Taiwan's semiconductor manufacturing company, or TSMC, produces a significant portion of the global supply of advanced semiconductors. It's cutting-edge technology powers everything from smartphones to high-performance computing, and its customers include Apple, Nvidia, and ARM. TSMC's dominance in chip production has made Taiwan a critical player in the global tech supply chain, drawing attention from major economies like the U.S. and China. This has escalated global tensions, with concerns over the stability
of Taiwan and the potential risks to the global tech industries if chip production were disrupted due to regional conflicts. Tim Culpan is an independent technology journalist and the author of the forthcoming book, The World's Smallest Superpower, inside the rise of TSMC, Foxcon, and a nation of Taiwan technology titans.
He's based in Taipei and has been covering the semiconductor and electronics hardware industry for 25 years, including 18 years as a journalist and columnist at Bloomberg. Most recently, his work can be found at timculpan.substac.com. Tim has written extensively about TSMC and recently broke news on the developments at TSMC's Arizona factory. He joins us today to discuss what's happening at TSMC and what that means for the U.S., Taiwan and China's chip industries.
This episode is hosted by Sean Falconer. Check the show notes for more information on Sean's work and where to find him. Tim, welcome to the show. I've been living in Taiwan for 25 years. I'm now an independent journalist. I was at Bloomberg for 18 years, the technology correspondent and columnist. I'm writing a book which we published a year and a half from now called The World's Smallest Superpower. It's about the rise of Taiwan and why it's so important in the global sphere of technology.
That's what I'm up to right now. Substacking like so many other people. Timculpan.substac.com is where he can find me. That's the plug. As we're talking about today, the global chip industry is a huge focus of what I'm looking at right now. It's such an important topic for everyone.
I think it's something that's been more a my radar in the last couple of years hearing things in the news. Also listening to other podcasts and people talking about this. In terms of TSMC, Taiwan semiconductor manufacturing company, it plays this really essential role in the global chip production, particularly for companies like Apple.
If you're not involved in that world, you haven't really given any thought. It's easy to overlook the position or dominant position that has. How did that happen? Why is it so crucial to global tech supply chain essentially? It was never inevitable that TSMC would be the world's most dominant, most important chip company. It was founded in 1997 and Intel was huge back then. AMD was huge back then. Even IBM was big in chips back then.
The idea at the time was to do something called pure play foundry. Purely make chips for somebody else based on their designs. It was a relatively new idea. They decided to do that in Taiwan through the Taiwan government and then TSMC spun off later. It's done very well because it has been solely focused on customers.
The remit and the goal of TSMC from its founding has been to never ever compete with their own customers. That early on didn't seem like a big deal, but today it really does matter. It means that TSMC can make chips for Apple and AMD and Qualcomm and Nvidia. Actually, ironically enough, it makes Intel's leading-edge chips because it only cares about its customers. It's not competing with its own customers.
As it's done so, they've worked very, very hard. The Taiwanese work ethic is crazy. The FABs run 24-7 as they do in most parts of the world. But the R&D also works 24-7. You have R&D engineers working at 3am trying to work out the recipes of how to make the next leading-edge chip. It's a very, very tough work ethic. It's very, very focused on keeping track of data. Chip manufacturing is very data intensive. A lot of AI and machine learning involved in chip manufacturing.
They've done that by being very, very, very consistent to the point where they overtook AMD, they've overtaken Intel, they've overtaken everybody else. All the other chip manufacturers around the world have fallen behind because TSMC, they just keep advancing. The online work ethic, I think, a company that's been solely focused on manufacturing chips for such a long period of time.
Surely they've also built up even process expertise that is hard to recreate and duplicate because you don't even know necessarily what you're copying, because all you're seeing is the end result of the chip or something like that from an outsider's perspective. That's really true. Every new node, which comes approximately every two years thanks to this concept known as Moore's Law, is built on the previous node.
You can't really just start halfway through. You need to know how the previous node was done, how the equipment was used, what the recipes and formula and parameters were for the equipment for the previous node, because when the new one comes along, that previous knowledge has to be used so you can move forward and keep moving the button forward.
That's why it's very, very difficult for anybody to catch up to someone like TSMC. If you're someone like Intel or AMD and even Samsung now, if you fall behind a little bit, you're really going to struggle to catch up. Because it's a very fast moving industry. Software is probably the only other industry moves as quickly as semiconductor manufacturing in that it really iterates so quickly.
