In recent years, U.S. policymakers have developed great anxiety about America’s need for advanced land-based manufacturing capabilities. The press has been filled with stories about all the ways the United States has fallen behindhow we can no longer produce state-of-the-art chips. This anxiety is rooted in both geopolitical concerns over rivalry with China and fears that the United States has somehow lost the ability to produce chips, just as we seem having lost the ability to make many things.

We would say that the problem is more economic than technological.

Editor’s Note:
Guest author Jonathan Goldberg is the founder of D2D Advisory, a multifunctional consulting firm. Jonathan has developed growth strategies and alliances for companies in the mobile, networking, gaming and software industries.

Simply put, Intel can produce cutting-edge semiconductors today; they just can’t do it economically. They have the know-how and the equipment. Their gaps are based entirely on the fact that they cannot yet profitably manufacture 18A, 3nm chips.

Let’s consider for a moment everyone’s favorite fear-mongering scenario: What if the United States lost access to TSMC’s manufacturing plants in Taiwan? War, blockade, alien invasion – whatever the reason. And along with that, imagine that the United States faces a military conflict and the lack of cutting-edge chips becomes a serious national security problem.

This would obviously cause immense disruption to the economy, but how long would it take Intel to get its process working? It’s reasonable to assume that the government could throw enough money at Intel to get its process up and running very quickly.

At first, Intel’s returns would be terrible, and the government would effectively cover these losses by paying fixed prices for wafers containing only 5 or 10 percent good chips. In the semis, volume solves a lot of problems, and in a time of great need, they could afford all the bad tranches it would take to get enough learning under their belt to improve those returns.

The traditional narrative on TSMC’s rise to success is that Intel missed the boat on mobile, TSMC became the foundry of choice for phones, which boosted their volumes.

Obviously, this is not a scenario that anyone hopes for, but we mention it here because it speaks to an important but largely ignored reality today. The traditional narrative on TSMC’s rise to success is that Intel missed the boat on mobile, TSMC became the foundry of choice for phones, which boosted their volumes.

With this volume, they were able to learn faster than others and, over time, gain process leadership. This is all true, but one critical factor is missing. During this period, TSMC benefited from massive subsidies. The best known were direct subsidies from the Taiwanese government, which allowed them to import wafer manufacturing equipment in the early days. But a much bigger subsidy was indirect: Taiwan’s new, undervalued dollar.

Historical NT$/US$ exchange rate. Source: Investing.com

The NT dollar is apparently a floating currency, but as the chart above shows, it appears to have been fixed against the US dollar for over 20 years. Economist Brad Setser has written extensively on the mechanisms Taiwan used to achieve this (TL;DR – commercial banks, then life insurance companies), essentially by managing the currency to maintain Taiwan’s competitiveness.

During this period, the US dollar inflated significantly, meaning the NT dollar also lost value. The best way to demonstrate this is to Economist’s Big Mac Index.

Source: Big Mac Economist Index. The blue line costs NT$

It is a convenient way to show how undervalued or overvalued a currency is relative to the US dollar. As this chart shows, the value of the NT$ has steadily eroded against the US dollar over the past twenty years, exactly when the TSMC was rising. From what we understand, this decline began in earnest with the Asian financial crisis of 1998 and has only deepened over time.

This provides a massive, indirect subsidy to TSMC. They may pay their employees wages that are competitive in Taiwan, but which are actually much lower than what their American competitors would have to pay.

TSMC’s revenue is valued in US dollars, but its workforce is paid in NT dollars and is the company’s real asset. And this discount has been accumulating for decades. We tend to view devalued currencies as a way for exporters to compete with foreign competitors by offering lower prices. Instead, TSMC used the effects of this monetary suppression to invest in its own talent pool.

We’ve read research that shows $NT is actually undervalued by around 30% (using a more comprehensive method than the Big Mac Index, which shows a level >50%). So we think it’s no coincidence that TSMC said its US factory would be 20-30% more expensive than the cost of wafers from its Taiwan factory.

To be clear, we are not diminishing TSMC’s technical talent. They have immense capabilities and unparalleled human capital. But we think it’s important to understand how they achieved this. The real power of TSMC management has been to invest its monetary advantage in its own talent pool, rather than squandering it on large-scale acquisitions with tenuous ties to its core business.

All of this begs the question of what anyone can do to compete with this.

The US government is fully aware of the state of Taiwan’s currency and has consistently refused to take action against it. Being competitive in the foundry industry requires external financing pools. For Intel, this has led to renewed calls for direct government support.

We would obviously be prefer a more commercial solutionin the form of investments from potential customers, but there is a growing chorus begging encouraging the US government to “save” Intel by subsidizing a group of shareholders.

The less obvious question is how Samsung can answer. The status of the South Korean won is actually not far off from the NT dollar, for similar reasons, but Samsung has chosen to spend this windfall elsewhere.

In the short term, Samsung Foundry will likely need support from the broader Samsung Chaebol. We don’t know to what extent the chaebol wants to support Foundry. The matter of memory is important for the whole group. Is Foundry putting this at risk? Is the money spent by Foundry becoming so great that the chaebol finally decides to fold and focus on memory?

What is clear is that Intel and Samsung will need considerable outside support to stay in the race.