TSMC production delay shows ill-conceived logic of US chip strategy

US President Joe Biden's plans to make chips in America were dealt a significant blow on Thursday after the company, Taiwan Semiconductor Manufacturing Corp (TSMC), announced production in its new Arizona plant would be delayed until at least 2025, citing a shortage of available workers.

The plant, first announced by the Trump administration, has always been conceived out of political, rather than business motivations, with the goal of consolidating US control over global semiconductor supply chains, with the US placing pressure on many leading chip companies, as well as backed by congressional subsidies, to build capacity on US territory.

However, the success of such projects was always going to be questionable given their overtly geopolitical character. Supply chains centralize themselves based on cost efficiency, labor availability, easy access to other components and logistical advantages, rather than ideological alignment. Because of this, the US goal to shoehorn the creation of a supply chain on its own territory lacks adequate foundations, and TSMC being forced to delay is a reality check in this area which shows the true challenges ahead. It will be expensive, unprofitable and inefficient.

A supply chain is an aggregation of businesses which emerge within a single geographic vicinity which feed into each other in providing related products and services. If, for example, you propose to build a car factory, is it a profitable or logical business choice to place that factory in the middle of nowhere? If cars are being assembled there, the parts after all aren't conjured out of thin air, nor are they made entirely in the factory itself. Who, for example, provides your tires? Your class windows? Your exhaust pipes? And every single other specialized component which goes into it? And not least of course, access to the raw materials required to make the rest? If you look of course at any successful car factory, you may note that these suppliers will prop up around it, this is how a supply chain works.

This of course is even more true for semiconductors and then by extension, the subsequent electronic industries they feed into. These supply chains have consolidated themselves around East Asia. While specialized companies such as TSMC or Samsung make the most advanced chips, they are regionally complimented by the massive industrial and logistical capacity of China who supply almost all the other required components, materials and labor needed to assemble goods such as smartphones, tablets, televisions, computers and so on.

These supply chains have consolidated precisely in this region of the world because it has been the cheapest and most effective means of doing so, a shift which American companies wholeheartedly embraced in recognising doing so at home was more expensive and less profitable.

But the US government has long decided it doesn't like this anymore, and in the name of opposing China, and consolidating its own geopolitical hegemony, seeks to forcibly rip up supply chains and relocate them on its home territory. This has been the fundamental goal of the Biden and Trump administrations in the semiconductor sector. Therefore against business logic, it is arguing these large semiconductor-manufacturing companies ignore the geographical realities of their supply chain and invest in production in the United States instead. It is a decision which has no business or cost based convenience to it whatsoever, but is fundamentally political.

Although the US promises massive subsidies to countries who do so, there are many problems with this approach, as TSMC's troubles show. It has no cost efficiency to it whatsoever, because Arizona is not the center of the global supply chain. In addition, there is no specialized semiconductor talent available in this region, it is all in Asia. This means the inconvenience of forcing them to relocate to this area makes the cost of labor more expensive.

Likewise, there is no aggregated supply chain of feeder businesses, components, or materials in this area, as per established supply chains, which also makes everything else expensive across the board. The final product of this decision making is that the whole process is more costlier, and therefore less competitive.

But China, with established industrial capacity, robust regional supply chain integration and access to talent in local proximity to it, does not face these problems. The TSMC saga thus goes to demonstrate that the logic of artificial and politically motivated US supply chain shifts are ill conceived, and this will not better America's prospects in doing so. The US is likely to be left with a highly unprofitable, inefficient and expensive semiconductor supply chain which will be unsuitable for both exporters and consumers.

(The author, a postgraduate student of Chinese studies at Oxford University, is an English analyst on international relations. The views are his own.)