THE MESSENGER Opinion Companies Can’t Afford to Choose Between the US and China Published 11/27/23 10:00 AM ET|Updated 11/27/23 02:39 PM ET Stanley Chao

 THE MESSENGER  Opinion

Companies Can’t Afford to Choose Between the US and China

Published 11/27/23 10:00 AM ET|Updated 11/27/23 02:39 PM ET

Stanley Chao

Presidents Biden and Xi may have met face-to-face in San Francisco, but their governments clearly do not see eye-to-eye when it comes to global trade policy. The Biden administration, in particular, is pressuring high-tech companies to choose between the world’s two largest economies. Those companies understandably are struggling to stay above the fray of U.S. efforts to decouple from China and “friendshore” supply chains. They would be wise to consider the cautionary tale of Taiwan Semiconductor Manufacturing Company (TSMC), which demonstrates the downside of corporate entanglement in geopolitical gamesmanship.

TSMC remains the undisputed juggernaut in the chipmaking world, but it has sunk $40 billion into a sand trap of its own construction. Urged on by President Trump and later prodded by Biden’s $53 billion in CHIPS Act subsidies, TSMC committed to build two cutting-edge chip plants in the Sonoran Desert of Arizona. As a series of cost overruns, construction delays, personnel shortages, and supply-chain woes suggest, the endeavor is off to a very shaky start.

From the get-go, TSMC founder Morris Chang was pessimistic about the Arizona project. When Nancy Pelosi (D-Calif.), then speaker of the U.S. House of Representatives, visited Taiwan in 2022, Chang is reported to have told her that Washington’s efforts to become a chip powerhouse are doomed to fail. Chang also considered the Arizona project to be a “wasteful and expensive exercise in futility,” and admitted that the cost of making chips there could be twice as high as in TSMC’s Taiwan foundries.

Chang’s comments were grounded in lessons learned from a previous mistake. In 1998, he green-lighted a chip factory in Washington state that, by his own admission, was “naïve.” High costs and staffing problems continue to plague the Camas, Wash., factory, which sits on 266 acres of mostly empty land once earmarked for additional plants. 

TSMC’s response to similar travails in Arizona has been to double down on hype. The foundry’s CEO, C.C. Wei, told analysts in September that “we will be able to deliver the same level of manufacturing, quality, and reliability in Arizona as from our fabs in Taiwan.” Chang himself has tried to walk back his wariness about the Arizona plant.

These efforts at damage control ring hollow in the face of the facts. For starters, the company’s construction costs in Arizona exceed those in Taiwan by a factor of four or five. More problematic for the long term, TSMC has resorted to flying in Taiwanese staff to compensate for its inability to recruit skilled personnel stateside. Its American employees have complained of a toxic work culture with long workdays, unsafe conditions, and months-long overseas trainings.

So what explains TSMC’s public bullishness about Arizona? In a word, geopolitics.

Whether or not the Biden administration or Taiwanese government actually said a word to Chang, he got the message not to provide fodder for China’s claim that the U.S. is turning supply chains into political weapons. 

Nothing demonstrates the blinding effect of geopolitics on business sense better than Foxconn’s infamous flop in Wisconsin. Back in 2017, Taiwan-based Foxconn Technology Group, the world’s largest contract electronics manufacturer, announced plans to build a state-of-the-art manufacturing campus in Wisconsin to produce cutting-edge flat panel displays.

Effectively, Foxconn delivered a multibillion-dollar homage to Trump’s Make America Great Again slogan. It was also a mirage.

US President Joe Biden greets Chinese President Xi Jinping before a meeting during the Asia-Pacific Economic Cooperation (APEC) Leaders' week in Woodside, California on November 15, 2023.BRENDAN SMIALOWSKI/AFP via Getty Images

Faced with cost overruns, lack of domestic supply chains, and a dearth of skilled labor (i.e., the exact problems TSMC now faces), Foxconn eventually slashed its investment by 93% (from $10 billion to $670 million), reduced its expected workforce by a similar rate (from 13,000 to 1,500 jobs), and abandoned the production of flat panel displays altogether. 

Why did Foxconn make promises it couldn’t keep? Lawrence Tabak, author of the tellingly titled book Foxconned, argues that political calculations were the decisive factor. “Foxconn may have been currying favor with Trump to avoid the tariffs Trump was levying on Made in China products,” explains Tabak. “They make Apple’s iPhone so it would have meant millions of lost profits. It was best to get on Trump’s good side.” 

Similarly, TSMC has every reason to ingratiate itself with President Biden. The administration effectively controls the fate of TSMC’s China business, since the chipmaker must apply for special waivers to ship U.S. chipmaking tools to its China foundry in Nanjing. Last year, the U.S. Commerce Department banned shipments to China of certain chips and the equipment used to make them. Without the waiver, the Nanjing foundry could be deemed obsolete in a few years. 

Taiwan’s security interests surely also loom large in TSMC’s considerations. As a self-governing island that China claims as its own, Taiwan prizes Biden’s unofficial commitment to protect it in the event of a military invasion. In the end, this is the only plausible reason why Taiwan would risk lowering its so-called “silicon shield.” (According to the shield theory, China will not use force to retake Taiwan for fear of losing access to 90% of the world’s cutting-edge chip production.)

There is no way for TSMC to be a winner in this game. At the risk of losing business in China, it is wasting billions in Arizona. A casual observer might wonder if TSMC’s presence in the Sonoran Desert has something to do with sand, the biggest raw material used to make semiconductors. It certainly has nothing to do with logistics.

The United States, a nation that exited the chipmaking game 30 years ago, is hardly the most logical place to recreate the world’s most complicated supply chain.

But TMSC will not be the only loser. There is also the state of Arizona, and you and me, the ones flipping the $53 billion in federal subsidies to build overpriced and underperforming factories in the middle of the desert. Through it all, politicians no doubt will shamelessly declare victory, prompting TMSC to utter similar platitudes.

TSMC may be on a path of no return in Arizona, but there is still time for its corporate peers to stop and absorb a powerful lesson that will remain true no matter what comes of the latest chat between Xi and Biden: Keep your business out of the geopolitical spin cycle, or your company will risk drowning in it.

Stanley Chao was previously executive vice president of U.S. chip maker Kingston Technology. He has worked in China and the Asia Pacific region for more than two decades and is the author of “Selling to China: A Guide for Small and Medium-Sized Businesses.” Follow him on Twitter @stanleychao6