Five major questions about TSMC's Japan plant

At the earnings conference on October 14, TSMC, the leading foundry, confirmed its plan to build a professional technology wafer factory in Japan. It is reported that the plan aims to respond to the call of the Japanese government to strengthen the local semiconductor supply chain to cope with the unprecedented global chip supply shortage.

In response, the Japanese government has expressed its full support for the project, and sources said it would subsidize half of the estimated $8 billion cost.

But what exactly will the plant produce, and who will win from the investment?

1. Why does TSMC want to build a factory in Japan?

Nikkei Asian Review mentioned that TSMC's Japanese plant mainly serves Sony and other Japanese customers. However, this investment is also part of TSMC's global strategy as governments around the world call for semiconductor production to be moved to their home countries for economic and national security reasons.

COVID-19 disruptions and an unprecedented chip shortage that is hitting the automotive industry, coupled with growing tensions between Taiwan and mainland China, have accelerated the localization of the semiconductor industry.

In response, TSMC allocated $100 billion for overseas expansion over the three years ending in 2022. In June, it broke ground on a plant in Arizona, the United States, which is its most advanced plant outside of Taiwan. The company is also considering building a chip factory in Germany. It should be noted that the Japanese factory was not included in the previous $100 billion plan.

2. What are the facilities like at TSMC’s Japan plant?

The new plant will be located in Kumamoto, western Japan, near a chip plant owned by Sony, TSMC's largest Japanese customer. The cost is estimated at 1 trillion yen ($8.8 billion), and the Japanese government is expected to provide multi-year support for the project.

The plant will produce a variety of chips, mainly image signal processors to microcontrollers, using 22-nanometer and 28-nanometer production technologies. Although not the latest 5-nanometer technology, 22-nanometer and 28-nanometer chips are seen as the most cost-effective options and have a wide range of applications in the consumer electronics, computing and automotive industries.

3. What are the risks of TSMC’s overseas expansion?

For decades, TSMC has concentrated its operations in Taiwan, China, and has received strong support from the government in terms of water, electricity, and land. The island's large semiconductor talent pool and mature supply chain have helped the company maintain relatively low operating costs while pursuing cutting-edge technology.

TSMC founder Morris Chang has repeatedly warned of the risks of overseas expansion, namely rising costs and insufficient output. In addition, industry executives say it can cost two to three times as much to build a new plant in Japan as it does to build a similar chip plant in Taiwan.

At the same time, sources close to TSMC said TSMC needs to find long-term growth outside Taiwan, as the island faces resource constraints such as the hydropower shortage it experienced earlier this year.

4. What does Japan hope to gain from this investment?

Japan has also joined the global chip race. New Prime Minister Fumio Kishida has made rebuilding the country's chip industry a key part of his economic policy and intends to launch a framework to support high-tech manufacturers.

"Our nation's semiconductor industry will become even more indispensable and self-reliant, making a significant contribution to our economic security," Kishida once said.

The decision to build a plant with relatively mature production technology is likely to reflect the needs of customers expected to purchase from the plant. For example, Sony's current products do not require 5-nanometer chips, which is different from the needs of TSMC's US customers, including Apple and Google.

5. What does this mean for the global chip crisis and the broader chip industry?

TSMC's new factories will not have a direct impact on chip shortages as both the Arizona plant and the Kumamoto plant are not expected to enter mass production until 2024.

Additionally, TSMC insists that the current chip shortage, especially in the automotive industry, is more related to COVID-related disruptions in Southeast Asia, as many other chip companies have factories there.

However, TSMC's plans come at a time when its competitors are also spending heavily to expand production capacity. Intel, the largest chipmaker in the United States, is spending $20 billion to build chip facilities in Arizona in the hope of winning manufacturing orders from companies such as Apple and Qualcomm. Its CEO said it will also invest up to $80 billion in Europe over the next decade to increase chip production capacity on the continent.

Meanwhile, Samsung plans to spend billions to expand its Texas manufacturing base as it responds to calls from the United States to bring more critical semiconductor production to the country. Samsung makes chips for itself and other companies such as Qualcomm and Google, and is working to attract more customers to its fold.