And then you know, the US introduced the chips acts to try to reduce the reliance on foreign semiconductor manufacturing. How does something like that potentially affect TSMC's dominance in chip manufacturing? I think it won't change a lot. It has basically enabled TSMC to set up in Arizona and expand in Arizona. And TSMC has been very, very, very clear from the start when the US government started wanting to kind of seduce them to America is, you know, show me the money has been TSMC's line.
You want to set up there, you have to help cover the cost of doing so. And under the chips act, a lot of money is being spent by US taxpayers, as well as the Arizona government at the local level. To get TSMC to set up in Arizona. But at the end of the day, the good stuff, the tough stuff will still be done in Taiwan.
Because the way the chip industry works is kind of two teams broadly speaking. There's the team that work out the recipes kind of like the head chef or the master chef in a kitchen. They work out the recipe of how to make something, how to make the pizza or the souffle. And once they've worked that out, that's the PhDs. That's the people who have specialist technology skills in maybe chemistry or in physics. And once they work out those recipes, then they pass it on to the operations team.
And the operations teams are the ones who have to put that into practice daily running 24 seven in a factory. You know, a minute of downtime is not acceptable in one of these factories because they're so expensive. And so what we're going to see is more of the operations will be done in Arizona.
But it'll still be maybe five or six percent of TSMC global capacity, but working out those secret recipes will still be done in Taiwan because all that previous knowledge generations of knowledge sit in Taiwan. And that can't be transplanted easily. So we will see more capacity outside of Taiwan, such as in Arizona. But it won't change the general dynamics of Taiwan still being the hub of R&D and future chip development.
Yeah, also you talked about the work ethic of the Taiwanese and also it's a part of the world where, you know, what you got to pay someone is significantly less than the US. So you know, if all manufacturing or a good portion of manufacturing shifts to the US, then how would that impact even in the cost of manufacturing the shifts themselves?
Well, what's interesting about the chip industry is TSMC doesn't dominate today because of lower wages. Yes, Taiwan wages are lower and engineers is cheaper in Taiwan than there in the US. But the biggest cost of semiconductor manufacturing is the equipment. It's, you know, every year is the depreciation of the equipment because TSMC spending $30 billion in 2024 they'll spend even more than that next year.
And it becomes redundant equipment within about five years. They have a very fast depreciation schedule. And so the actual wages of the workers won't be the big factor. There are other costs in the US. There's a lot of licensing and red tape and environmental standards and things like that. The process in the bureaucracy in the US is a lot, lot slower than in Taiwan. And that slows things down. That makes it very, very difficult for the US to compete mainly because of red tape.
And the other thing is the US doesn't have the clusters of suppliers. There's a lot of chemicals. There's a lot of other parts to the puzzle of making a chip. There's probably two 300 suppliers to TSMC right now. Some of them will set up in the US and follow TSMC. A lot of the others won't. They won't be able to afford to. And so the cost will go up as a result of that as well. With all the suppliers like where are the bulk of those suppliers stationed around the world?
They're mostly in Asia. Japan has a very robust industry of equipment as well over materials. Probably the most important equipment company is a Dutch company called ASMR, which used to be part of Philips in 30 years ago and it spun off. But the US is a very important part of not just fabrication, but other parts of the chip puzzle. Most of the value of a semiconductor today is still coming from the US.
There is design tools. The software that is used to design chips is crazy leading edge and very, very complicated and very, very expensive. The US dominates that. They also have incredibly good materials, makers and equipment makers in the US. So some of the most important equipment makers are American companies. It's just that the actual process, the final part of making the chip is not done in the US as much as it used to be.
So we do have a supply chain around the world, but because of the 30, 40 years of history in Taiwan and in Asia, Japan and Korea of course are very good at making chips. You naturally have both the Asian companies and the Western companies clustered around these few hubs of manufacturing in Asia. In terms of China, they've made significant investments into semiconductor sector trying to catch up to the whites of the US, but they still lag behind in advanced chip production.
What are the primary barriers for China? A lot of it is to do with trying to catch up because more law works so quickly. The Chinese companies like SMIC, semiconductor manufacturing, international, which is probably the most famous and most leading edge at the moment, they have caught up to where TSMC was six or seven years ago. And that's a pretty good feat. They've done very, very well.
But because the chip industry isn't sitting still, it's always moving forward. It's not good enough to be where your competitor was five or ten years ago. You have to be where they are today. And the reason why they're struggling is because they don't have the right engineers. They don't have the focus and attention to detail that the Taiwanese and the Koreans and the Americans have in terms of chip manufacturing.
