, the US Secretary of State, the once-postponed and now-on-again weekend trip to Beijing. It's the first time he, as Secretary of State, has been there. Also, this was a last-moment meeting that included President Xi Jinping, and that's very important because on the ground in China, no attention being given publicly to the trip until Xi meets with Blinken, 35 minutes long, and then suddenly it is everywhere, and it's over 1 billion views, and it's all over state media, and it's all over social media. In a sense, the Chinese blessing the visit to their public and showing that they want to have a more constructive or at least stable relationship.
The other takeaway, marginal but still not unimportant, is the willingness to create a fentanyl working group. That's something the Americans have been pressing on for a while, which provides a little bit of cover for Biden that he's actually getting something done with the Chinese. Of course, the proof of the pudding is in the eating, and execution on that is something that everyone is going to be skeptical about and watching.
Okay, that's the good news. What's the bad news? There is no trust within this relationship. The US-China relationship continues to be very contentious, very conflictual. It's true that the Chinese gave their standard speaking points on Taiwan, and we can go to war, and we maintain the status quo. The Americans said, "We're not changing the status quo, and we don't want war." And everything will be fine. But the status quo is changing. The status quo is changing in a couple of ways. First of all, the Americans are doing whatever they can to make Taiwan less important. The export controls on Taiwan's semiconductors. Let's keep in mind that until very recently, until about a year ago, TSMC was producing 92% of the most important semiconductors in the world. The highest speed, smallest, fast. This is critical. Suddenly, that's down to 80%. Why? Because the Americans want to get away from vulnerability to Taiwan.
That's going to be down to 50% probably within five years. And as that happens, you've got Foxconn now moving all of their supply chain away from mainland China and towards India and Vietnam and Canada and other countries. Why are they doing that? And the answer is because the Americans see the status quo as risky, and they're trying to de-risk the status quo, which means less exposure to Taiwan, which makes a lot of sense for the Americans. But if you're the Chinese, you see that as actually leading to confrontation. You're saying, "Wait a second, we no longer have the ability to get access to this high-level technology. We have to build it ourselves." So when they do that and Taiwan becomes less important, it of course, becomes an area that's easier to have direct conflict.
Part of the reason the Americans were able to put unprecedented levels of sanctions against the Russians is because the Americans do almost no business with the Russians, Taiwan becomes less important, and the Americans de-risk the broader US-China relationship. It becomes easier to have confrontation with the Chinese, and as the Chinese take similar steps, they do the same thing. The one thing that didn't happen in this meeting was a willingness to re-engage on the military-to-military front. The Americans have been asking for it. Chinese have said no. They continue to say no this weekend. At the same time that the Chinese have taken really aggressive measures in the Taiwan Straits, in the South China Sea that potentially could risk direct accident/conflict with American military warships, jet fighters operating in the area. The fact that the Chinese are willing to tolerate that level of risk is they would argue analogous to the Americans being willing to tolerate greater levels of risk around the broader US-China relationship and around Taiwan.
That's not going to change. It's not going to change because Biden thinks he's got the right policies right now for China, because the politics of the relationship are heavily constrained by hawkish Democrats and Republicans, and because we're heading into the 2024 election. Now, the one thing that's useful is that in this relationship, Biden and Xi know each other well, they've known each other for a long time. Biden actually speaks with a lot of pride about that when you talk to him personally about how much time he spent with Xi. Not that he necessarily likes everything about him or trusts everything he says, but he respects him as a leader as opposed to Biden's view of Putin, which is exactly the opposite. That means that when they meet face-to-face, maybe there'll be a video call soon, but certainly looks likely on the sidelines of the APEX Summit in San Francisco this fall. Biden's going to go for a couple of days. That has the potential to strengthen the stabilization of the relationship, even as the structural forces are heading more towards conflict. I wish I had better news, but I'm glad the meeting happened. I'm glad it went as well as it actually did.
A researcher wearing cleanroom suit displaying a wafer in the lab of Shanghai Microsemi Semiconductor Co., Ltd. in Shanghai, China.
Who’s winning the war over chips?
When it comes to semiconductor production, there’s just one superpower: Taiwan. The self-governing island produces more than two-thirds of the world’s chips, and almost all of the advanced ones.
But with Taiwan’s geopolitical fate uncertain, both Washington and Beijing are racing to build their own dominance and self-sufficiency in the chip industry.
We sat down with Eurasia Group geo-technology expert Xiaomeng Lu to learn more about where this battle is heading. The interview has been edited for length and clarity.
