Your next iPhone won\u2019t be stamped Made in America. But pry open the casing in 2025 and you may see semiconductor chips that were etched into silicon in the Arizona desert.<\/p>\n
While it will be scorching outside, the Phoenix \u201cfab\u201d gearing up to produce That\u2019s no coincidence. Apple is TSMC\u2019s largest source of business, worth billions in annual revenue. Apple is looking for chip security, among many companies seeking to shore up supplies amid rising geopolitical tensions and fears over disruptions.\u00a0\u00a0<\/p>\n War breaking out between Israel and Hamas is just the latest worry for multinational companies. Russia\u2019s invasion of Ukraine and escalating tensions between the U.S. and China are fragmenting global trade. Disruptions in chip supplies from the pandemic remain fresh. A global race is now on by companies and governments to secure supplies of chips that are critical to both their industrial strength and their militaries.<\/p>\n No company is caught in the crosscurrents more than TSMC. Producing the vast majority of advanced semiconductors in Taiwan, TSMC is the lifeblood for tech\u2019s new applications like artificial intelligence and advanced military weaponry. Taiwan, of course, is a geopolitical flashpoint between the U.S. and China, which claims the island as its territory, while the U.S. has indicated that it would defend the island in the event of an invasion or attack.\u00a0<\/p>\n Both for its security and customers like Behind the scenes, Apple played a role in luring TSMC, according to some analysts, who said the iPhone maker leaned on the chip maker in a way only it could.\u00a0<\/p>\n \u201cIt was like the Godfather made an offer you couldn\u2019t refuse,\u201d says Dan Hutcheson, vice chair of TechInsights, a semiconductor research firm. Apple threatened it might go elsewhere for chip supplies if TSMC didn\u2019t come through with a U.S. plant, he said. And Cook \u201cwas instrumental\u201d in getting former President Donald Trump to promise U.S. financial support.\u00a0<\/p>\n TSMC, in a statement to Barron\u2019s<\/em>, said that \u201cmany factors\u201d went into building in Arizona, adding, \u201cThe U.S. government also supported our decision to invest here.\u201d Apple declined to comment.\u00a0<\/p>\n <\/p>\n Fueled by concerns about China, the U.S. has adopted the most friendly industrial chip policy in a generation. The 2022 Chips and Science Act included $39 billion in grants for manufacturing and 25% tax credits for construction. States such as Arizona, Texas, New York, and Ohio are also throwing in subsidies, aiming to capture economic gains from a chip revival.\u00a0<\/p>\n TSMC is now leading a wave of U.S. manufacturing, including companies like Yet places like Arizona\u2014water-thirsty and far from TSMC\u2019s highly efficient production in Asia\u2014are hardly ideal for new fabs. \u201cIn Taiwan, TSMC is treated almost like royalty,\u201d says Kirk Yang, chairman of Kirkland Capital, based part-time in Taiwan. \u201cIn Arizona, they\u2019re just one of the good guys.\u201d\u00a0<\/p>\n A spokesperson for TSMC said that it would be more expensive to build in Arizona than Taiwan, \u201clargely due to higher costs associated with construction and facility operations.\u201d\u00a0<\/p>\n So far, it has been a slog. Construction is running behind schedule, with mass production now expected to start in 2025 rather than next year. Labor problems have piled up as TSMC vies with Intel and other tech companies expanding in the state. Union leaders have castigated TSMC for claiming that it couldn\u2019t find enough workers, while the company said it had to fly in technicians from Taiwan due to a lack of skilled labor in the state.\u00a0<\/p>\n TSMC is also expanding amid a global chip downturn. Industrywide sales are expected to fall 10% from 2022 levels to $515 billion this year, according to the Semiconductor Industry Association. A recovery is expected next year, with AI stoking demand. But growing U.S. restrictions of chip exports to China are weighing on the market, with China accounting for 36% of sales for U.S. chip companies.