And the problem that we're going to see going forward is that China will keep spending a lot of money on trying to get its chip industry up and running. It's not a new thing. China has been spending a lot of money, government money, for more than 25 years. And that money has, in a way, gone to waste because they haven't caught up. And if that's Beijing's goal is to catch up to the West, which I include TSMC, then they've kind of failed.
But they do have a lot more capacity of older nodes, the stuff that may be five to ten years old, which is still used a lot. A lot of chips actually come from that area. You don't need all chips to be made at the very leading edge. And so the reason why China is struggling to catch up is they don't have the engineers. They have a government policy right now that really doesn't reward entrepreneurship or innovation or risk taking.
And if you want to catch up in something like semiconductors, you have to take risks. You have to try something new. And there's a lot, a lot of incentive for an engineer from China to stay in China. If they've got a really good pedigree, like a good degree and a good background of PhDs, they probably want to leave and go to the US and work at a US company rather than stay in China. So that's going to be a real challenge for the Chinese going forward.
Yeah, so it sounds like there's a situation built in cultural challenges around like not really fostering a culture of innovation, whereas the US, that's certainly not the case like the US is very, I mean, focus is a lot on innovation. That's why so many startups come out of, you know, US-based companies and so on.
So what is the US doing in terms of strategic moves to continue to, as we have control over chip manufacturing and continue to be work with companies like TSMC to be on the cutting edge and make sure that China is not catching up.
The US has a kind of a carrot and stick approach. The carrot is the chips and sciences act, which is to throw a lot of money at companies to set up in the US. TSMC is a beneficiary. Intel is a beneficiary, even though it's American, you know, they're getting money to set up Samsung is also doing that. And quite a few other companies.
And not just the fabrication companies. There is companies like another company called SAS Global WIFR, which makes the silicon, the actual platas of silicon, which is so important. That's a Taiwanese company and they've got money from the US government or will get money from the US government to set up in Texas, in Sherman, Texas to make those slices of silicon.
And so that's bringing a lot of the supply change to the US. It's not going to be large compared to Taiwan or Korea or Japan or even China, but it's helpful. The stick approach is the US Commerce Department, basically restricting the access that the Chinese companies will have to American technology. And that's not just American technology, manufactured and made by Americans such as American equipment and software.
But American technology that might happen to appear in equipment made by a Dutch company or a Taiwanese company or a Japanese company. And the US has, you know, the ability to do that, to say, all right, you are not an American company, but your equipment, your product, uses American technology.
You're not allowed to sell that to the Chinese. That's actually been surprisingly effective. I know that in the US, especially in DC, there's a big debate, oh, it hasn't worked, it's been a failure, these kind of things don't work. The reality on the ground is that it has been effective. And it'll take a few more years for us to notice the effect because those restrictions only came in around 2022.
And given the way the industry develops, it takes a few years for restrictions to really take hold. It's not going to stop a truck immediately on the line. It's kind of slowing down, it's like a massive parachute slowing down development in China. It is effective, maybe not as quickly as policymakers would like, but it is working. So the current and stick approach is working to slow down the Chinese as well as help the Americans catch up.
And with TSMC, like setting up shop in Arizona and the US, has there been any reaction from the Chinese to that? It's not happy. It involves the Chinese government's belief that Taiwan and America inconse that America is just trying to prop up Taiwan. So from a political point of view, it does give Beijing some talking points, but they also know there's not much can be done about it.
I know that there has been some propaganda and misinformation and disinformation campaigns out of China to try and so discord between the American and the Taiwanese workers in Arizona. I've been seeing some issues with labor relations and so forth in Arizona over the last year or two.
And I know that part of that has been Chinese disinformation campaigns on social media to try and make it look like the Taiwanese disrespect the Americans using racist terms, trying to make the Taiwanese distrust the Americans and think the Americans are unworthy, unreliable. But I talked to people on the ground in Arizona. Yeah, there is a clash of cultures in a way between the Taiwanese and the Americans, but they generally get along quite well. They're focused.
They're engineers at the end of the day. Anyone who's an engineer of any type, there's a lot of internal office politics. But at the end of the day, you're trying to get the job, diamond ship a product. And that's what they're focused at in Arizona.
So the cultural issues between the way Taiwanese do business, Americans do business is really quite small compared to the fact that they're all really on the same team trying to get fabs up and running operational. And they're really focused on trying to hit the same kinds of levels of manufacturing and you have that is seeing in Taiwan. And they're doing that. And so that's really boosted morale amongst the Taiwanese and the Americans working in Arizona.