GZERO: When did this global war over chips really get started, and what’s driving it?
Xiaomeng Lu: Before 2017 and 2018, Beijing generally had this view that China was a big digital economy power. “We're the home to the biggest platform companies in the world” and so on.
But when the US placed severe sanctions on Huawei [in 2019], it kneecapped Huawei's 5G flagship business portfolio. Huawei is one of the poster children of China's highly advanced technology system, and Beijing suddenly realized that it was heavily reliant on just a couple suppliers of semiconductors, some of which are American.
China saw it had basically no near-term leverage against US technology dominance in this area, and that they needed to address the vulnerability. So that's why China started using this term "technology self-reliance.”
That generated a sense of competition in the US and increased the focus on Taiwan [the leading chip producer overall]. Those two things are, I think, the top drivers of the US-China race in semiconductor development.
What are the US and China doing to gain their own advantage in semiconductors?
Xiaomeng Lu: China a few years ago established a national fund to support semiconductor companies [domestically], and I think the clearest number on all of it is somewhere near $50 billion for two rounds of national investment in the domestic semiconductor industry.
The US recently passed the CHIPS Act, which includes broad financial support for science and technology. But the part that's most significant is basically a lot of tax breaks for the domestic high-end manufacturing part of the semiconductor industry. That's somewhere around $52 billion dollars.
So there's definitely a race of government sponsorship in this industry to ensure they get the competitive edge. For the US, their goal is to maintain a large, existing competitive advantage over China. For China, their goal is just to catch up.
So, is China in fact catching up?
Xiaomeng Lu: There's a lot of problems with how they're spending their money. Some factories got a lot of government funding and then didn't produce much technology, and a few years later went bankrupt or were bought by industry players. There's also quite a bit of corruption in the process of allocating those funds to various national champions.
But at the same time, it’s generated some constructive results, including, for example, companies like SMIC, a national champion in manufacturing midrange semiconductors. So there's a handful of successful cases and maybe a dozen failures. It's a mixed outcome so far.
Will the CHIPS Act keep the US ahead in the chip race?
Xiaomeng Lu: It’s too early to tell. There is a detailed implementation guide for companies that want to apply for this $52 billion fund, but that guideline won’t be issued by the Department of Commerce until next February. So we don't even know who is qualified for this funding yet.
The US has recently imposed export controls that prevent American companies from sending key technologies to China. Will those measures be effective in curtailing China's tech sector strategy?
Xiaomeng Lu: In the near term, I think they're quite effective. They focus on the high-end chips used for high-performance computers and super-computers, an area where China has so far done well. So the US restrictions create an upstream crisis for Beijing that will slow down China's supercomputing industry development. Until now, some Chinese supercomputers have outperformed their American and Japanese counterparts, and I think that competitive edge will be, if not eliminated, undermined significantly in the coming years.
Some people say Taiwan’s status as a semiconductor superpower actually protects the island from invasion by China – the idea being that the risk of the Taiwanese chip factories being damaged in a war is something that worries Beijing since its own tech companies rely on Taiwanese chips. Do you believe in this “Silicon Shield”?
Xiaomeng Lu: A lot of mainland Chinese factories still rely on those [Taiwanese] components. That's a big part of China's global electronics trade flows. I think between the technology exposure and the trade element, they will try not to take drastic actions around those chip factories until the political drivers really escalate the conflict.
But I think it's a temporary shield. If a real war starts, then the Silicon Shield is not going to do anything. Right now it's kind of a very thin layer of protection when the political environment is not that dire.
If TSMC [the main Taiwanese semiconductor company] were not on the island, do you believe China would have already invaded?
Xiaomeng Lu: It's not a driving factor, it's a secondary element. The red line is always sovereignty. If Taiwan publicly declares independence, then it doesn't matter if TSMC is there or not.
Would warnings of an impending invasion lead to a brain drain that could threaten Taiwan’s semiconductor industry?
Xiaomeng Lu: I think if the tension escalates further, you will see China try to poach talent from Taiwan by offering them jobs and careers and generous financial packages, and the US would probably do the same. If those engineers are concerned about their own safety, their families’ safety, there is a scenario for at least some of them to move away from the island. And that's one of the worst-case scenarios for the Taiwanese government. They want to keep their Silicon Shield, they want to keep their high-end technology, they want to keep their talent on the ground.
House Speaker Nancy Pelosi has encouraged TSMC to move some of its production to the US, to take advantage of CHIPs act money. Is that likely to happen?
