Why is TSMC Building a Multibillion Dollar Semiconductor Chip Factory in Germany?

The investment of Taiwan's TSMC, the world's largest semiconductor chip manufacturer, in a German chip producing company is a significant step in the development of a complex political environment around chip manufacturing.

Taiwan Semiconductor Manufacturing Company (TSMC) disclosed investment plans in Germany's automotive sector on Tuesday with a substantial investment of up to $3.8 billion in its subsidiary, the European Semiconductor Manufacturing Company (ESMC).

Under the joint venture agreement, ESMC will become the majority shareholder in a new $11 billion chip producing plant with a 70 percent ownership stake, while three other industry leaders — Germany-based Robert Bosch and Infineon Technologies, along with NXP Semiconductors from the Netherlands — will each have a 10 percent stake.

The proposed semiconductor plant to be sited in Dresden, eastern Germany, is scheduled to launch by the end of 2027, per the company's statement.

Sputnik delves into what is known about TSMC's planned chip production facility, its underpinnings, and other sundry issues.

What is TSMC?

TSMC, short for Taiwan Semiconductor Manufacturing Co., is the world's largest contract manufacturer of semiconductors - essential components behind electronic devices such as phones, laptops, vehicles, timepieces, and refrigerators. The company's clientele boasts big tech giants like Apple, AMD, Intel, Nvidia, and Qualcomm.

Presently valued at around $550 billion, the firm commands over 50 percent of the global market share in the semiconductor industry as of 2021, and its dominance is even more pronounced (approaching a near monopoly) when it comes to the most advanced processors, according to estimates from various sources.

What is a Semiconductor and What is it Used For?

A semiconductor, also called integrated circuit or chip, is usually produced from silicon, exhibiting electrical conductivity levels intermediate to those of insulators (like glass) and pure conductors (like copper or aluminum). The incorporation of impurities through doping (deliberate introduction of impurities into the crystal lattice structure of a semiconductor to alter its electrical properties) allows the shaping and tailoring of chips, adapting them precisely to the specific operational needs of a the electronic component they are embedded within.

A semiconductor chip is a compact electrical circuit that incorporates multiple elements like transistors and interconnections, all fabricated on a semiconductor wafer. A combination of these elements forms an integrated circuit (IC) - a fundamental unit of electronic devices.

How Important is TSMC in the Global Semiconductor Market?

Taiwan's semiconductor sector is renowned as the island's "silicon shield," with virtually every aspect of contemporary existence intertwined with computers, microchips, and semiconductors.

In the past, TSMC introduced the 0.25-0.18-micron processes, culminating in the achievement of the next-generation 7nm process technology.

The semiconductor company has made substantial investments in advanced 300mm and 12-inch wafer fabrication facilities in Tainan and Hsinchu, respectively. These strategic investments enhance their production capabilities and leverage economies of scale to offer market-driven pricing.

Why is TSMC Investing in Germany?

The aspiration of Taiwan to establish closer political and trade relations with the European Union is easily understood.

"[TSMC] makes its investment decisions based on its business needs. For its decision to build a plant in Germany, just as its decision to build plants in the United States and Japan, the motivations include geopolitical realities, customer demand, and the amount of subsidies that host country national and local governments are willing to provide," says Ross Feingold, a political risk analyst.

Germany's Manufacturing Sector Problems

The viability of this project hinges on substantial government subsidies from Germany, similar to the $3.5 billion support TSMC received from Japan's Ministry of Economy, Trade and Industry (METI) in 2022 for its forthcoming chip fab (scheduled to start semiconductor production in 2024) in Kikuyo, Kumamoto Prefecture.

"Government spending to promote economic growth has long been part of the economic model in Western European countries... China also follows this model," Feingold noted.

Beyond establishing the Taiwanese chipmaking facility, this joint venture is set to catalyze economic expansion across various sectors, including the supply chain, logistics, research and development at German universities, and expenditures by well-compensated tech employees, as pointed out by Feingold.

What Does TSMC's Expansion Mean for Germany?

In restrospect, TSMC's ambition for the German chip market is huge, but also quite complicated.

This move came in the thick of Germany’s dire economic straits occasioned by the surge in energy costs following its support for NATO's proxy war in Ukraine, and blowback from multiple economic sanctions imposed on Russia.

