Industry is abuzz about the recent announcement of Taiwan Semiconductor Manufacturing Company (TSMC) that it will build a $12 billion dollar chip manufacturing plant in the state of Arizona. The new fab (factory) will produce 20,000 wafers per month that are used to make chips. Controversy surrounds the deal as Senator Chuck Schumer and other Democratic senators want to know how much the U.S. and Arizona governments are incentivizing the deal. However, TSMC’s Arizona project can provide insight as to how Asian companies will set up operations in the U.S. and what they are looking for.
Prior to the coronavirus crisis, both U.S. and Asian global companies have been caught in the middle of the U.S.-China trade war and heightening tensions between the two superpowers. The current crisis has served to disrupt supply chains and cause many cracks in the production sharing strategy in which companies use suppliers and manufacturers all over the world to produce a final product. Because of these ongoing disruptions – there have been several during the past decade – economists are speculating that many Asian companies will hedge their bets by setting up satellite plants in North America, to be closer to final markets and to better manage disruptions.
A Taiwanese friend of mine who runs a major production operation in Mexico made me aware of the observations of Yang Yingchao, who is the chief consultant of Yikang Group and Qingxing Capital, and the chairman of Kirkland Capital. While there is a cost gap in terms of establishing a plant in the U.S. vs. China, Yingchao has an interesting take on this. Commenting on the TSMC deal, he said, “So I always feel that Taiwanese companies will definitely come to the United States to set up factories, like Hon Hai before and TSMC in the future. Don’t worry about betting China or the United States, because this is basically both sides, and will not offend people. The cost in the United States is relatively high, but the most expensive fab cost is actually equipment, and labor costs are secondary.” This is a concept that most of us involved in recruiting manufacturers understand very well. At face value, an industrial building for a 200,000-square-foot manufacturing plant can easily cost $12 million. However, in almost all of the deals I have been involved with, the equipment is more expensive than the cost of the land and the building, in specific cases, many times more.
Yingchao also makes an interesting observation on the U.S.-China trade war: “I always felt that it was not a trade war, but a technology war, like ZTE and Huawei. The U.S.-China conflict will only become more and more intense. In the future, global technology should become a one-ball, two-system. Like the previous 3G mobile phones, there are GSM and CDMA, which can be used in the world, but not with each other. In the future, there will be a Chinese standard and a non-Chinese standard.” Yingchao sees no foreseeable end to the U.S. and China tensions. That and the fact that the U.S. is such a large market for technology are two major reasons why more firms from Asia will locate satellite operations in the U.S. These were major factors in TSMC’s decision to locate in Arizona.
And why was Arizona chosen by TSMC over a high-tech state like California?
Yingchao noted that Arizona’s proximity to Asia, its cheaper land compared to California, and the fact that it already has some well-known players as major factors. States Yingchao, who lives in Phoenix, “So many technology companies, like Intel, have been in Phoenix for 20 years, and it built a fab, just across from my house. Phoenix not only has cheap labor and living expenses, but also many high-tech engineers.”
I think the last part of Yingchao’s Arizona thoughts are of great insight. When recruiting a manufacturer that wants to develop a build-to-suit facility, the cost of the land is generally one of its smaller costs, and factors less in a deal than most people think. The cost of land might pique a company’s interest to initially look at a site. A good recruiter will use the land as “bait” to highlight the more important factors such as a quality workforce, proximity to buyers and suppliers, and reasonable utilities’ costs – essentially pitching the total cost of business. Arizona can brag to future industrial prospects that Intel is already in the state because of a well-educated workforce, low operational costs, and a friendly state government. It can also drive home the point that it is only one state removed from the West Coast – a miniscule distance in the grand scheme of things.
Whether this is actually true or not is initially irrelevant, rather it serves to attract interest from foreign companies searching for new sites to locate. Many experts speculate that Arizona may not have been the first choice for TSMC, but that politics at the highest level pressured the company to locate in a predominantly Republican state.
I think that the role that politics played in TSMC’s decision is secondary to heeding YingChao’s wise observations. The marketing strategy that Arizona can and should use to attract more Asian companies is also important. Communities in the U.S. hoping to recruit Asian companies on the move can use this information to build their own recruitment strategies.