Why TSMC Did A $100 Billion Deal With Trump On US Chip Manufacturing
All presidents of these United States have the bully pulpit from which to lecture the American people and, for the past century, the rest of the world about how the global economy and culture should work. Donald Trump has certainly used this pulpit in his first and now second terms as The Leader Of The Free World, and in the four years between those two terms.
But in his second term Trump has treated the Resolute desk in the Oval Office as a bargaining table, and is further using the threat – and now initiation – of ever-increasing tariffs as a means of bringing manufacturing that is done outside of the United States inside its borders to create new jobs here. And for those of us who call America home, this sounds a whole lot better than globalization has been for the manufacturing base that has been whittled away over many decades.
With so much of the manufacturing of products that are ultimately sold to Americans being done in China, Mexico, and Canada, it is no surprise that the tariffs are hitting there first and hitting hard. But Trump has made it clear that tariffs will also apply to Taiwan, the currently independent island that became the homeland of the non-communist part of the Chinese polity after decades of revolution in the wake of World War II. And that is important because most of the foundry capacity of Taiwan Semiconductor Manufacturing Co is located around the capital city of Taipei.
We have said it before and it bears repeating: China wants to assume control of Taiwan, much as it did Hong Kong. Given the dependence of the world on high-end chips that are made and packaged mostly in Taiwan, any capture of Taiwan by China would likely escalate into another world war. Debate for yourself how optional nuclear is here. But for the sake of something akin to stability in this balkanizing world, it has been in Taiwan’s best interest to spread its own risk out geographically, and the company has been doing that in recent years.
Yesterday, at the White House, TSMC chief executive officer CC Wei and President Trump outlined a new investment deal that will allow TSMC’s customers to avoid tariffs that would have started at 25 percent and go higher from there. Nvidia, AMD, Apple, Qualcomm, and Broadcom who, unlike Intel do not have their own foundries, are not happy they their products might be subjected to such tariffs. And particularly ones that will not be static, one-time events, but will get worse over time like software support on legacy products always does.
The threatened tariffs on semiconductors, which is driving TSMC’s investments in American fabs as much as its desire to mitigate its own political and economic risks because China wants Taiwan, will not just be a cost to bear this one time, but an inflationary one that will keep getting worse and worse and that will inevitably cause price inflation at the end user level for our smartphones and the gear that goes into datacenters that drives the cost of our applications. Nvidia, AMD, Apple, Qualcomm, and Broadcom cannot do anything about a tariff on semiconductor imports, except taking a profit hit. Only TSMC can solve this problem – and buying Intel Foundry, as has been rumored, is not necessarily the answer – although such an investment or acquisition might allow TSMC to more quickly expand its footprint in America, even though it does create a chip manufacturing monopoly for most of the important compute and networking engines in the world.
It was never clear how the threatened tariffs on semiconductors would be implemented. Would they be incremental to any tariffs on China, Mexico, or other countries for any electronic devices being imported after manufacture in those countries? But what is clear is that a 25 percent tariff directly on semiconductors would be expensive. North American accounts for 65 percent of its revenues (most of that is the United States), and around half of its revenues comes from what it calls “high performance computing” products, which means chips using the latest two nodes of whatever is the current manufacturing nodes.
With around $115 billion in sales expected in 2025 in our model of TSMC, and $605 billion over the next four years, if you multiply that all out – about 60 percent revenue in the US – then that is $363 billion in revenues with a 25 percent tariff, which is about $91 billion. Ah, but we think the tariffs will increase every year. Call it a 5 percent increase per year, with a 40 percent tariff by 2028, and then the amount of money that the US would collect $122 billion in the next four years if the tariff was exercised at the point of manufacturing and at the cost of manufacturing that TSMC charges for those chips.
There would be additional tariffs on the manufacturing of finished goods using such chips as well. Either way, the squeeze would be on TSMC’s profits, and it was clearly cheaper and easier to do a deal with Donald Trump for an incremental $100 billion in fab spending in the United States then to try to figure this hairball out and game theory it. And there is a growing hedge as the US foundries come online against a Chinese invasion of Taiwan, but as we have pointed out before, this very hedge – meaning that invading Taiwan does not cause World War III because the US and Europe are less dependent on that island nation for chips – increases the odds that China can take over.