And in terms of tension between China and Taiwan, if that tension continues to increase, how would that impact the global tech industry? Well, I think the big issue really is that Taiwan is the world's smaller superpowers as I posit it. And it's beyond just chip manufacturing. If we take just the fabrication of a ship, there's a lot that happens before that process and a lot happens after.
And the ship comes out of a factory, whether it's in Arizona or in Shinju or in Dresden, Germany, it has to be tested. Then it's sliced up and it's packaged with a kind of an all-air of NAML. And it's got wires put to it. And then it's put on a PCB and all that process. And a lot of that will still be done either in Taiwan or by Taiwanese companies.
Foxconn is not as famous, I guess, as TSMC right now, although it has been famous because it makes iPhones. There is important to the global economy as TSMC. There's other companies like Pegatron and Quanta, which really most people don't know, but they make a lot of the AI servers and a lot of other smartphones and other devices. And they're all Taiwanese companies. So if anything happened to Taiwan, these companies would struggle to function.
So it's not just semiconductors that would be at risk. It would be the whole hardware supply chain. The AI servers made for Nvidia are done by Taiwanese companies in Taiwan. And so the semiconductor industry would definitely suffer. And the chips and sides of the act will try and ameliorate that by having more capacity in the US. But all the processes before and after making a chip are also at risk if anything befiles Taiwan.
Is that the main motivation of the chips act is to try to a situation create a more resiliency to any kind of disruption in the global supply chain if there was something that happened between Taiwan and China? Yeah, I think the chips and sciences act is it's very much product developed by politicians. That's reality with a lot of backing from the US semiconductor association that's got their hand out wanting money from the government.
And yes, the idea is to have more resilience and security in the US. But it's for only one part of the puzzle. And I think the issue really is the dependencies, I guess in software terms. You could secure totally this one step of the puzzle. But the dependencies on other parts of the hardware stack are still there in Asia. And so it would ameliorate and soften some of the issues if something went wrong in Taiwan and the US would make some chips at TSMC in Arizona.
But all the other parts of the puzzle are still out in Asia. And the US needs that at the end of the day as well. And what is I mean in terms of the chips and science act like what are the main sort of takeaways in terms of the restrictions or policies put in place by that?
Essentially the chips and science act is giving away money through tax breaks and various other non-cash and centers as well as some cash and centers such as cheap loans or low interest loans or zero interest loans to companies that set up in the US. And you don't get all that money at once. You have to hit certain benchmarks and targets. So every company goes to the US government and says, all right, we want some of this money.
Here is our plan. This is what we plan to do. We plan to set up by this day to get production going at this day, get to this production note at this day. And as they hit each of those stages, the company gets a certain amount of that incentive back to them. So it spread out of a period of time. And so the chips and sciences act is really about doing that to incentivize. But it's not enough to make a worthwhile for a company.
A company still has to basically spend its own money and find its own clients to make a worthwhile. And that's what TSMC is trying to do. Are there other Western countries that are trying to follow, like, you know, put similar things in place to try to protect against disruption in the global swaijian? Yeah, the EU has a very similar policy to the US. So the EU broadly as a union has policies and then individual countries within Europe are also enacting some of their own policies.
Germany has been successful in securing TSMC to set up in Dresden in Germany, which has already been a hub of semiconductor activity, AMD owned fabs in Dresden before they sold it off when AMD split 15 years ago. So that has been successful. Those factories that TSMC will set up will not be leading leading edge. It's actually focused on the automotive industry, which is slightly older technology, but it's the technology that the auto industry needs.
Japan has also been successful in getting TSMC to set up a factory in a place called Kumamoto. That factory is up and running very, very soon. We'll actually see production out of it in 2025. And for similar reasons, the auto industry as well, electronics industry is very big in Japan. And a lot of the chips that will be made in Japan will be for those sectors. It won't be for AI servers or iPhones. It will be more for cars and other industrial electronics.
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But just basically if I understand correctly the challenges that even if they can reverse engineer it by the time they could put all the things in place to actually manufacture it based on the process of reverse engineering, there are already two or three years behind whatever that chip is. Yeah, you've now, that's it. That's exactly what it is. The US has been ahead in many industries, you know, aircraft technology and engine technology and even nuclear weapons and all sorts of other things.
