What a Small Chip Fab Really Buys

By Dan Gallagher

Anyone in the business of making chips knows that little things can make a big difference.

Taiwan Semiconductor Manufacturing, better known as TSMC, currently makes chips with circuitry measuring 5 nanometers thick. That is about twice the diameter of a strand of human DNA, and is the most advanced chipmaking process in production today. It will be put to use in the new fabrication plant the company is now planning to build in Arizona, with the explicit blessing of the U.S. government.

But despite the impressive-sounding specs, the project TSMC announced Friday morning will actually be rather limited in scale and impact. The company says it will spend a total of $12 billion on the project over an eight-year period starting next year; TSMC's capital expenditures this year alone are expected to top $15 billion. And by the time the plant is fully up and running in 2024, 5 nanometers won't even count as top of the line anymore. TSMC disclosed on its earnings call last month that its 3-nanometer process is expected to be in volume production by the second half of 2022.

Nor will the project do much for the U.S. government's widely touted efforts to bring more of the high-tech supply chain onshore. TSMC says the Arizona facility will produce about 20,000 silicon wafers a month. That is just one-fifth the size of its largest fabs currently running in Taiwan and wouldn't even be close to meeting the needs of the company's largest U.S. customers. Mark Li of Bernstein estimates that Apple alone requires 60,000 to 100,000 wafers a month. He also says that TSMC's history with other fabs built outside of its home base in Taiwan suggest the Arizona facility will be a "margin drag" unless government incentives or higher prices can make up the difference.

What the new facility does buy TSMC is a better seat at the table. Chipmaking has become a high-profile weapon in the trade war between the U.S. and China. That point was driven home Friday morning when the Commerce Department released new rules that add further restrictions to chip products sold to Huawei and its subsidiaries. The rule would appear to sharply limit TSMC's ability to supply chips to Huawei, since they are mostly made with equipment from U.S. companies such as Applied Materials, KLA and Lam Research. Those three stocks averaged a drop of 5% Friday morning.

TSMC's U.S.-listed shares fell Friday as well, though it is highly likely the company's Arizona project will help shield it from some of the fallout. Citi's Atif Malik wrote to clients that the timing of the two announcements was likely "strategic and part of a compromise" that would allow TSMC to keep producing some chips for Huawei while also being subject to the new regulations. Pierre Ferragu of New Street Research believes the new export controls are a way to give the Trump administration more negotiating leverage to limit Huawei's "commercial ambitions" as opposed to killing the Chinese tech giant outright.

Chipmakers might just be pawns in a geopolitical game, but TSMC's latest move could keep it from being a sacrificed one. A little fab can go a long way.

Write to Dan Gallagher at dan.gallagher@wsj.com

(END) Dow Jones Newswires

May 15, 2020 14:31 ET (18:31 GMT)

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