(2020-05-19) Thompson Chips And Geopolitics

Ben Thompson: Chips and Geopolitics. Clayton Christensen, in 2003’s The Innovator’s Solution, explained how the natural course of industries was from interdependent architectures to modular ones. Taiwan Semiconductor Manufacturing Company (TSMC), the company Chang founded in 1987, is arguably the single best example of the process Christensen described.

Intel invented the microprocessor in 1971

It would take a very long time for this integrated approach to overshoot the market

Intel made general purpose processors; processors that were created for a specific task would be much faster, at least in theory, but it was hard to get started: Chang, then a long-time executive at Texas Instruments, observed in the 1980s that it cost $50~$100 million dollars to start a new chip company, primarily because of the cost of manufacturing

A few years later, in 1987, Chang was invited home to Taiwan, and asked to put together a business plan for a new government initiative to create a semiconductor industry.

"I paused to try to examine what we have got in Taiwan. And my conclusion was that [we had] very little. The only possible strength that Taiwan had, and even that was a potential one, not an obvious one, was semiconductor manufacturing, wafer manufacturing. And so what kind of company would you create to fit that strength and avoid all the other weaknesses? The answer was pure-play foundry… In choosing the pure-play foundry mode, I managed to exploit, perhaps, the only strength that Taiwan had, and managed to avoid a lot of the other weaknesses. Now, however, there was one problem with the pure-play foundry model and it could be a fatal problem which was, “Where’s the market?”""

Specifically, Chang made it possible for chip designers to start their own companies

It worked. Graphics processors were an early example: Nvidia was started in 1993 with only $20 million, and never owned its own fab.

Today there are thousands of chip designers in all kinds of niches creating specialized chips for everything from appliances to fighter jets, and none of them have their own foundry.

TSMC eventually surpassed Intel in not just flexibility but also pure performance

with that came an entirely new class of problems, not just for TSMC, but also Taiwan.

Taiwan, you will note, is just off the coast of China.

This is a big problem if you are a U.S. military planner. Your job is not to figure out if there will ever be a war between the U.S. and China, but to plan for an eventuality you hope never occurs. And in that planning the fact that TSMC’s foundries — and Samsung’s — are within easy reach of Chinese missiles is a major issue.

China, meanwhile, is investing heavily in catching up, although Semiconductor Manufacturing International Corporation (SMIC), its Shanghai-based champion, only just started manufacturing on a 14nm process, years after TSMC, Samsung, and Intel

This was the context for last week’s announcement that TSMC is building a fab in the United States

spend $12 billion to build a chip factory in Arizona

Construction will begin next year with production targeted for 2024

TSMC said the plant would make 20,000 wafers a month, making it a relatively small facility for a company that made more than 12 million wafers last year alone. TSMC’s Fab 18 in Taiwan, which currently produces its 5-nanometer chips, was targeted for 100,000 wafers a month when it broke ground in 2018.

That this move is happening at all suggests the sort of momentous choice not simply on TSMC’s part but also Taiwan’s that is hard to undo: when it comes to the U.S. and China, ambiguously sitting in the middle, selling to both, was no longer an option.

There are three big lessons for tech specifically and America broadly in this news.

First, while we learned in 2016 that technology was inseparable from domestic politics, the lesson in 2020 should be that technology is inseparable from geopolitics.

Second, at some point every tech company is going to have to make a choice between the U.S. and China.

Third, Intel, much like Compaq, is an allegory for where the U.S. seems to have lost its way. Locked in an endless pursuit of efficiency and shareholder value, the U.S. gave up its flexibility and resiliency in favor of top-end performance.