Xiaomeng Lu: I think they're considering it but if you’re TSMC, it depends on how high you think the geopolitical risk is. If [an attack] is going to happen in five years, they probably want to move. But the risk of moving the most advanced technology and their people over to the US is that if the conflict doesn't happen or doesn't escalate to a very severe level, you are wasting your resources and irking the Taiwanese government.This comes to you from the Signal newsletter team of GZERO Media. Sign up today.
Semiconductor manufacturing.
The semiconductor battle is heating up
Global semiconductor supply chains have some big resistance points that threaten to make microchips a macro-geopolitical flashpoint. On Tuesday, US President Joe Biden will visit Taiwanese chipmaker TSMC’s facility in Arizona, where he'll spotlight the White House’s efforts to ramp up US chip manufacturing amid the US-China chip race.
____________________________
In technology, as in geopolitics, a little resistance can make all the difference. Consider semiconductors, the nearly invisible microchips essential for running everything from our computers to our cars to our cruise missiles. They work by doing something deceptively simple: They use carefully calibrated resistance to slow the flow of electricity through a circuit in ways that make computing possible. The smaller they get the more powerful our devices become.
The trouble is, global semiconductor supply chains have some big resistance points of their own, choke points that threaten to make microchips a macro-geopolitical flashpoint.
America’s Democrats and Republicans don’t agree on much, but there’s a consensus at the top of both parties that Chinese advances in digital technologies, especially in supercomputing, threaten US national security. In particular, supremacy in quantum computing by one country could make it impossible for another to encrypt government and personal communications and data. US tech firms, increasingly shut out of Chinese markets, share these worries.
For now, the US is believed to have a significant technological edge over China, and Washington wants to keep it that way. That helps explain why the US has used export controls to deny Huawei and other major Chinese tech companies access to cutting-edge, US-made hardware and software.
But there’s a larger semiconductor-specific geopolitical problem for both the US and China: The vast majority of the world’s most powerful and sophisticated semiconductors are produced on the disputed island of Taiwan, which Beijing regards as a renegade Chinese province and which Washington, despite carefully crafted diplomatic language, still treats as a de facto independent nation.
The company at the core of the semiconductor question is the Taiwan Semiconductor Manufacturing Company, TSMC, a $550 billion company that holds about half the global market for semiconductors and produces about 90% of the most advanced chips. Headquartered on Taiwan's north coast, TSMC sits at the geographic heart of the tensions that divide America and China, and its strategically vital product will only become more essential to the smooth functioning of the global economy as computing power grows exponentially and more digital products are connected to the Internet of Things.
Political leaders in China and the United States know that if a military confrontation shut down TSMC, a shortage of semiconductors would cripple dozens of economic sectors in both countries and in every region of the world. They also know they need to make themselves less vulnerable by sharply increasing the percentage of advanced chips manufactured within their borders. Finally, both know this ambition will be enormously expensive for many years.
Many in Taiwan see TSMC as a “platinum shield” that protects the island’s security because China can’t force Taiwan to unify with mainland China without risking a war with the United States that might destroy the company, which Beijing considers a strategic prize.
China’s leaders also know that the production of semiconductors depends as much on human expertise as on machinery and state-of-the-art factories. Murmurings of a Chinese attack on Taiwan – even just a naval blockade – could create a massive tech brain-drain of the most talented engineers, who might flee the potential battleground for a warm welcome in the West.
For all these reasons, China can’t move on Taiwan until it has much more confidence that it can control what happens to TSMC and the semiconductor industry.
For better and for worse, the Taiwan chip dilemma creates a kind of digital-age mutually assured economic destruction that has so far helped limit the risk that US-China tensions create real conflict.
This comes to you from the Signal newsletter team of GZERO Media. Sign up today.
Taiwan’s outsize importance in manufacturing semiconductor chips
A big reason the Chinese leader is pushing harder than ever to annex Taiwan is actually quite small. The self-governing island has an outsize manufacturing capacity for semiconductors – the little chips that bind the electrical circuits we use in our daily lives. Cell phones, laptops, modern cars, and even airplanes all rely on these tiny computer wafers. Taiwanese chip manufacturer TSMC alone makes more than half of the chips outsourced by all foreign companies, which means your iPhone likely runs on Taiwanese-made semiconductors. What would happen to the world's semiconductor chips if China were to take control of Taiwan?
Watch the episode of GZERO World with Ian Bremmer: What could spark a US-China war?