AZ Chips

 

How Global Conflict Led to a Surprising Plan to Make Apple Chips in a Desert

Your next iPhone won’t be stamped Made in America. But pry open the casing in 2025 and you may see semiconductor chips that were etched into silicon in the Arizona desert.

While it will be scorching outside, the Phoenix “fab” gearing up to produce 

Apple

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’s (ticker: AAPL) chips will be cool, clean, and cutting-edge. 

Taiwan Semiconductor Manufacturing

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 (TSM) is plowing $40 billion into the project, aiming to crank out 600,000 wafers a year. Apple CEO Tim Cook, at a “tool in” ceremony last year, said Apple would be “proud” to be the fab’s biggest customer. 

That’s no coincidence. Apple is TSMC’s largest source of business, worth billions in annual revenue. Apple is looking for chip security, among many companies seeking to shore up supplies amid rising geopolitical tensions and fears over disruptions.  

War breaking out between Israel and Hamas is just the latest worry for multinational companies. Russia’s invasion of Ukraine and escalating tensions between the U.S. and China are fragmenting global trade. Disruptions in chip supplies from the pandemic remain fresh. A global race is now on by companies and governments to secure supplies of chips that are critical to both their industrial strength and their militaries.

No company is caught in the crosscurrents more than TSMC. Producing the vast majority of advanced semiconductors in Taiwan, TSMC is the lifeblood for tech’s new applications like artificial intelligence and advanced military weaponry. Taiwan, of course, is a geopolitical flashpoint between the U.S. and China, which claims the island as its territory, while the U.S. has indicated that it would defend the island in the event of an invasion or attack. 

Both for its security and customers like Nvidia (NVDA) and Apple, TSMC is building several plants overseas, with Arizona as a prototype. “Arizona is the first trial of our overseas megasite development,” said TSMC Chairman Mark Liu at a conference in Taiwan in September. The buildout is a “learning process,” he added, expressing confidence that it will be a “very successful project.”

“It was like the Godfather made an offer you couldn’t refuse,” says Dan Hutcheson, vice chair of TechInsights, a semiconductor research firm. Apple threatened it might go elsewhere for chip supplies if TSMC didn’t come through with a U.S. plant, he said. And Cook “was instrumental” in getting former President Donald Trump to promise U.S. financial support. 

TSMC, in a statement to Barron’s, said that “many factors” went into building in Arizona, adding, “The U.S. government also supported our decision to invest here.” Apple declined to comment. 

Making Chips in the Desert

Fueled by concerns about China, the U.S. has adopted the most friendly industrial chip policy in a generation. The 2022 Chips and Science Act included $39 billion in grants for manufacturing and 25% tax credits for construction. States such as Arizona, Texas, New York, and Ohio are also throwing in subsidies, aiming to capture economic gains from a chip revival. 

TSMC is now leading a wave of U.S. manufacturing, including companies like 

Intel

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 (INTC), GlobalFoundries (GFS), and Samsung Electronics (005930.Korea), which are vying for billions in subsidies. More than $200 billion of investment has been committed by chip makers, according to the Semiconductor Industry Association. 

Yet places like Arizona—water-thirsty and far from TSMC’s highly efficient production in Asia—are hardly ideal for new fabs. “In Taiwan, TSMC is treated almost like royalty,” says Kirk Yang, chairman of Kirkland Capital, based part-time in Taiwan. “In Arizona, they’re just one of the good guys.” 

A spokesperson for TSMC said that it would be more expensive to build in Arizona than Taiwan, “largely due to higher costs associated with construction and facility operations.” 

So far, it has been a slog. Construction is going slow with mass production now expected to start in late 2025, nearly a year behind schedule, according to JPMorgan Chase (JPM) analyst Gokul Hariharan. Labor problems have piled up as TSMC vies with Intel and other tech companies expanding in the state. Difficulty with tool installation, uncertainty over subsidy payments, and weak demand for advanced processors are also contributing to delays, according to Hariharan.

Indeed, TSMC is building in Arizona amid a global chip downturn. Industrywide sales are expected to fall 10% from 2022 levels to $515 billion this year, according to the Semiconductor Industry Association. A recovery is expected next year, with AI stoking demand. But growing U.S. restrictions of chip exports to China are weighing on the market, with China accounting for 36% of sales for U.S. chip companies.

All of it is taking a toll on TSMC’s finances. Along with a new fab in Arizona, TSMC is building plants in Germany, Japan, and mainland China. The company is aiming for $92 billion through 2025 in capital expenditure, according to consensus forecasts. Its capex as a percentage of sales has risen and is denting free cash flow, which is expected to fall 22% this year to $12.3 billion before recovering to $20.5 billion in 2024.

Some analysts say that TSMC decided to build in Arizona more for political than economic reasons. “It was not a business decision,” says Needham analyst Charles Shi. 

The business case makes more sense now that tensions with China have risen, pressuring customers like Apple, Nvidia, and 

Advanced Micro Devices

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 (AMD) to branch out from Taiwan. But TSMC may be slow-walking construction in Arizona because it’s struggling to fill capacity in Taiwan, Shi says. The company now has global capacity for 16 million to 17 million wafers but may have trouble selling it all without a big sales revival. “That’s why they’re not really in a hurry to turn on Arizona,” he says.

One skeptic on the economics of Arizona appears to be Morris Chang, TSMC’s founder and former chairman. In a podcast last year, he described the Arizona plant as an “expensive exercise in futility.” TSMC’s foundry in Camas, Wash., built in 1997, still produces chips at 50% higher costs than in Taiwan, he noted, adding that he expects the Arizona chips to be “noncompetitive” in world markets. He could not be reached for comment. 

Chip experts say that TSMC’s Arizona fabs will be costly to run. Handel Jones, a veteran industry consultant, calculates a 30% cost premium per transistor in Arizona compared with Taiwan, even after production has been optimized. Tools, materials, and equipment costs are comparable, he says, but TSMC’s operating efficiency, or chip yield per wafer, will remain higher in Taiwan, where the company has woven decades of expertise and quality control into its plants. 

“In Taiwan, the technicians and engineers are highly trained, so you have a high level of equipment throughput, uptime, and fewer defects,” he says.  

One other competitive advantage for TSMC’s home country is the weak Taiwan dollar, according to Brad Setser, a senior fellow at the Council on Foreign Relations and former Biden administration official. “It’s hard to overstate how undervalued the Taiwan dollar is on most measures,” he says, noting that it remains weaker than it was in 1997. A weak Taiwan dollar suppresses local labor costs and ramps up profits for goods sold in U.S. dollars. That has long been a structural advantage for TSMC in Taiwan, Setser says.

The Price of Security

TSMC might not be in Arizona at all if the company weren’t a global choke point for chips. Almost all of its chips are made in Taiwan, accounting for 54% of global production and 80% of advanced chips, according to Morgan Stanley. Companies like Apple and Nvidia depend on TSMC for leading-edge chips, which go into things like iPhones, computers running AI apps, and self-driving electric cars made by 

Tesla

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 (TSLA). Military contractors rely on TSMC for chips in things like drones, guided missiles, and communications gear.

TSMC aims to be the Switzerland of semis—a neutral player in a global tech arms race. The problem is that Taiwan is a geopolitical tinderbox. If China invades the island or disrupts supplies, manufacturing of leading-edge electronics, including aviation, communication, and military applications, would be disrupted, at the least. 

“There are legitimate concerns about the ability of the U.S. to protect TSMC in the event of a military escalation,” says Setser. “The Chips Act was a strategic hedge against an invasion of the island.”