Mon. Apr 22nd, 2024

Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

[email protected]

August 4, 2023

It is unfortunate that politics has now taken over economic realities. Instead of profitability and sustainability based on market principles, politics have taken over with national security as the only deciding factor in global business. However, politicians are not the best people around to make decisions on major investment and business operations.

De-globalization or de-couple have proven that it is impossible, now de-risk and diversification have become fashionable in global politics and forced upon global businesses. Politicians simple mindedly believe that throwing to or promising enough money, anything will happen following their wishes.

The following article details a classic case of politicians forcing a pipe-dream project on a global industry leader that is unwinding before it is even completed construction. Many of the now clearly challenging issues are not new and unforeseeable. For example, the lack of qualified skilled professionals in the US has been well known for decades. Nothing much has been accomplished in the US to address the education and training of a qualified labor force. The wishful thinking on resolving the workforce with our ineffective immigration system has not worked and will not work for TSMC in Arizona.

Of course, there are other shortages facing TSMC: affordable clean water and clean energy. Yet another time bomb is the lack of access to the global market: the US will impose severe export control against China; the China will retaliate with export control of raw materials as well as limiting the market access for TSMC.

The net result: there is no winner, including politicians who may lose elections. Instead of succumbing to hard-handed politics, TSMC and other tech giants need to take climate into account or risk seeing their investments go up in smoke.

No, Water, No Workers, No Chips

TSMC and other tech giants need to take climate into account or risk seeing their investments go up in smoke.

By Michael Ferrari, the chief scientific and chief investment officer at Climate Alpha, and Parag Khanna, the founder and CEO of Climate Alpha.

AUGUST 4, 2023, 8:28 AM

All roads lead to Phoenix. On the gravy train of greenfield investment riding on the back of Inflation Reduction Act legislative incentives in the United States, no county ranks higher than Arizona’s Maricopa. The county leads the nation in foreign direct investment, with Taiwan Semiconductor Manufacturing Corp. (TSMC), Intel, LG Energy, and others expanding their footprint in the Grand Canyon State. But Phoenix is neither the next Rome nor the next Detroit. The reasons boil down to workers and water.

First, the labor. America’s skilled worker shortage has been well documented since before the Trump-era immigration slump and pandemic border closures. Especially in the tech industry—the United States’ most productive, high-wage, and globally dominant sector—huge deficit in homegrown engineering talent and endlessly bungled immigration policies have left Big Tech with no choice but to outsource more jobs abroad.

Arizona dangled its low taxes and sunshine, but TSMC has had to fly in Taiwanese technicians to jump-start production at the 4 nanometer chip plant that was meant to be completed by 2024, but has been delayed until 2025 at the earliest.

From electric vehicles to gaming consoles, the forecasted demand for the company’s industry-leading chips is projected to rise long into the future—and its market share is already north of 50 percent. Given the geopolitical risks it faces in Asia, a well-trained U.S. workforce could give it the comfort to establish the United States as a quasi-second headquarters. After all, Morris Morris Chang, the company’s founder, had a long first career with Texas Instruments.

But the next slowdown they may face is Arizona’s dwindling water supply. In just the past year, Scottsdale cut off water to Rio Verde Foothills, an upscale unincorporated suburb on its fringes, due to the region’s ongoing megadrought and its curtailed allocation of Colorado River water. This was followed by Phoenix freezing new construction permits for homes that rely on groundwater.

Forced to find other sources, industry players have stepped up buying water rights from farmers, essentially bribing them to stop growing food that would serve the region’s fast-growing population. Then there are the backroom deals involved in an Israeli company receiving the green light for a $5.5 billion project to desalinate water from Mexico’s Sea of Cortez and pipe it 200 miles uphill through deserts and natural preserves to Phoenix.

Water risk brings political risk for companies. Especially in Europe, governments are carefully weighing the short-term benefits of corporate investment versus the climate stress it exacerbates. They have good reason to be suspicious: Firms such as Microsoft have been notoriously inconsistent in reporting their water consumption, and promises to replenish consumed water haven’t been delivered on. And even if data centers are becoming more efficient, growing demand just means more of them. Some European provinces have blocked data center development, pushing them to locations with high heat risk.

But to fulfill its promise of putting the United States on a path toward sustainable industrial self-sufficiency, these policies need to better align investment with resources, matching companies to geographies that best suit their needs. It would be better to direct capital allocation to climate resilient regions than to throw good money after potentially stranded assets.

If any company ought to know better on all these matters, it’s TSMC. In Taiwan itself, the industry’s huge energy and water consumption are a source of controversy and difficulty. Not only have droughts on the island occasionally slowed production, but the company’s own water consumption rose 70 percent from 2015-19.

Furthermore, Taiwan knows that its real special sauce is precisely the technically skilled workforce that the United States lacks. Yet TSMC has doubled down on Phoenix, a place without a reliable long-term water supply for industry, little in the way of renewable energy, and a construction freeze that will make it challenging to house all the workers it needs to import.

With all the uncertainty over both water and workers, this begs the question of whether the semiconductor company the entire world is courting would have been better off establishing its U.S. beachhead in the upper Midwest or northeast instead? Ohio, upstate New York, and Michigan rank high in greenfield corporate investments, resilience to climate shocks, and are abundant in quality universities and technical institutes.

Amid accelerating climate change and an intensifying war for global talent, how can those devising U.S. industrial policy better select the appropriate locations to steer investment to?

Meanwhile, in Taipei, there are far more complex geopolitical consequences to consider. TSMC has long been considered Taiwan’s “silicon shield,” a leader of industry so important that a conflict that took it offline would be a major own-goal for China. But it is precisely the combination of the China threat, environmental stress, and pandemic-era supply chain disruptions that convinced TSMC’s customers that its home nation represents too large a concentration risk.

Now TSMC and its rivals are expanding production from Japan to the United States, Europe, and India. This globally diversified set of chip manufacturers is easier for China to exploit as countries more susceptible to Chinese pressure become less rigid in compliance with U.S.-led export controls over advanced technologies.

Industrial policy is back in vogue as a national security and economic strategy. But to get it right requires aligning investment into industry and infrastructure with the geographies of resources and resilience. The countries that build climate adaptation into their strategies will be the ones that build back better.

A closeup of a silicon wafer on display at Taiwan Semiconductor Research Institution on September 16, 2022 in Hsinchu, Taiwan.

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