Goodbye Mr Chips

You suspect that the moment of ‘peak oil’ might have passed when Saudi Arabia says it is diversifying away from the fossil fuel. The Saudis are even building the $500 billion Neom city (literally, ‘new future’) which is set to be served by driverless cars powered by renewable energy not oil.

The prospect of such a fundamental change has led the world’s tech majors to invest in self-driving electric cars, including a dozen ambitious start-ups from China.

Yet the best way to punt on the post-oil era, some have suggested, is to buy into a firm that makes semiconductor chips. In this line of thinking, semiconductors are set to replace oil as the lifeblood of the global economy. Much of the Chinese media has arrived at the same conclusion – and the theme of a “chip war” has been front-and-centre since a ban on sales of American components to telecom giant ZTE (and possibly Huawei, see WiC406).

At the heart of the debate is one of the most-talked about companies: Taiwan Semiconductor Manufacturing Company, or TSMC. Indeed, discussion of the firm’s strategic importance has been so intense in some quarters that some participants even believe the chipmaker could feasibly turn out to be a catalyst for an invasion of Taiwan by mainland China.

Why is TSMC in focus?

The Chinese see the American sanctions on ZTE as part of a new attempt to constrain its economic potential. The Chinese name for ZTE, or zhongxing, is the short form of zhongguo (China) and fuxing (renaissance), effectively replicating Xi Jinping’s centennial goal for China’s “great revival”.

Already the employer of more than 80,000 staff, ZTE is a flag bearer for China’s ambitions to become a tech superpower by 2025. Yet even a powerhouse like this – and one enjoying strong backing from Beijing – has been put “into a coma”, as its chairman Yin Yimin admitted owing to the sales ban on American chips.

Talk of ZTE’s potential collapse as a result of the embargo has also prompted the country’s media outlets to ask how the Chinese can win back the initiative in the brewing trade conflict with US. Across social media too, “China-US chip war” is one of the trending hashtags. “Why do we still have no ‘Chinese heart’?” internet users have been asking, fuelled by a renewed national fervour (rather appropriately, the Chinese word for ‘chip’ sounds similar to ‘heart’). And for many there was some comfort in one of the most viewed articles on the topic on WeChat. “The most formidable chipmaker in the world is in China,” the title reads. “Its name is TSMC.”

How formidable is TSMC?

Similar to Foxconn, another Taiwanese corporate giant, TSMC doesn’t manufacture under its own brand. In the jargon of the semiconductor industry, it is a foundry, which makes chips for designers without factories (known as fabs), such as Qualcomm and NVIDIA.

TSMC is the island’s biggest enterprise. Its $200 billion market value is twice that of Foxconn’s Taiwan-listed unit and just a notch below PetroChina ($210 billion), mainland China’s biggest oil firm.

It controlled 57% of the foundry market last year but according to an article by The Economist in early April, TSMC is about to overtake Intel to become “the world’s most advanced chipmaker” (tellingly, TSMC’s market value overtook Intel last year as well).

The strength of a chipmaker boils down to their ability to shrink “nodes”, or the width of channels etched into silicon chips. While Intel, which also designs chips, currently produces chips with a 10-nanometre node (a billionth of a metre), TSMC advanced to 7-nanometre territory in the first quarter of this year.

But the upfront investment in building such an advanced foundry is high. TSMC’s newest fab is likely to cost at least $20 billion. This excludes lesser players from the game. While switching from one foundry to another was once trivial, The Economist noted, many companies such as Apple have now worked within the TSMC “ecosystem” for years and effectively ‘joint venture in IP terms’ with the foundry on the chip manufacturing process.

At a press conference in January, TSMC’s founder Morris Chang said the foundry expects to start commercial production of 5-nanometre chips by 2020. This puts TSMC in the driving seat of the semiconductor industry, which is set to dictate next-generation consumer products including electric vehicles, drones, robots and 5G smartphones.

“The ‘hearts’ of most tech giants are in TSMC’s hand,” the aforementioned WeChat article suggested. “The tech world would feel the shock whenever Morris Chang taps his foot,” the same article also suggested.

Who is Morris Chang?

Chang was born in 1931 in the coastal Chinese city of Ningbo. In 1949 he moved to the United States to study at Harvard University. Later he transferred to MIT where he earned a degree in mechanical engineering.

Hired by Texas Instruments (TI) in 1958, Chang worked with Jack Kilby, who chatted with him over coffee breaks about the possibility of shrinking the then giant vacuum tubes into small silicon chips. The innovation, aka the integrated circuit, made the modern computer possible (and earned Kilby a Nobel Prize in physics).

Chang spent 25 years at TI rising through the ranks, earning a PhD at Stanford along the way. He headed TI’s semiconductor division when he left in 1983, and following a brief spell at General Instruments, Chang returned to Taiwan.

While Intel’s co-founder Gordon Moore rightly predicted that the processing power of a chip would double every two years while the price would fall by half, Chang put his rival’s famed hypothesis into commercial use and redefined the industry by recognising that small chip designers could not afford to run their own fabs. He founded TSMC in 1987 as the world’s first dedicated foundry.

Critically, from day one TSMC appears to have enjoyed the full backing of Taiwan’s government, which remains the company’s key shareholder through a strategic fund. Over the past 20 years the island’s political control has flip-flopped between the Nationalist Party (KMT) and the independence-leaning Democratic Progressive Party (DPP). Yet Chang insists he has no political allegiance and prefers to stay out of politics.

After the 2012 general election – when the KMT retook power – most Taiwanese tycoons with business interests on the mainland such as Foxconn’s Terry Gou came forward and publicly vowed their support for the so-called ‘1992 Consensus’ – stipulating there is only ‘one China’ – but Chang refused to follow suit. “I support the president elected by the people,” was all Chang said.

