Chips, Geopolitics, Elections

The interconnection between the technology business and geopolitics has become increasingly exposed, as the US-China trade war and export control continue to heat up during the coronavirus pandemic. Another less-discussed but equally important layer to this interconnection is how domestic politics and elections dictate the evolution of this link.

Both layers are on full display recently when, within a 24-hour window, the U.S. Department of Commerce toughened its export control on Huawei for national security reasons and the Taiwan Semiconductor Manufacturing Company (TSMC) announced its intention to build an advanced chip foundry in, of all places, Phoenix, Arizona.

There are two maps that we need to overlay on top of this issue to better understand its intricacies: the 2020 electoral map and the Wassenaar Arrangement member nation map.

The Wassenaar Map

Most analysis of the semiconductor industry’s geopolitical impact uses a “US vs China” lens. But it’s broader than that. The more comprehensive one should be “Wassenaar vs China” lens.

According to its own official description, the Wassenaar Arrangement is:

“...the first global multilateral arrangement on export controls for conventional weapons and sensitive dual-use goods and technologies...designed to promote transparency, exchange of views and information and greater responsibility in transfers of conventional arms and dual-use goods and technologies, thus preventing destabilising accumulations.”

In more plain terms, it is a membership organization that coordinates how to control or restrict technology transfer to non-member countries that could be used in hostile ways, aka “destabilising accumulations”. Semiconductor manufacturing technology, what TSMC and other foundries use, would fall under dual-use, because it can be used to make both products used by the military and everyday consumers.

Here’s the Wassenaar Map. The dark-dotted countries are members of the Wassenaar Agreement:

Overlaying this map with where all the chip foundries are, notable places that are *not* part of the agreement are China, Taiwan, and Singapore. Interestingly, Russia is part of the agreement, even though it has become quite adversarial towards the U.S. and much of Europe since Putin began his third presidential term in 2012.

The reason why Taiwan is not part of the agreement could be two-fold:

1. Its nation-state status is uncertain. Depending on who you ask, Taiwan is either a beacon of democracy or a “renegade province”. As China becomes more powerful over the last two decades, the number of countries that use to recognize Taiwan as a country has been decreasing. The Wassenaar Agreement’s participating members are all nation-states -- no NGOs, IGOs, or places of ambiguous status;

2. Taiwan’s relationship with China is volatile and fluctuates quite a bit depending on who is running the place. Its current president, Tsai Ing-wen, is strongly pro-independence and antagonistic towards China. Her predecessor, Ma Ying-jeou, was more pro-status-quo and cooperative towards China. When the Wassenaar Agreement was first formed in 1996, the Taiwanese democracy that we know today was also in its infancy -- holding its very first presidential election that year, while living through the Taiwan Strait Crisis that involved missile tests from China and two American aircraft carriers moving in to stabilize the region. Taiwan was busy trying to survive.

Even though Taiwan is not officially part of the Wassenaar Agreement, it does maintain an export control list that tracks the Agreement’s guideline, and takes its cues from the U.S. Back in 2007, when the Chairman and founding CEO of TSMC, Morris Chang, gave an extensive biographical interview and was asked about whether the Taiwanese government should allow its semiconductor technology to be transferred to China, he smartly skirted around the question and said: “I think the Taiwan government should certainly watch what the U.S. government is doing.”

Chang also mentioned in the same interview that the U.S. was the strictest among all the Wassenaar countries. Given the rise in geopolitical tension during the years since that interview, not only has the U.S. become more strict, it is also applying its influence to restrict other Wassenaar countries from doing business with China. In early 2020, the Trump administration did exactly that with the Dutch government to block the sale of lithography, a dual-use technology, to Semiconductor Manufacturing International Corp (SMIC), the largest Chinese chipmaker. Worth noting that three days after this latest round of restrictions on Huawei, SMIC received a $2.2 billion USD equity investment from the Chinese government.

So Why Arizona?

Not only has TSMC, and Taiwan in general, been caught in the middle of this “Wassenaar vs China” tension, it is now squarely caught in the electoral tension of the upcoming 2020 US presidential contest as well, by choosing to build its new foundry in Arizona.

For those of you who don’t follow American politics closely, Arizona has become a top swing state in the upcoming election. Seasoned political strategists see Biden’s most likely path to victory is winning Arizona, plus Pennsylvania and Michigan, while losing all the other swing states, as illustrated in this map:

I circled both Arizona and Wisconsin (in white) on this map, because Wisconsin is the other swing state that has received a sizable investment from another Taiwanese manufacturer, Foxconn, which has so far produced nothing except empty buildings. However, the Foxconn investment announced in mid-2017 was a potent political talking point for the 2018 midterm election, and it still promises to start production this year despite all the delays, conveniently offering up another round of political talking points.

Some close reading of TSMC’s official announcement of the Arizona foundry shows many similarities. It specified a topline, headline-grabbing investment amount ($12 billion USD), a direct job creation number (1,600), and the boilerplate indirect job creation number of “thousands”. Construction conveniently starts in 2021, after the election, and production is targeted to begin in 2024, conveniently during the next presidential election year. How can the manufacturing of two products as different as semiconductors (TSMC) and LCD panels (Foxconn) both so neatly pack into the American electoral calendar and located in hotly contested swing states?

Meanwhile, the promised 5-nanometer technology and the future 20,000 wafers per month capacity (whenever production is functioning at full speed) is minuscule compared to the more than 1 million per month capacity that TSMC has already reached this year.

This is not to take anything away from Arizona as a growing tech hub. Intel has one of its foundries there. It is the home of sizable software companies like Infusionsoft and Lifelock, the location of Zoom’s new engineering expansion, and, anecdotally, the destination of many software developers, who are working remotely to enjoy the lower cost of living. But for TSMC, there are other more natural options to expand in the U.S., if the decision was purely a business one. It already has a Fab in Washington State and two design centers in California (San Jose) and Texas (Austin). Of course, none of those states hold any political value in a presidential election.

I hate to bring raw politics into my analysis of technology and businesses; our media, culture, and now even public health have become too politicized. But in the case of making semiconductor chips, the presence of politics is too apparent and unavoidable. If and when COVID-19 subsides and campaigning resumes, we can expect both Trump and Biden’s team to spend a lot of money and time in Arizona. By then, don’t be surprised if “TSMC”, “job creation”, “national security”, and “Made in America” become part and parcel to their stump speech.

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