Why Can't the USA Manufacture Semiconductors Like TSMC?

When policymakers and the general public consider why the U.S. struggles to compete with semiconductor manufacturers like Taiwan Semiconductor Manufacturing Company (TSMC), several factors come into play that are often overlooked, such as the colossal costs involved in chip fabrication and the business models of Integrated Device Manufacturers (IDMs) versus foundries.

Cost of Semiconductor Manufacturing Facilities

One critical aspect often misunderstood is the enormous investment required for state-of-the-art semiconductor manufacturing facilities. Building and maintaining a modern chip fabrication plant now typically costs in the range of tens of billions of dollars. This astronomical capital investment is a primary reason why individual chip-design companies cannot afford to operate their own facilities. The economics simply don't support a decentralized production model.

Global Production Dynamics

Due to these high costs and the system of economies of scale, a few specialized companies have emerged that primarily focus on manufacturing chips for multiple chip-design companies. The major players in this space include TSMC, Samsung, UMC, SMIC, and Global Foundries, with TSMC being the market leader. These companies operate on a business model where fixed costs are high and variable costs are low, allowing them to maintain high yields and competitive pricing. The shift of production to regions with lower labor costs, such as Taiwan, has further solidified their position.

Business Model Differences: IDM vs. Foundry

Comparing Integrated Device Manufacturers (IDMs) like Intel with foundries like TSMC reveals significant differences in their business models. When manufacturing chips for your own use, the primary cost drivers are the acquisition of advanced equipment and research and development (RD) processes. In contrast, foundries focus on minimizing variable costs, which are the actual production and manufacturing costs. These differences have direct implications on pricing and performance optimization:

Profit Margins and Pricing: IDMs often need to price their products higher to cover the high fixed costs, whereas foundries aim to produce as many chips as possible to lower variable costs, making them more competitive in the market. Performance vs. Cost: In the case of foundries, there's a strong incentive to improve performance rather than reduce cost, as even a small increase in chip density can significantly impact profits.

Challenges in Chip Manufacturing

Chip manufacturing is an intricate process involving multiple steps like lithography, which can lead to high defect rates even when each individual step is accurate. TSMC's most significant achievement lies in its ability to consistently produce cutting-edge chips with a yield rate of around 90%. This consistency is crucial for maintaining supply chains and ensuring reliability.

Fabrics must also adapt to diverse client requirements. TSMC's vast client list, including major chip designers like Apple, Qualcomm, and AMD, highlights the scale and complexity of their operations. Unlike IDMs, which typically handle a single or a few designs per year, foundries must be flexible and responsive to a wide range of needs. This requires deep involvement in the chip design process, which TSMC excels at due to its experienced team.

Historical Context and Strategic Decisions

The history of the semiconductor industry also provides context. When personal computers first emerged, DRAM (Dynamic Random Access Memory) chips were the bottleneck, leading most companies to focus on memory production. However, recognizing the potential of microprocessors, Intel focused on CPUs, a move that proved highly successful. The dominance of IDMs continued until the rise of smartphones, which drastically changed the market dynamics. Struggles with cost and complexity led to the widespread adoption of the fabless-foundry model, where chip designers do not manufacture their own products.

In conclusion, while the U.S. may face challenges in maintaining its competitiveness in semiconductor manufacturing, understanding the business models and economic realities behind global semiconductor production is crucial for formulating effective strategies. As the industry continues to evolve, the role of foundries in driving innovation and efficiency will likely remain central.