<\/p>\n All of it is taking a toll on TSMC\u2019s finances. Along with a new fab in Arizona, TSMC is building plants in Germany, Japan, and mainland China. The company is aiming for $92 billion through 2025 in capital expenditure, according to consensus forecasts. Its capex as a percentage of sales has risen and is denting free cash flow, which is expected to fall 22% this year to $12.3 billion before recovering to $20.5 billion in 2024.<\/p>\n Some analysts say that TSMC decided to build in Arizona more for political than economic reasons. \u201cIt was not a business decision,\u201d says Needham analyst Charles Shi.\u00a0<\/p>\n The business case makes more sense now that tensions with China have risen, pressuring customers like Apple, Nvidia, and One skeptic on the economics of Arizona appears to be Morris Chang, TSMC\u2019s founder and former chairman. In a podcast last year, he described the Arizona plant as an \u201cexpensive exercise in futility.\u201d TSMC\u2019s foundry in Camas, Wash., built in 1997, still produces chips at 50% higher costs than in Taiwan, he noted, adding that he expects the Arizona chips to be \u201cnoncompetitive\u201d in world markets. He could not be reached for comment.\u00a0<\/p>\n Chip experts say that TSMC\u2019s Arizona fabs will be costly to run. Handel Jones, a veteran industry consultant, calculates a 30% cost premium per transistor in Arizona compared with Taiwan, even after production has been optimized. Tools, materials, and equipment costs are comparable, he says, but TSMC\u2019s operating efficiency, or chip yield per wafer, will remain higher in Taiwan, where the company has woven decades of expertise and quality control into its plants.\u00a0<\/p>\n \u201cIn Taiwan, the technicians and engineers are highly trained, so you have a high level of equipment throughput, uptime, and fewer defects,\u201d he says.\u00a0\u00a0<\/p>\n One other competitive advantage for TSMC\u2019s home country is the weak Taiwan dollar, according to Brad Setser, a senior fellow at the Council on Foreign Relations and former Biden administration official. \u201cIt\u2019s hard to overstate how undervalued the Taiwan dollar is on most measures,\u201d he says, noting that it remains weaker than it was in 1997. A weak Taiwan dollar suppresses local labor costs and ramps up profits for goods sold in U.S. dollars. That has long been a structural advantage for TSMC in Taiwan, Setser says.<\/p>\n TMSC might not be in Arizona at all if the company weren\u2019t a global choke point for chips. Almost all of its chips are made in Taiwan, accounting for 54% of global production and 80% of advanced chips, according to Morgan Stanley. Companies like Apple and Nvidia depend on TSMC for leading-edge chips, which go into things like iPhones, computers running AI apps, and self-driving electric cars made by TSMC aims to be the Switzerland of semis\u2014a neutral player in a global tech arms race. The problem is that Taiwan is a geopolitical tinderbox. If China invades the island or disrupts supplies, manufacturing of leading-edge electronics, including aviation, communication, and military applications, would be disrupted, at the least.\u00a0<\/p>\n \u201cThere are legitimate concerns about the ability of the U.S. to protect TSMC in the event of a military escalation,\u201d says Setser. \u201cThe Chips Act was a strategic hedge against an invasion of the island.\u201d<\/p>\n Concerns about Taiwan have led to massive investment in U.S. chip making. Near term, the buildout is a boon for manufacturing; fabs going up in Arizona, Ohio, Texas, and other states are fueling demand for everything from water infrastructure to electrical work. TSMC\u2019s Arizona complex is now one of the largest construction sites in the U.S., with 12,000 workers on the 1,000-acre campus. Long term, the semi tooling industry stands to win big, including companies like \u201cWe\u2019re making our supply chain less efficient because of geopolitics, and the winners will be the agnostic pick-and-shovel plays\u2014the machine and tooling subsectors,\u201d says Marko Papic, chief strategist of investment firm Clocktower Group.<\/p>\n If the goal of all the investment in U.S. chip manufacturing is security, it has a long way to go.\u00a0<\/p>\n One roadblock is that TSMC and Taiwan aren\u2019t abandoning their \u201csilicon shield\u201d strategy. By making Taiwan indispensable to global chip supplies, the country gave the U.S. and other countries strong economic incentives to defend the island. The strategy, originating in the 1970s, is even more powerful today, as chips have become indispensable to global commerce and weaponry.