We are in a fight for microchip supremacy. And China’s gaining ground.

The US CHIP Act was hailed as a solution to the United States’ long term microchip fabrication problem wherein a lot of design of US microchips happen in the United States but manufacturing and packaging happen overseas. 81% of microchips are manufactured and packaged in China and Taiwan. With Taiwan Semiconductor Manufacturing Company (TSMC) having the world’s leading facilities.

The outcome of the US CHIP Act remains to be seen, but it’s not looking good so far.

What’s the Deal?

US investment in local microchip production is a BFD to quote Joe Biden, but there is one problem with how things are playing. TSMC’s new, $40 billion with a ‘B’, microchip fabrication facility in Arizona will not have a packaging capability. This means, any new silicon manufactured at that Arizona facility will require shipping back to Taiwan for packaging, before being used here.

That makes no sense.

The Devil Is In the Details

The Arizona plant construction is 1) behind schedule because of a lack of skilled US workers, and 2) TSMC has no plans to build a packaging facility here.

These issues will prevent the plant from coming online by 2025, and delivering its first microprocessors by the end of the decade.

When the US CHIP Act was announced, Apple signed on to become the new plant’s largest customer. Analysts assumed Apple would have its M class computer microprocessors and A-class iPhone processors made at the plant. Tim Cook was quoted, “Apple will be operating with chips stamped with ‘Made in the USA’.” Well, the cores may be made here, but packaged elsewhere.

What This Means

This means the US is still vulnerable. China has been threatening to invade Taiwan for the last decade. They claim Taiwan is China and a Chinese possession and TSMC’s microprocessor spoils should be theirs. This puts the US in a bind with a significant amount of microchip know-how and intellectual property being sniffed by Chinese state actors. This was the reasoning behind the CHIP Act and bringing more production on US soil.

All of the sanctions and posturing between the US and China have also put the US at a distinct disadvantage at least in the short term.

Since the US sanctioned Huawei, one of China’s largest chip makers for telecom, China (Huawei) has built out its own capability. As we reported last week, Huawei burst on the scene with a new 5G phone sporting a chip using a 7-nanometer process without US or TSMC help. (I think they may have stolen some US or TSMC IP, but I can’t prove anything.)

Even though they are behind, it won’t take too long for them to catch up to TSMC or to IBM’s lead in 2-nanometer microprocessor manufacturing.

Right now, the US doesn’t have the facilities to scale up and package many processors stateside. The US currently has 43 chip manufacturing and processing facilities mostly held by single corporations for specialized chips. China has 111 of these facilities able to support other vendors, Taiwan has 107. A conquered Taiwan would give China significant capacity to manufacture these chips. Especially at a time when companies are pushing for more AI specific processor designs and increasingly powerful general purpose microprocessors.

The real lesson here is Biden’s policies on sanctions and isolationism in this realm aren’t working. We’re seeing how sanctions are working in Russia, they aren’t. Now we see how sanctioning has pushed Huawei to quickly build out their own capability.

In the short term, this is good for China and Huawei. It’s a significant win. A poke in the eye for the US.

In the long term, it remains to be seen. America has gotten soft. We no longer invest big government bucks for big think projects, and maybe this is the kick in the butt this country needs.

Similar to how we had to sit our asses on the ground and watch the heavens as Sputnik circled the Earth, maybe this is the push we needed to get ourselves in gear to R&D new advances in quantum computing and communication. Big think projects require big government money. And many a Republican-led Congress has been loathe to finance these types of projects. The Internet, GPS, nor the highway system would have been funded in our current legislative climate.

Maybe China pulling ahead wouldn’t be a bad thing.

-MJ