And other countries caught up because these are not technologies that move that quickly like a car today is kind of similar to a car 50 years ago, the combustion engine hasn't changed a lot the basics are there.
You know, the Italians have a Ferrari, it's a better engine and the Americans have Detroit and so forth, but essentially a car is the same chips are very, very different chip today made it leading edge by TSMC in Shinjul is quite different has a lot of technologies, a lot of machinery that we're not even seen five years ago.
One of which, for example, is extreme ultraviolet, the photography technology coming out of Dutch company ASMR nobody had used that machinery five or 10 years ago nobody had seen it and so they get this equipment and they've got to work out how to use it and it doesn't come with an instruction manual saying is the recipe. TSMC has to sit down and work out the recipe every single step in making a chip there's maybe 30 or 40 steps every step will have maybe 50 to 100 parameters.
The humidity and the temperature and the air pressure and the amount of time that it's turned on like we're talking millie millie seconds all of those parameters are crucial to making that step and then you multiply that out the multiplier effect means it's very very difficult. So even if a person gets their hands on an EUV piece of equipment doesn't mean they had no how to use it it's very very difficult.
So as you say, if the Chinese would get their hands on this kind of equipment or work it out or reverse engineer it everybody else has moved down the road and they've got to try and start that process again that's why it's very very difficult because the industry moves very very quickly it's very hard to catch up because reverse engineering is not enough.
In terms of you're figuring out those parameters in the process around that as well as whatever the designs are that are going into the you know the next generation of chips and somebody how much protection essentially is in place to prevent people from getting their hands on that ahead of ahead of essentially the implementation of those things already being existence.
Those parameters are really the secret source of how to make a ship every single tool has its own set of parameters and a dedicated team of engineers you could be an engineer at a TSMC fab and know this one tool inside out and have no clue how to operate the next tool in the process that's how specialized it is.
And this information is highly highly secretive it's very closely guarded you for example cannot go into a TSMC factory with any electronic equipment not allowed thanks to apples rigidity with security the printers at the SMC have paper that is embedded with small filaments of metal.
So that as you exit the TSMC facility and go through a metal detector if you are taking out any paper that has been printed in the TSMC facility the metal detector will go off that's how strict they are on security and TSMC even has a kill switch if a fab was taken over they compress a button and literally just delete all the information and kill it so that you could get access to the equipment but you wouldn't get access to the secret source of how to use that equipment and that is the key that's why.
Companies that have access to the same equipment and not able to do the same thing because they haven't worked out the secret formula haven't been able to get access to the secret formulas of how to use it. What percentage of people working at TSMC would even even has like a full view of the entire like production line and has a you know good grasp of how all that stuff works together.
Each fab and there's more than 20 fabs you know it's just a word fabrication plant facility is more than 20 leads each fab has a fab manager or two and they have the big picture macro view of it.
But I guess it's like in software engineering you know if you look at a product this even a product manager or the engineering manager probably doesn't know the intercreases of every little line of software code or every little package within the code they might know how it kind of all fits together because they'll map it out.
But it's a similar in semiconductors there will be a fab manager as an overall view there will be process technology engineers and then lion engineers who have an idea of when it comes out of this piece of equipment that she needs to be feeding these parameters kind of like say an API and software once it comes out you know we'll do a test at this stage and if it hits these parameters then we move it on to the next stage if not then we work out if there's a problem.
So there's not a lot of people who have a broad enough picture and a deep picture you've either got a broad picture or you've got a deep picture you probably don't have both. And it's not just because of security it's just pure like intellectual capacity because the industry moves so quickly it's not possible for anybody to have that depth of knowledge and breadth of knowledge at the same time.
How many people are like working in one of these fabs like what's this look like if you walked into one of them. Well if you're actually inside the clean room of a fab and you see a lot of people you know there's problems that's that's the reality they are kind of very low human occupation facilities because you don't want more humans because they introduced dirt and grime and these you know there's clean rooms.
So most of the people in a fab are not actually in the clean room clean room part of it they're just kind of in the periphery looking at computers checking parameters checking what's going on it's a lot of just checking parameters and looking at screams and so forth.
It's not someone going in and physically picking up a way for after it comes out of the oven and then moving it to the other part of the process because it's very hands off because it works very quickly and because of the desire to not introduce any particles of dust. But a fab itself will have a few thousand people working in it and these people all have their specialized role for a specific piece of equipment or a specific part of the process.