<\/p>\n TSMC still plans to produce its most advanced chips in Taiwan. One way to see that is in the race to cram the most transistors on a chip. Transistors are measured in nanometers, the size of a few atoms, with billions of transistors etched into each chip. More than 90% of global chip capacity below 10 nanometers is in Taiwan, and TSMC is on its way down to 2-nm production, leading the global industry.\u00a0<\/p>\n Few of the announced U.S. fabs will match Taiwan for years, says TechInsights\u2019 Hutcheson. Samsung is planning 4-nm production in Texas in 2024 and 3-nm chips in 2025. Intel is ramping up 3 nm now, aiming for 2 nm in 2025. Yet TSMC has produced 3-nm chips at high volume in Taiwan since early 2023 and is gearing up to start 2 nm next year. In Arizona, the first fab will start with 4 nm and a second will add 3 nm in 2026, putting Arizona a generation behind Taiwan.\u00a0<\/p>\n America will still be a pit stop on a global chip tour. Most silicon wafers come from Japan. After wafers are processed in a foundry, individual chips need to be cut, attached to other \u201cchiplets,\u201d and connected to circuit boards. All of that happens in a global web of plants. TSMC controls much of the market for advanced packaging in Taiwan. The U.S. is far behind, though Intel is scaling up packaging in Arizona and has a plant under way in New Mexico, which could handle some of TSMC\u2019s Arizona chips.<\/p>\n Taiwan is also a hub for \u201cmasks,\u201d or design patterns for chips, says Mike Mayberry, former chief technology officer of Intel. \u201cIf you want a new product, you need new masks, and that\u2019s done in Taiwan. It\u2019s another example of a single point of failure.\u201d<\/p>\n Security concerns aren\u2019t the only force driving TSMC outside Taiwan. TSMC is riding a huge wave of demand for advanced chips, and the company is outgrowing Taiwan as a production hub, straining its energy, water, and engineering resources. \u201cThey really dragged their feet on expanding globally, but eventually you run out of room in Taiwan,\u201d says an industry executive.<\/p>\n Making chips in the desert could raise costs for its customers, including its biggest one, Apple. Yet even Apple may have no choice but to pay more for chips and other components as it bows to geopolitical pressures.\u00a0\u00a0<\/p>\n Apple is now adjusting its global production network to bolster security. The company plans to shift some iPhone assembly to India and Vietnam, lessening its reliance on If Apple, worried about Taiwan, had to lean on TSMC to make chips in the U.S., that would be in character, says Mayberry. \u201cApple is a commanding presence and can push suppliers around a lot,\u201d he says. \u201cTSMC is a big supplier, too, so you can\u2019t make them do anything you like. I\u2019d guess that Apple saw the political winds and said we need more of a U.S. presence.\u201d\u00a0<\/p>\n <\/p>\n Apple probably won\u2019t buy core processors from Arizona for future generations of iPhones; those will almost certainly remain in Taiwan. Jones estimates that Apple will still source 90% of wafers from TSMC\u2019s fabs in Taiwan. But Apple could source chips for things like headphones, Air Tags, older-generation iPhones and iPads, cameras, and power management.\u00a0<\/p>\n A big order might also come for 5G connectivity, Wi-Fi, and Bluetooth chips. Apple has tried for years to use its own modem chipsets, replacing those made by Qualcomm. The fabs in Arizona could produce them, says Needham\u2019s Shi. \u201cApple can pull a lot of wafers out of Arizona for connectivity, even if Arizona stays one generation behind Taiwan,\u201d he says.\u00a0<\/p>\n Arizona does have benefits, including inexpensive land and seismic stability, which is critical for chip making. TSMC says that it will recycle most of the water it needs and will have flexibility to scale up production, with capacity for up to six fabs. The foundries will have leading-edge equipment, including \u201cextreme ultraviolet lithography,\u201d or EUV, machines for etching transistors onto wafers. An EUV is \u201cvery expensive and specialized,\u201d says Mayberry. \u201cYou wouldn\u2019t waste that on something that sells for peanuts; you\u2019d use it for something that commands a premium\u2014whether it\u2019s a graphics chip for Nvidia, a central processing unit for AMD, or chip for Apple.