By He Jun*
On December 6, TSMC held the opening ceremony for the arrival of the first batch of machines and equipment at its Arizona wafer fab. The event was attended by some of the most important personalities in the U.S., among whom were President Joe Biden, Secretary of Commerce Gina Raimondo, members of Congress and local officials. In addition, senior executives of semiconductor companies such as Apple, Nvidia, AMD, Applied Materials, Lam Research, KLA Corporation, and Tokyo Electron also attended the event.
At the ceremony, President Biden remarked that, “Over 30 years ago, America had more than 30 percent of the global chip production. Then something happened. American manufacturing, the backbone of our economy, began to get hollowed out. Companies moved jobs overseas. Today — today we’re down to producing only around 10 percent of the world’s chips, despite leading the world in research and design in new chip technologies. But, folks, where is it written — where is it written that America can’t lead the world once again in manufacturing? I don’t know where that’s written, and we’re proving it can”. Regarding TSMC’s construction of factories in the U.S., Biden said, “These are the most advanced semiconductor chips on the planet. The chips will power iPhones and MacBooks, as Tim Cook can attest. Apple had to buy all the advanced chips from overseas. Now they’re going to bring more of their supply chain here, home. It can be a gamechanger”. National Economic Council Director Brian Deese noted that President Biden’s visit to this occasion signifies that TSMC had reached an important milestone, i.e., bringing the most advanced semiconductor production back to the U.S.
Before the ceremony, TSMC gave another big gift to the U.S., announcing that it would increase the planned investment of USD 12 billion to USD 40 billion, and build two factories in Phoenix, which are planned to be put into production in 2024 and 2026 for 4nm and 3nm chips respectively. This is TSMC’s largest investment outside Taiwan and one of the largest foreign direct investments in U.S. history.
It would be a grave mistake to think that this is a matter only of importance for the semiconductor industry. When TSMC invested heavily in the construction of advanced chip factories in the U.S., for the U.S. this is far more than simply attracting foreign investment in the semiconductor industry and transferring advanced industries to the country. If that were the case, the U.S. government would not specifically introduce relevant acts and provide large investment subsidies to the related companies, let alone welcome TSMC to build a factory in the U.S. in such a way. Researchers at ANBOUND believe that there are several crucial reasons for the U.S. to attach great importance to TSMC.
The first reason is related to national security and geopolitics. Advanced semiconductors are the core of this information age, and they are closely linked to national security, military affairs, and technology. The market share of U.S. semiconductor manufacturing has declined from 37% of global semiconductor production in 1990 to 12% in 2021. This is unacceptable to the U.S., especially when the advanced chip manufacturing capabilities are concentrated in Asia. Therefore, it needs to strengthen its capabilities in semiconductor manufacturing to alleviate national security concerns. China’s efforts to develop the semiconductor industry in recent years have exacerbated the concerns of the U.S. and triggered its continued responses. On TSMC’s construction of the plant, the New York Times commented that this is tantamount to “build a hedge against China”.
The second reason is the focus on the agglomeration of high-tech industries after the decline of globalization. It is worth noting that Morris Chang, the founder of TSMC, said on December 6 in the TSMC’s Arizona new plant ceremony that, “the [the semiconductor industry] witnessed a big change in the world, a big geopolitical situation change in the world. Globalization is almost dead and free trade is almost dead. A lot of people still wish they would come back, but I don’t think they will be back”. As an entrepreneur with a strategic vision, Chang has previously predicted that, “as the world is no longer peaceful, TSMC is gaining vital importance in geostrategic terms”.
ANBOUND’s founder Chan Kung arrived at his conclusion years ago in regard to the death of globalization mentioned by Chang. When researching the issue of U.S.-China trade frictions in the Donald Trump era, Chan believes that the classic globalization model of relying on the global division of labor and cooperation, supply chains and free trade, allocation of production factors around the world to seek the lowest manufacturing cost, has come to an end. It is difficult for the world to return to such an old model. The death of the globalization model is not only related to geopolitical games but also has profound economic reasons behind it.
In the research report Globalization in Transition: the Future of Trade and Value Chains released by McKinsey in 2019, it is pointed out that in some value chains, trade based labor-cost arbitrage is declining. In the 1990s and early 2000s, many decisions about the location of production by companies were based on labor costs, especially in labor-intensive industries. Today, however, only 18% of merchandise trade is based on labor-cost arbitrage. At the same time, global value chains are becoming increasingly knowledge-intensive. Across all value chains, capital expenditures on R&D and intangible assets (such as trademarks, software, and intellectual property) as a share of revenue rose from 5.4% in 2000 to 13.1% in 2016. This trend is most evident in global innovation value chains. Machinery and equipment companies spend 36% of their revenue on R&D and intangible assets, while the pharmaceutical and medical equipment industries spend 80% on the same.
These shifts carry major implications for globalization patterns. It signifies that low-income countries face important changes in the way they participate in global value chains. Changes in globalization patterns will be further exacerbated by rising wages in developing countries, coupled with the mass adoption of automation and artificial intelligence. In the future, more and more labor-intensive manufacturing industries will gradually transform into capital and technology-intensive ones. Chan believes that the decline of globalization and the disappearance of free trade is because its necessity is decreasing, and the current world production is no longer relying on labor-cost arbitrage. The labor costs of the so-called low-cost countries and regions are quickly catching up. Hence, there is no need to go to various countries in the world to deploy production because of cheap wages for laborers. Global production is losing its indispensability.
This is a fundamental change. If the importance of low-cost labor factors is significantly reduced, the global production layout will undergo major shifts, and the position of “world factories” like China will be weakened. In recent years, driven by the COVID-19 pandemic and geopolitical factors, the global supply and industrial chains have undergone important restructuring, with the production link moving closer to the consumer market. From the perspective of supply chain, there are new trends of shorter chains with dispersed and localized production as noted by ANBOUND’s researchers. For the processing and manufacturing system built on labor costs in the past, if its own manufacturing industry does not upgrade technology and increase added value, future decline may be inevitable.
Final analysis conclusion:
Globalization is on the verge of death, and free trade has almost disappeared. This is not only caused by intensified trade friction and geopolitical competition but also by changes in the global value chain brought about by technological progress and innovation in production models. Under the evolution of globalization and geopolitical competition, TSMC’s investment in advanced chip factories in the United States demonstrates this well. For countries like China, which is struggling to escape the middle-income trap, the death of the classic globalization model will have adverse consequences.
*He Jun is a researcher for ANBOUND