And they're running 24 seven so they have shifts. There's generally fewer people working at 3 a.m. than 3 p.m. but they are working 24 seven. What is the typical process for someone to become you know a specialist in a fab like are they going and taking specific training or is this something that TSMC actually provides training to have you know people always available to have these skills.
Generally you do need a college education in a aligned kind of engineering degree. It's not necessarily electronic engineering or semiconductor engineering but it might be chemical engineering. It might be physics because in the day semiconductors are a mold of physics and chemistry. You might be a mechanical engineer for specific type of mechanical engineer and there to be skill set required.
More and more people inside a chipfab are actually machine learning and AI engineers. If you're a data scientist you've probably got a job waiting for your TSMC because a lot of data scientists are needed. But you know the US is now getting ready to ramp up its education process to feed TSMC Arizona State is working very very closely with his MC ASU is churning up engineers.
And right now in the fab said Arizona are former ASU you know ASU grads the Taiwan education system is two or three major universities in Taiwan that are very much geared towards creating the kind of graduates the companies like TSMC need. You can get a job inside a fab without having an engineering background but it probably won't be a leading edge engineering role it might be something a little bit aligned with it.
But there's definitely a lot of roles in the sciences and it's not necessarily directly semiconductor engineering. In terms of the US with the kind of expert controls that they've put in place to restrict you know semiconductors going into places like China like other ripple effects to other countries looking to the US or even those that you know manufacturers like Japan or South Korea and other president.
There is ripple effect in terms of the ability of countries and companies to sell equipment to China. ASML for example the last couple of years did really really well in China ironically enough because the Chinese could see that the door was closing and the Americans were going to cut them off. And so the Chinese were rushing to buy Dutch equipment and that kind of peaked just recently and next year 2025-2026 the Chinese will buy a lot less equipment from overseas for that reason.
Japan is also impacted where Japanese were not allowed to not able to sell a lot of the equipment that they otherwise might have wanted to sell to the Chinese. So there's definitely been a ripple effect on that side of it. The ripple effect on the other side of it in terms of manufacturing in China is because China will be crimped in its ability to move to the leading edge it will be stuck kind of in what we call a legacy node or mature node.
And these are nodes that are actually really really needed not everything as I said needs to be leading edge. A lot of chips that we we see in use today in our cars or in our computers can use technology that was developed 10 years ago. But if China builds up a large capacity of that kind of technology then we're going to see a flood of capacity available.
And you know they'll be selling off that capacity to anybody really really cheap rates and so we could see a massive glance in mature node capacity in China. And if you're a Western or a non Chinese company in that area you're going to struggle because you're going to struggle to really big price competitive. This episode is brought to you by Work OS.
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In terms of like chip manufacturing that's going on in China like as you said earlier it's not necessarily you know the latest Apple chip but they there is a lot of chip manufacturing that's going that still happens there. What kind of industries I guess do those chips end up being in? We kind of forget where we use chips today like your credit card has a chip in it right you know smart card reader might even have to one is the NFC and one is the little gold you know chip that is encrypted.
A lot of that stuff is made in China right a lot of the kind of the dull boring chips that go into micro control of the controls the window in your car going up and down. These are really really important chips but they're not leading edge they're pretty mundane they come on and eat chips and we kind of forget how often we are interacting with semiconductors on a day-to-day basis.
And so China can turn out a lot of those chips like buy the bucket full I don't even need to price a per unit their price of per 10,000 pieces you know few cents per 10,000 pieces.
And that's where we're seeing a lot of Chinese made chips we're also seeing China getting someone advanced in memory technologies like DRAM and and will they will be probably used in you know Chinese server farms or Chinese electronics a lot of it's going straight into electronics made by Chinese companies and staying within China. A lot of Chinese made chips never leaving China. Is there any concern over you know China creating or you know building a lot of these sort of more commodity chips?
There is concern because they could flood the market we could see if you're a European company that is making smart card chips or NFC chips or even Bluetooth chips which are pretty commoditized now Bluetooth has been around a while and when it first came out there's a few companies that can do it and if you can do Bluetooth you really you got a lot of contracts.
But Bluetooth it's an open standard and the process of making a Bluetooth chip is pretty well known and so you if you're a non Chinese company in those areas you better have something really awesome to offer your clients in addition to that like some ability to build a product or integrated into something else but if you are just purely making that one ship that the Chinese can do.
You're definitely going to struggle and there is concerns outside of China in Europe in the US in Asia that the Chinese could flood the market a lot of these commodity chips and bring the prices down and companies could go out of business as a result. The biggest concern there is around from a competition standpoint of them being on the own that market less than it being any kind of like I don't know potential threat to security.
