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TSMC tells US clients it can meet Pentagon security standards

World's top contract chipmaker navigates rift between Beijing and Washington

An operations specialist aboard the guided-missile destroyer USS Stethem records enemy locations during a fleet synthetic training scenario. The U.S. is working to strengthen reviews of the sensitive chips it procures. (Photo courtesy of the U.S. Navy) 

HSINCHU, Taiwan -- The chairman of Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker and a key Apple supplier, on Saturday said his company is willing to work with U.S. customers to help them abide by their government's security mandates when it comes to developing semiconductors for military and national security clients.

But Chairman Mark Liu's comments also shows the fine line TSMC is walking as it navigates U.S.-China tensions.

TSMC produces advanced semiconductors for most of the world's leading chip developers. Its 480 clients include Apple, Huawei Technologies, Qualcomm, Xilinx, Nvidia, Advanced Micro Devices, Alphabet and Alibaba Group Holding. TSMC is recognized as the sole supplier of core processors for the iPhone and as a key producer of chips that go into Huawei's smartphones and telecom equipment. But TSMC also helps U.S. customers build processors that have military uses or are integral to governmental national security systems.

"The US Defense Department asked our U.S. customers, 'Why do you go to TSMC instead of GlobalFoundries," TSMC Chairman Mark Liu said at a news conference on Saturday, the company's annual sports day.

GlobalFoundries is a U.S.-based contract chipmaker, but one that is having difficulty keeping up with the industry's rush toward ever smaller and faster chips.

 TSMC Chairman Mark Liu says the U.S. government is beginning to realize that American defense contractors need the Taiwanese chipmaker.

TSMC's customers "answered that if they manufactured at GlobalFoundries, their [chip] products could lose their competitive edge" because GlobalFoundries does not have enough advanced production technology," Liu continued, wondering aloud about the U.S. semiconductor industry's ability to maintain its standing as the global leader in design.

"I don't think the U.S. government would do anything recklessly," Liu went on. "And we would be very open to communicate with and help [our customers]."

GlobalFoundries sits behind TSMC as the world's No. 2 contract chipmaker; it is owned by an Abu Dhabi sovereign wealth fund. Last year, it announced it would not follow the industry into expensive 7 nanometer chipmaking. It currently produces 14 nm chips.The smaller the nanometer size, the most advanced and costly to produce such chips.

This has put U.S. defense and government contractors with virtually nowhere to go.

At a tech forum on Thursday, Liu confirmed that TSMC's U.S. customers have been contacted by the Pentagon regarding the security implications of offshoring chip manufacturing. TSMC's advanced chip production sites are mainly in Taiwan. Liu said TSMC currently has no plans to build or buy a factory in the U.S. due to cost concerns.

TSMC is dealing with another delicate situation. It also makes chips for Huawei but does so by using chipmaking equipment built by American companies. This fact combined with the U.S. government blacklisting of Huawei has caused some head-scratching as to whether TSMC is in a legal gray area.

The blacklist restricts Huawei's ability to use American technologies, but TSMC said its practice was fully complying with U.S. new regulations and it has received reassurance that its work for Huawei is permissible.

TSMC is reportedly being pressured by the U.S. government to limit shipments to Huawei, though the Taiwanese chip titan denied it received any such requests. However, the Financial Times on Sunday evening said Washington has over the past year repeatedly asked the Taiwanese government to restrict TSMC from selling chips to Huawei, citing anonymous U.S. and Taiwanese officials.   

Huawei was placed on the blacklist about five months ago, when TSMC said it would continue manufacturing chips for the company.

Huawei's semiconductor unit, HiSilicon, is TSMC's second largest customer, behind Apple, and is TSMC's fastest-growing customer.

The U.S. remains the Taiwanese chip titan's largest market, accounting for more than half of its revenue, but China is where TSMC expects most of its growth to come from, given the country's ambition to become self-reliant in semiconductors, crucial components that are used in all matter of electronic products.

Like Apple and Qualcomm, Huawei's chip unit HiSilicon, a key power behind China's chip ambitions, is a chip designer and relies on contract manufacturers like TSMC for production.

Going forward, Liu said it is his understanding that the U.S. Defense Department has initiated a next-generation global procurement program to enhance the current Trusted Foundry Program. The previous programs were designed to secure the manufacturing infrastructure tech vendors need to provide hardware to the military. The Trusted Foundry Program mandates that certified suppliers have all necessary products made in the U.S., mainly by American producers.

"We think that the U.S. government has realized that the old Trusted Foundry Program may not be up to date," Liu said. "U.S. top officials, such as U.S. Defense Department Deputy Secretary Lisa Porter, have already voiced this idea -- that all the products need to be certified no matter if they are made in the U.S. or not.

"We know that the U.S. is working on a new global procurement program that not necessarily only involves making those sensitive chips locally but ... verifies those chips in a more advanced way."

TSMC founder Morris Chang says the Taiwanese chip producer has become strategic territory that both sides in today's global conflict want to secure.

Liu concluded, "We are very glad to see this development."

Porter, the deputy undersecretary of defense for research and engineering, and other Pentagon officials have tried to promote new tech safeguards to keep sensitive chip designs secure, a strategy that would help the Defense Department use cutting-edge factories not located in the U.S.

Liu added that his company has begun a research partnership with Purdue University in Indiana to develop advanced chips that can be detected or traced if security concerns arise. The research program is also studying how to build a secure ecosystem for making microelectronics systems, chips that are not yet commercialized.

As for today's geopolitical uncertainties, Liu said he does not expect them to end soon. He also said the tensions will not dissipate abruptly but rather gradually. "Business leaders need the wisdom to deal with those geopolitical uncertainties," he said. "To strike a balance [between both sides] could be one solution."

TSMC founder Morris Chang at the same event on Saturday said that during the current geopolitical uncertainties, the Taiwanese chip producer has become strategic territory that all sides want to secure.

TSMC is the world's top producer of leading-edge 7 nanometer and 5 nanometer chips. Intel of the U.S. and Samsung Electronics of South Korea are running to catch up. As the nanometer size becomes smaller, engineers are able to squeeze more integrated circuits on to one chip and thus more powerful. That also presents more challenges to and become more expensive for manufacturers.

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