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Caught between US and China, this star chipmaker doesn't want to pick sides

For now Liu can afford to rebuff pressure - direct or indirect - to cut off Huawei and expand in the US

TSMC has a real chance to replace Intel as the best chipmaker in the business

You’ve got to feel for Mark Liu. The chairman of Taiwan Semiconductor Manufacturing Co. just wants to make chips.

And he does; the best chips for the best companies in the world. Unfortunately, one of his clients is Huawei Technologies Co. So it’s not surprising that the world’s largest contract chipmaker has found itself in something of a pickle. 

On the one hand, you’ve got officials in Washington repeatedly asking Taiwan’s government to restrain TSMC from selling chips to Huawei, as the Financial Times reported Monday, citing government sources in both the US and Taiwan. The Chinese electronics giant — which the US has accused of spying — is one of TSMC’s top-five clients and likely contributes roughly 5% to 10% of annual revenue.

On the other is China, with a government-led policy to design and build more semiconductors in the coming years. Demand from US companies currently dwarfs that of Huawei and other Chinese names. American tech giants such as Apple Inc., Qualcomm Inc., Broadcom Corp. and Nvidia Corp. together account for 61% of TSMC’s revenue, and comprise the biggest buyers of the Taiwanese company’s most advanced technologies. But China is growing quickly, which leaves TSMC with an unappealing choice: Upset its current large client base in the US, or risk losing a future client base in China.

There are two things that the US is most scared about when it comes to TSMC. The first is that Chinese companies may get access to the best technology, including semiconductors, that could be used for nefarious purposes, which explains the pressure the FT cites. The other is that the US itself may be cut off from the hardware supply chain, at the heart of which is TSMC.

This is why US officials have been hoping that manufacturers like TSMC would expand in America. At present, most of the company’s capacity is spread across three locations in north, central and southern Taiwan. It has two factories in China (the technology made there isn’t as advanced as back home) and one older facility in the US 

Liu has politely pushed back against US expansion citing the steep costs. In reality, it’s more the daunting logistics of setting up and staffing an advanced factory so far from home base where all the R&D is done. Each of its Taiwan facilities are close enough that engineers can move around and troubleshoot with relative ease. 

That makes TSMC the belle of the ball. Which sounds nice, except when it comes to choosing a dance partner — and Liu doesn’t want to have to decide. I’ve argued before that everyone will need to pick sides at some point as the digital Iron Curtain falls. For TSMC, this probably won’t come as a declaratory statement, but through quiet and subtle decisions on which cases it will accept and which it will turn down. 

This brings us back to Liu. In response to the FT report, TSMC spokeswoman Elizabeth Sun told Bloomberg News that the US has not in fact asked it to stop supplying Huawei. Liu met with Commerce Department officials during a US trip earlier this year where they talked about the Chinese company, she said, without elaborating on what they discussed. Meanwhile, a Taiwan cabinet spokeswoman denied that the US asked its government to stop TSMC from shipping to Huawei.

I have covered TSMC for almost 20 years, and the notion that the Taiwan government would, or even could, tell the chipmaker what to do is hard to fathom. TSMC is Taiwan’s largest company. It’s publicly listed, has independent management and board of directors, and an impeccable reputation for corporate governance. As a chipmaker to the stars, there’s no other company in the world that can do what TSMC does in terms of technological prowess or sheer capacity. Samsung Electronics Co. and Intel Corp. are its nearest rivals.

For now Liu can afford to rebuff pressure — direct or indirect — to cut off Huawei and expand in the US. TSMC holds all the cards because American clients desperately need the Taiwanese company’s technology, and Chinese ones aren’t big enough to buy up all of its factory capacity. It may end up offering to build a facility in America as an appeasement move.

But TSMC won’t be able to sit on the fence forever. While Liu may want to just make chips, he’ll eventually have to make a choice.
 
I take the denial of Taiwan’s governmentwith a pinch of salt. It’s likely the US consulted with Taiwanese officials on how to deal with the issue, though they may have stopped short of pressuring the company directly.