\u201d<\/p>\n Other customers are likely to be auto makers looking for chip security after pandemic-fueled disruptions. \u201cThe auto companies really want onshore supply,\u201d says Jones, noting that chip suppliers like Near term, TSMC will subsidize overseas production with profits from more-efficient fabs in Taiwan, says Shi. That\u2019s one reason TSMC raised prices on chips in 2022 and 2023. But a chip glut may be building as global production ramps up; that could pressure prices and margins.\u00a0<\/p>\n The wild card is friction with China. \u201cThe scale of Arizona tells me that TSMC and its customers so far do not think the threat from China is that material,\u201d Shi says. A rise in tensions would probably accelerate an exodus from Taiwan, however, for all but leading-edge processors.\u00a0<\/p>\n How profitable will it all be? The chip industry aims to hit $1 trillion in annual revenue by 2030, nearly double current levels. Strong demand for AI and other emerging tech could soak up fab capacity, regardless of higher operating costs or where it\u2019s built.\u00a0<\/p>\n TSMC and Apple, the industry\u2019s titans, are expected to generate $37 billion and $109 billion of net income in 2025, respectively, up substantially from this year. Gross margins for TSMC could improve as the company\u2019s capex levels off. But the price for geopolitical security is rising for everyone. Chip makers, consumers, and investors will ultimately bear the cost.\u00a0<\/p>\n Write to Daren Fonda at daren.fonda@barrons.com<\/p>\n<\/p><\/div>\n
\n Apple\u2019s<\/span>
\n (ticker: AAPL) chips will be cool, clean, and cutting-edge.
\n Taiwan Semiconductor Manufacturing
\n (TSM) is plowing $40 billion into the project, aiming to crank out 600,000 chips a year. Apple CEO Tim Cook, at a \u201ctool in\u201d ceremony last year, said Apple would be \u201cproud\u201d to be the fab\u2019s biggest customer.\u00a0<\/p>\n
\n Nvidia
\n (NVDA) and Apple, TSMC is building several plants overseas, with Arizona as a prototype. \u201cArizona is the first trial of our overseas megasite development,\u201d said TSMC Chairman Mark Liu at a conference in Taiwan in September. The buildout is a \u201clearning process,\u201d he added, expressing confidence that it will be a \u201cvery successful project.\u201d<\/p>\nMaking Chips in the Desert<\/h2>\n
\n Intel
\n (INTC),
\n GlobalFoundries
\n (GFS), and
\n Samsung Electronics
\n (005930.Korea), which are vying for billions in subsidies. More than $200 billion of investment has been committed by chip makers, according to the Semiconductor Industry Association.\u00a0<\/p>\n
\n Advanced Micro Devices
\n (AMD) to branch out from Taiwan. But TSMC may be slow-walking construction in Arizona because it\u2019s struggling to fill capacity in Taiwan, Shi says. The company now has global capacity for 16 million to 17 million wafers but may have trouble selling it all without a big sales revival. \u201cThat\u2019s why they\u2019re not really in a hurry to turn on Arizona,\u201d he says.<\/p>\nThe Price of Security<\/h2>\n
\n Tesla
\n (TSLA). Military contractors rely on TSMC for chips in things like drones, guided missiles, and communications gear.<\/p>\n
\n Micron Technology
\n (MU) says it will spend up to $100 billion on a \u201cmegafab\u201d for memory chips in upstate New York.
\n Qualcomm
\n (QCOM), GlobalFoundries, Intel, and Samsung are building foundries in the U.S. Ideally, the investments will lift U.S. chip production from roughly 12% of the world\u2019s total today, a goal of the Chips Act.\u00a0<\/p>\n
\n KLA
\n (KLAC),
\n Lam Research
\n (LRCX),
\n Applied Materials
\n (AMAT), and ASML Holding (ASML).<\/p>\nApple\u2019s Geopolitical Bet<\/h2>\n
\n Foxconn
\n (2354.Taiwan) in China. Domestically, Apple says it is investing $430 billion in research and development, manufacturing, and other initiatives through 2026.\u00a0<\/p>\nWho Will Pay for Security?<\/h2>\n
\n Mobileye Global
\n (MBLY), Qualcomm, and
\n NXP Semiconductors
\n (NXPI) could source from Arizona. <\/p>\n