Expect a lot of Taiwanese executives to consider what living in the Arizona desert might look like for their families.
The Carrot And The Stick
Under the deal announced yesterday, TSMC is committing to spending at least $100 billion in new funds to add three advanced foundries and two packaging facilities to its facilities outside of Phoenix, Arizona.
“Semiconductors are the backbone of the 21st century economy – and, really, without the semiconductors, there is no economy – powering everything from AI to automobiles to advanced manufacturing,” Trump explained at the White House briefing with Wei. “And we must be able to build the chips and semiconductors that we need right here, in American factories, with American skill and American labor. And that’s exactly what we’re doing. As you know, Taiwan pretty much has a monopoly on that market. And I think “pretty much” is not a term that’s even appropriate. They do have a monopoly. And this is a tremendous move by the most powerful company in the world.”
Not to pick a bone with Trump, but Nvidia is the most powerful company in the world. . . . And they also have a monopoly, if by which you mean more than 85 percent market share of an important market.
TSMC started investing in its Arizona foundries in May 2020, during the beginning of the coronavirus pandemic, with $12 billion. A second foundry was announced in December 2022, boosting TSMC’s cumulative investment up to that point to $40 billion. In April 2024, TSMC said it would add a third foundry and boosted its cumulative spending in Arizona to $65 billion, and the US Chips Act under President Biden gave TSMC $6.6 billion in direct funding to help cushion all of that investment.
Part of the reason the Biden Administration offered the $6.6 billion carrot was the three TSMC fabs in Arizona create around 6,000 permanent and relatively high paying jobs, and there were 20,000 construction jobs during the construction phase of the foundries and what TSMC projects are an additional tens of thousands of indirect supplier jobs. Trump went straight, swinging the tariff stick at the dominant users of TSMC’s foundry services and those who drive its processes and its profits who all happen to be based in America. And getting $100 billion more out of TSMC, as Trump noted with some humor, cost the US government not a penny.
Interestingly, TSMC has stopped whinging about the American workforce and the high cost of doing business here compared to Taiwan, and Trump said yesterday that when these next three fabs are online, approximately 40 percent of the high end chips sold worldwide would be made in America and that somewhere between 20,000 and 25,000 jobs would be created.
These fab ramps take time, of course. The first Arizona fab started four years ago is now in volume production with the N4 process, with a yield that is as good as the same N4 fab in Taiwan. The second fab started in 2022 is going to be dedicated to the N3 process and is expected to be operation in 2028, and the third foundry will etch using the N2 process and will be operational “by the end of the decade,” according to TSMC.
We think that TSMC will be picking up the pace of bringing foundry three online, and will be similarly trying to get foundries four, five, and six up and running a bit more quickly. Say, before the end of Trump’s second term. But no one has said anything about that. What CC Wei did say – and this is important – is that TSMC would be producing the most advanced AI chips in America and that it would also be adding a research and development center in Arizona alongside those six foundries and two packaging centers.
This is really important because TSMC is going to spread its brain trust over two geographic locations, again mitigating its risks. And doing so might just keep World War III from happening in at least one potential scenario, which is a good thing. Now, we need to get to work on the other scenarios that are still out there.
One last thing: It is important to put that $100 billion investment into in perspective. TSMC spent $30.45 billion in 2023 and $29.76 billion in 2024 on capital expenses, and said a few weeks ago it was spending $40 billion in 2025. There is an average of $25 billion in incremental spending just announced per year over the next four years, but it is not clear if this is really incremental of if it is being shifted away from Taiwan and towards the United States. If capital spending goes back down to an average of $30 billion a year, then we know almost all of TSMC’s spending has shifted to the United States, and if it holds at around $40 billion a year, then the US will still represent two thirds of capital spending. It would not be long before as much advanced foundry capacity exists in the United States as in Taiwan.
The actual spending on capex in the US and Taiwan will tell us just how worried TSMC is about putative tariffs and Chinese invasion.