There is a security issue it's very very difficult to work out whether chip has a secret kind of properties or functionality built into it. In the same way it's very hard to find bugs or back doors in code you know we know that exists. Code does ship with bugs and back doors and which we do have as to find it. It's a lot harder in a semiconductor than it is in code right.
First of all you have to know what you're looking for and if it's hidden in such a way that you don't have some kind of static or dynamic test to find it well good luck and those who have shipped it know how to access that back door in semiconductor. It is not science fiction to believe that there are back doors in semiconductors that are being shipped out of China. It is happening it is real it's very hard to find.
They may be right happening right now already shipped and that's one of the reasons why the US especially the three letter agencies in the US want to have more of their chips made in America so these back door functionality won't be built into them. Other document in cases of back doors being found in China built chips.
There are that I think are not public or not public enough that we could really pinpoint it I believe that US security intelligence agencies are aware of them are concerned enough about them to believe that they exist. And so yes there's feasibility has been proven by industry and back at the end that it's feasibly possible.
And if you're a paranoid security agency then if it's feasible you know it's probably been done and so yet there is there is documented cases among security agencies I haven't seen those documents I know that they exist but there is definitely you know cases out in the wild of back doors built into semiconductors.
In terms of like some of Apple's processors being made in the US out of Arizona like do you think that that's something that other your major companies like AMD and Intel or others will fall suit. Yeah so it was inevitable that an American company would be the first client of TSMC Arizona I didn't know who it would be my guess was a B in video Apple AMD and I broke the news that it was Apple it's the A16 processor which by the time it comes out will be maybe two generations old.
It will probably go into the next iPhone SE which is kind of the lowest spec iPhone that Apple brings out every couple of years and might go into some other products since breaking that news I since learned that AMD is next the next cab off the rank. AMD will make high performance computing processes which maybe AI chips not all high performance computing processes are AI chips but they're in the same general league.
I believe that's a bigger deal because you know AI is a bigger deal than a smartphone chip in terms of the ability to what they can do in the world and it shows that the US is getting towards a certain amount of AI hardware resiliency and independence.
It's once it's then packaged at am core which is an American company also setting up an Arizona once it's packaged and then it could be sent over the border to Mexico to be put on to a printed circuit board and put into a server North America maybe not the US specifically the North America is getting very very close to independence in an AI server manufacturer and that's I think a very big deal for the US.
You're looking ahead I guess over the next five to 10 years like where do you think this world is going in terms of chip manufacturing we're going to send up you know I think moving a lot of the manufacturing out of out of Taiwan to other countries like given all the geopolitical tension between China US China and Taiwan like how is this going to change over the next few years.
There's definitely more manufacturing made or being built outside of Taiwan Arizona, Dresden and Kalmer, Malta and Japan are the three main areas that we can think of but it's worth remembering that as TSMC breaks ground in those three places it's also building new facilities in Taiwan.
It's not sitting still in Taiwan it's still spending significant money and Taiwan's a small island and so they're rushing around the island trying to find a few spare hectares to build a factory when it's not that easy in Taiwan.
What they're doing it and another area where there's been a lot of time and energy is building leading edge packaging there's a technology called coos chip on wafer on substrate and that essentially combines old style chip packaging with the semiconductor lithography and it's very very important because that allows the core GPU from saying Nvidia blackwell to be put right next to the high bandwidth memory which is basically DRAM.
And having that closer is very important for speed it's like having your warehouse next year your shop right if you have to go down 10 miles down the highway deliveries are going to be slower so semiconductor engineers are trying to make the chips more like combine all the parts of the chip closer together and so packaging technology is hugely important.
So there is going to be more capacity outside of Taiwan but there's still going to be most of the capacity in Taiwan most of the know hell and most of the leading edge capacity for packaging will be in Taiwan so the actual balance of power will not change that much no matter how much money other government spend Taiwan is still the home for TSMC and it's never going to change.
How is the fact that like Taiwan over the last 35 years or whatever has become this dominant power in chip manufacturing how is that effective like other industries in Taiwan because I would think that in order to get the chips out of the country and lots of other things you know even just supporting people work like thousands of people working in one factory you have to build up a lot of other industries to support the machine.
We have a labor shortage in Taiwan in climate rate is very very low Taiwanese what's a lot of labor and really needs to import more.
