Thread by @TheDailyMao

Couple things to add here: this came right after Keith Krach visited Taiwan, where he discussed 'realigning supply chains' with both Tsai Ing-Wen and TSMC head Morris Chang. US policy is now to 1) protect TSMC vs Chinese competitors and 2) regulate who TSMC can sell to

1/n

The US will then use carrots (continued US subsidies, orders from US cos like QCOM AAPL NVDA) and the stick of 'protecting' against TSMC's Chinese competition to control TSMC by proxy.

The US wants China to set up substitutes to TSMC. That makes their stick more credible.

2/n

With TSMC firmly in the US orbit, the US believes it can then control the global diffusion of other technology such as 5G, AI, AR/VR, driverless cars, and robotics, as all of them benefit from leading-edge semicon fab capabilities

3/n

The Chinese government worked hard to build up trust with TSMC. The net profits from high-priced Huawei orders between 2016-2019 are what financed TSMC's EUV research and let it take a process lead over Samsung

4/n

After ASML blocked shipments to SMIC in 2018, TSMC promised China that it would continue backing Chinese firms 100%, and sent delegations to Huawei from 2018-2020 assuring them TSMC would never cut them off.

5/n

At the same time, TSMC was helping Apple and QCOM accelerate their 5nm SoC designs, in preparation for using their orders to replace lost Huawei revenue once a US ban did come down.

6/n

But TSMC has a major vulnerability: nearly 100% of its chips are eventually incorporated into electronics devices using some combination of Chinese downstream or upstream capabilities (design, test/packaging, device mfg, shipping, etc).

7/n

If the Chinese government so chose to do so, it could excise TSMC from global supply chains altogether by making it so no Chinese company could do business with them - using Samsung or Chinese fabs as substitutes.

8/n

Of course Apple (mainly) and Taiwanese contract mfrs (to a lesser extent) would scramble to set up an alternate supply chain for TSMC, but that would take time - and possibly longer than it would take Chinese fabs to reach parity with TSMC.

9/n

China could make that process even harder for TSMC by making the sanctions secondary and immediate: companies would have to choose, now, while only China is 100% free of COVID, whether they want to risk supply chain disruptions by using TSMC or not.

10/n

Does TSMC deserve this? Yes. You can argue that they were involuntarily forced by the US, but they haven't resisted and are complicit. Now, they want to enjoy the benefits of China's manufacturing efficiency while denying Chinese firms the chance to move up the value chain.

11/n

I'd follow this up with a state-sponsored relocation program for all TSMC engineers w/ 3+ yrs exp, while stating anyone who joins TSMC after 2021-1-1 will be personally sanctioned and forever banned from companies with ops in China. Burn their talent pipeline to the ground

12/12