This has led to a downshift and concerns that Europe’s economic heavyweight might undergo gradual deindustrialization. According to EU data estimates, Europe's economic powerhouse is projected to register a meagre growth rate of 0.3 percent in 2023.

News from German media indicates that the Chancellor Olaf Scholz led-government is gearing up to provide a significant financial boost, amounting to about $5.5 billion in subsidies to begin construction and operation of the semiconductor production facility.

The European bloc is trying to attract investments from Taiwan's chip sector without making major deals with its government. They've rejected Taiwan's requests to talk about a special investment agreement, claiming that if investments flow freely, a formal deal isn't necessary.

From a supply chain and resilience perspective, the presence of additional semiconductor manufacturing capacity in Europe, as exemplified by the TSMC plant catering to Germany's crucial automotive industry, could offer notable strains. Germany's industrial output dipped by 1.5 percent in June, worse than market expectations of a 0.5 percent drop which followed a 0.1 percent downward revision dip in May - the third recorded low in 2023.

Germany's shortage of skilled labor is evident, as its companies face difficulties in hiring skilled workers from other countries. Despite the introduction of a new immigration law, slow and bureaucratic processes continue to hinder firms from strengthening their workforce by recruiting skilled migrants.

However, given the technical nature of the industrial processes involved in cutting-edge semiconductor manufacturing, TSMC will have to carefully plan for the recruitment of highly skilled employees with specific expertise to be able to deliver the production targets.

Should Taiwan Have Concerns Over Overseas Expansion?

The Taiwan semiconductor manufacturing company is committed to retaining its most advanced manufacturing operations on the island. In recent years, the firm has unveiled significant production capacity expansions across multiple regions in Taiwan, including Hsinchu, Taichung, and Tainan.

Notwithstanding, even as TSMC discusses intentions to augment capacity beyond Taiwan, skeptics raise concerns about potential implications, such as doubts regarding the company's commitment to Taiwan, the potential for a brain drain of skilled workers, or the transfer of contemporary expertise, as indicated by Feingold.

The expert contends that the increasing risk of US aggression against China is steadily simmering, with Washington using Taiwan as a leverage. Thus, there is reason to believe that TSMC could fall victim to US-China geopolitical tensions in the event of a mismanaged fallout akin to NATO's handling of the conflict in Ukraine.

Similarly, the presence of TSMC's manufacturing facilities in Taiwan does not guarantee that the West would refrain from fomenting provocations to prevent the loss of these facilities. Nevertheless, the company is confidently pursuing its expansion in Taiwan, despite all the risks.

Political Motivations for TSMC's Move and the China-US Trade War Connection

The dominance wielded by the world’s biggest semiconductor manufacturer has led to a situation where its primary adversaries are corporations and entire governments.

Beijing's strive to bridge the gap has additionally faced obstacles due to Washington's recurring interventions, preventing its endeavors from purchasing foreign chip firms outright and impeding its access to the specialized equipment necessary for modern fabrication facilities.

Just as TSMC finds itself trapped in a power struggle between Washington and Beijing, the island it sits on is similarly entangled — with significantly graver potential ramifications.

While the United States holds a commanding position in chip design, its deficiency in manufacturing capacity continues to raise concerns among policymakers, who are actively working to establish more fabrication facilities domestically.

Why is the US Heavily Dependent on Taiwan's Semiconductor Industry?

The United States mainly relies on Taiwanese chip manufacturing capabilities for its defense systems. Taiwan's semiconductor industry is integral to the functionality of various military hardware, including F-35 fighter aircraft and a diverse array of "military-grade" technology utilized by the US Department of Defense (DOD).

Many US defense systems incorporate field-programmable gate arrays (FPGA), which resemble commercially available versions but incorporate distinct features tailored to military requirements.

For several decades, the US defense industry has grappled with establishing a secure domestic foundation for manufacturing the semiconductors essential for military use. Yet, the evolution of semiconductor technology in industrial fields is predominantly impelled by advancements in devices intended for commercial use.

Due to competitive considerations, American chip manufacturers have chosen to relocate a significant portion of commercial chips' production, assembly, testing, and packaging processes to international locations. This often involves partnering with foreign suppliers.