So the structure of the Taiwanese economy has changed a lot as you say TSMC is the largest company in Taiwan it's the largest member of the Taiwan stock exchange and then anything affiliated to TSMC whether it's you know there is company who just exist to build the factory shell that's all they do is build the factory shell they do it very very well just TSMC build a new factory every year
and they make their money just from that so you've got whole engineers like construction engineers and architects who set up their whole industry and the whole career around building a factory and they're really good at it you've got chemical suppliers who are very good at not just you know maybe making the chemicals but delivering it in specialized trucks and hooking it up and all that kind of stuff so you've got a whole lot of specializations that are built up in Taiwan as a result of Taiwan semiconductor industry not just TSMC there's another company called UMC there's quite a lot of other companies in Taiwan that do make semiconductors.
And that cluster effect has been hugely important but as a result TSMC and its clusters of suppliers have kind of sucked up all of the workforce and you know they hire a lot of people they hire a lot of the university graduates mostly out of engineering degrees but also a lot of social science and liberal arts graduates are going to these companies as well to do with its marketing or or market planning or also to other information sciences work and as a result
young graduates out of universities they don't want to they don't want to go and work in a Starbucks or they don't want to go and work in traditional industries like plastics or automotive they want to go where the action is where the money is because TSMC employees they get paid quite well not nothing compared to the US but they also get shares and so forth if you're senior enough so it can be very lucrative to work for these companies and it's changed the whole structure of the Taiwan economy for sure.
It's really interesting to think about the how the sort of ripple facts within the country and all the side businesses who basically they're the one that just builds factories.
It's like San Francisco if you go to a bar in San Francisco you bump into someone you've ever made you just ask which startup you work for right it's like you know everybody works for from one of the big software companies or internet companies always working on a startup right it's similar in Taiwan everybody is one or two degrees separation from somebody works at TSMC or supplies to TSMC.
Yeah and I think that's why when those industries you suffer a downturn of what other industries that maybe on the surface level seem unrelated also suffer downturn like if suddenly there's less tech industry in San Francisco Bay area then that means like you know less people are spending money at restaurants and bars and so forth. Yeah what's interesting in Taiwan though is TSMC's never had massive soft cuts.
Taiwanese companies don't cut staff they hire very gingerly very carefully there was one period of time when Morris John the founder of TSMC was not in charge and his replacement did cut staff for the first time ever and the CEO was cut next and he lost his job and Morris John took back the mantle of the company. So it's it's kind of an unwritten rule you don't cut staff can be very careful about your hiring but when there's a downturn you you kind of grin and bear it and you get through it.
Is that a TSMC thing or is that like a Taiwanese cultural thing it's broadly a Taiwanese cultural thing you don't have the massive hiring like you have in Silicon Valley and you know the Facebook some of Google's and so forth where you know suddenly you hire 20,000 people in in two years and then you go whoops we have too many people let's cut them right the Taiwanese just don't do that they they
Taiwanese are overworked any Taiwanese will know that you know their team needs three more people but you know the boss is not going to give them that so you got to get it done yourself. And as a result when there is a downturn you know those people keep their jobs because they're still needed so there's not a lot of extra staffing at a Taiwanese company or the upside that is the downturns don't really hit us hard for the workforce.
I think this is really fascinating Tim is there anything else you'd like to share. I guess that the key thing really is that if the US wants to build resilience and security and semiconductors they need to think beyond semiconductors you need to think of the whole kind of hardware technology stack from the materials all way through the final product.
And understand that the US is not going to make it all themselves they shouldn't try and make it all themselves it's not a diss of the United States economy or workers that you can't do it yourself. Global trade is what makes the US strong and so the best thing that the US and its policy makers can do is is work with. You know allied countries like Korea Japan and Taiwan and say well let's work on this together make sure we have.
Security and resiliency but it also means that if Taiwan falls the US is in trouble let's just the reality it's a big thing to kind of go to defend another country. But the reality is the US would be a very very very bad shape something bad head home to Taiwan and that's that's a reality that we all have to kind of deal with. Yeah absolutely I mean I think it's not just the US that would suffer it'd be all you know western countries.
It would make covert look like a hiccup right would make it look like a small sneeze what happened with covert it would it would be cataclysmic for the global economy. Well Tim thanks so much for being here I think this was really fascinating I think you shared a lot of details about sort of the history what's going on and you know what potentially the future looks like. Thanks Sean if you listen to us have questions then most welcome to reach out. Cheers.