The mature chips are not subject to US sanctions, as Washington only restricts technologies of 7-nm node chips and under to China. The plan to double production capacity at the Nanjing plant also forms part of TSMC’s US$100 billion investment plan over the next three years, unveiled in early April and which has been under consideration since the plant started scaling up production in 2018.

However, the expansion – which will double monthly capacity at the Nanjing fab to 40,000 wafers – has kicked up controversy in both Beijing and Taipei amid heightened cross-strait tensions and the US-China tech war.

In Taiwan, Wang Mei-hua, minister of economic affairs for the self-ruled island, faced questions from lawmakers in a hearing this week about whether TSMC’s planned Nanjing investment would increase risks of Chinese theft of Taiwanese technology, a growing concern for Taiwan when Beijing is ramping up military pressure on the island.

Beijing regards Taiwan as a renegade province that must eventually be reunified with the mainland, by force if necessary, while the ruling Democratic Progressive Party in Taiwan has refused to see “reunification” as the future of the island’s relationship with the mainland.

Supercomputer sanctions on China begin to bite

Four Taiwanese lawmakers this week tabled a proposal to amend the commercial secrets law to widen the scope of what constitutes a ‘secret’ and to toughen penalties for any breach of the law, with mainland China a potential target. Taipei has told recruitment agencies to remove all listings for jobs in China to prevent a brain drain to the mainland.

Amid this fevered atmosphere, TSMC’s investment decision has touched a political nerve.

Xiang Ligang, a Beijing-based tech analyst, recently wrote an influential article that called on the Chinese authorities to stop TSMC’s Nanjing expansion plan. He said TSMC was trying to “dump” 28-nm node chips on the mainland to beat out Chinese rivals and that it could threaten China’s domestic efforts to catch up in chip manufacturing. Xiang also wrote that TSMC’s recent decision to set up an advanced fab in Arizona for 5-nm node chip production, with an investment of US$12 billion, was part of a broad strategy to deny the mainland any access to advanced technologies.

In a follow-up interview with the South China Morning Post, Xiang said his article was aimed at sounding an alarm in China about the potential threat of TSMC to the country’s local fabs, including Shanghai-based Semiconductor Manufacturing International Corp (SMIC), which has been developing factories that produce similar technology to TSMC’s Nanjing plant.

TSMC to spend US$100 billion over three years to grow chip capacity

“TSMC is such a sophisticated player with great power, and if it is in the arena, it can easily defeat all the China players,” Xiang said. “It’s a very serious issue and I certainly hope that there will be a future for China’s domestic chip industry.”

Xiang said he has not received any feedback from the Chinese government. “It’s hard to imagine that policymakers will be swayed by a single article, but at least they may pay attention to the issue and conduct a review.”

The article triggered a heated debate on Chinese social media and even prompted a question at a regular press conference at the Taiwan Affairs Office of the State Council this week. Spokesperson Ma Xiaoguang did not directly address the question, saying relevant authorities would conduct a scientific review and take appropriate measures on individual investment cases. TSMC declined to comment on the issue.

Many in the chip industry said Xiang’s argument was flawed because the TSMC expansion would ease a chip shortage and give China’s booming chip design firms a better chance to turn designs into real products.

Bai Lei, a semiconductor expert at a Shanghai-based chip design company, said the expansion plan was – by every means – a good thing for China’s domestic chip industry development, as it would ease a supply shortage of “mature technology” chips and help to train Chinese engineers.

“Advanced chips are for gadgets like smartphones, but demand for mature chips is huge from the automotive sector, broad industry, the aviation sector and even the military,” said Bai.

The Nanjing fab is one of 12 foundries run by TSMC, which had a combined annual capacity of 12 million, 12-inch equivalent wafers in 2020. TSMC Nanjing was established in 2016 and was hailed by authorities as one of the most important projects for Nanjing, and even Jiangsu, at the time. At the ground-breaking ceremony in July 2016, the 89-year-old founder and former chairman and CEO of TSMC Morris Chang was in attendance, along with a long list of senior government officials, including the then Jiangsu Communist Party secretary Li Qiang. Li is now the Shanghai Communist Party secretary.

In October 2018, when the plant started to produce chips in bulk, Jiangsu Communist Party secretary Lou Qinjian and Jiangsu provincial governor Wu Zhenglong met Mark Liu, the executive chairman of TSMC, in Nanjing. Lou said then that Jiangsu planned to make the TSMC Nanjing plant “an example of cross-strait cooperation to enhance the overall competitiveness of the semiconductor industry on both sides of the strait.”

That goodwill now appears to have faded, even though Beijing has never publicly pointed its finger at TSMC.

For now, TSMC still has all of its most advanced fabs in Taiwan, including a 3-nm node factory currently under construction. And Morris Chang said in rare, recent public speech that Taiwan should defend its leadership in semiconductor manufacturing.

However, it seems like TSMC’s destiny will be to continue to walk a tightrope amid political winds from Taipei, Beijing and Washington. But given that it is the US that controls the most advanced software and intellectual property needed for semiconductor development, TSMC is always likely to tilt towards Washington in the end.

“TSMC has no choice but to comply with US export restrictions,” said William Deng, an analyst at UBS in Hong Kong.