A new era of Chinese chipmakers?

Taiwan’s Liberty Times believes Chang would be the runaway winner should he ever stand for the island’s presidential election as an independent candidate.

This is highly unlikely though, given the 86 year-old said he would retire last October. He will step down as TSMC’s chairman in June after three decades at the helm.

One of TSMC’s biggest challenge after the departure of “Taiwan’s semiconductor godfather” will be contending with the rise of foundries and chipmakers across the Taiwan Strait. China has been late to this particular game. Yet strong backing from Beijing has helped Chinese foundries boost capacity in recent years, although the country still lacks the technology to produce the top-quality chips and the necessary engineering talents to design them (see WiC357).

Chinese firms imported $260 billion worth of chips last year, or twice the amount that was spent on buying foreign crude (China consumes 60% of the world’s semiconductors but makes just 16%, according to PWC). Akin to the energy-hungry country’s pursuit of overseas energy resources, Beijing has been stepping up investment in the semiconductor industry too.

A policy directive was published in 2014 to support Chinese chipmakers. In 2016, the China Integrated Circuit Investment Fund took the lead to invest $24 billion in the country’s first integrated circuit (IC) memory chip foundry in Wuhan (see WiC322).

The ZTE debacle will almost certainly spook the Chinese government into pouring more resources into the industry. Already, it is closing on another $19 billion semiconductor fund and even internet giant Alibaba has emerged as a new force to produce “China’s heart” (see this week’s “Alibaba has joined China’s ‘chip war'”).

Last week, President Xi visited Wuhan to issue another semiconductor battle cry. “No matter how big a person is, he or she can never be strong without a sound and strong heart,” the Chinese leader said while visiting the city’s main semiconductor plant, urging businesses to make major breakthroughs in chip technology.

How are cross-Strait relations?

Though Chinese chipmakers now mostly compete at the lower-end of the market, strong backing from Beijing means the Chinese are the only newcomers likely capable of challenging the bigger entrenched players such as Intel, Samsung (see this week’s “Telecom” section) and perhaps inevitably, TSMC.

But it won’t be easy and it (likely) won’t be swift. As Alexander Wolf, an economist at Aberdeen Standard Life, told the Washington Post: “Even though they’ve (the Chinese) committed a lot of money to the investment fund, the reality has sunk in that it’s harder than just throwing money at the problem. The Samsungs of the world, the TSMCs have a large head start. Certain products, you can’t really reverse engineer.”

TSMC said last week the US ban on ZTE and potentially other Chinese firms, would pose no material impact to its businesses given the Chinese could purchase non-American chips from TSMC’s product mix.

But the escalating China-US trade war has come at a time when tension is flaring up across the Taiwan Strait.

In recent months Beijing has been sending warships and aircraft to conduct patrols around the island. In a statement on its weibo, the Chinese air force even provocatively posted photos of Taipei 101, Taiwan’s tallest building.

“We are confident to meet any challenge. The motherland is in our hearts, and the jewelled island is in the bosom of the motherland,” a pilot was quoted as saying.

The South China Morning Post ran an article on the extensive drills this week entitled: “Has Beijing just put the finishing touches to its battle plan to take back Taiwan?”

Also this week the Dominican Republic became the latest country to switch recognition to Beijing from Taipei, leaving only 19 countries in the world still maintaining diplomatic ties with Taiwan.

Taiwan’s DPP-led government has vowed it won’t submit to pressure and intimidation from the mainland. On the opposite side, Hong Kong’s Ta Kung Po newspaper believes Beijing’s Taiwan policy has evolved into a two-part approach, with “the tough prong getting tougher” while “the soft prong gets ever softer”.

The new strategy is best underscored by a 31-point measure announced in March by the mainland’s Taiwan Affairs Office to attract Taiwanese businesses and talents. Since then, a unit of Foxconn has been fast-tracked to go public in the Chinese A-share market.

Some coastal cities like Xiamen have even made special housing subsidies available to young Taiwanese who are willing to migrate across the Taiwan Strait.

Is TSMC Taiwan’s “silicon shield”?

This brings us back to the widely circulated WeChat article about TSMC. Many internet users actually laugh at the writer’s reference to TSMC as a chipmaker “in China”.

“But TSMC is 80%-owned by foreign investors [including Intel and Philips],” a netizen noted. Still, those hopeful of a TSMC takeover used the phrase: “When will our glorious unification be achieved?” Indeed in discussion groups focused on military issues – where the article was also posted – the online chat has been eerily focused on whether controlling TSMC would add another potent reason for a mainland invasion of Taiwan. The strategic importance of TSMC has long been a hot topic among Taiwanese media too – although the discussion has been based on an entirely different perspective. TSMC has been dubbed Taiwan’s “silicon shield”, a theory popularised by Craig Addison in his book Silicon Shield.

Proponents of this theory suggest that a mainland invasion of Taiwan will wipe trillions of dollars off the value of American tech firms that rely on TSMC’s chips. As such, these tech giants would be powerful voices urging Washington to shield the island against any military attack, just like the Americans would do to help their Middle East allies and protect their oil interests.

“Taiwan can take comfort from a ‘silicon’ shield that is already in place,” Addison wrote in the New York Times. “The silicon shield grows stronger each year.” ­­­

The thing is this was penned in 2000. The commentary surrounding the TSMC article suggests that some in China now see the semiconductor giant as a ‘silicon shield’ too, but of an alternative variety: a means to shield their own tech industry as it seeks to oust Silicon Valley from global leadership in areas like artificial intelligence (AI) and driverless cars.

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