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Big upgrades in Arizona with advanced tech plants imply changes to foundry strategy

Taiwan Semiconductor Manufacturing Company’s decision to bring its latest technology to America is a big step forward for US President Joe Biden’s quest for security in the vital tech supply chain — but still leaves Washington short of being able to completely produce the most complex chips in the US.

The world’s biggest chipmaker by sales must also pull off an intricate balancing act as it steps up its US presence, satisfying customers such as Nvidia without damaging its highly profitable business model, which has underpinned the development of the global semiconductor industry for more than 30 years.

TSMC’s planned $65bn of investments in Arizona are part of a construction race in the US that involves other global chipmakers such as Samsung and Intel, which are also taking big subsidies from Washington.

But producing chips for purposes such as AI is still likely to involve plants in Asia, a reflection of the complexity involved in packaging various types of chip together to boost their performance and efficiency.

“It’s really not that simple to onshore everything. Having the logic [chip] foundry in the US and then a bit of the packaging there is not enough,” said Myron Xie, an analyst at boutique consultancy SemiAnalysis.

TSMC — which makes chips under contract at hugely complex and expensive fabrication plants, or fabs — plans to start manufacturing 2-nanometre chips in the US in 2028. This is an upgrade from the company’s previous plans. At that time 2nm technology is expected to be the latest in mass production worldwide, whereas previously the company had intended each new US fab to start operating with process technology one generation behind Taiwan.

TSMC has also committed to offer a third plant using 2nm or even newer technology by 2030.

Washington is paying a hefty price for the upgrade, with US$6.6bn in grants and up to $5bn in loans for TSMC. The money comes from the 2022 Chips and Science Act, which aims to onshore advanced chipmaking for the US. Commerce secretary Gina Raimondo has said the US will be on track to make about 20 per cent of the world’s most advanced chips by the end of the decade.

But while Washington’s money offers some incentive, TSMC’s most important motive for stepping up its commitment to the US was to bring its own US strategy in line with the needs of Nvidia and other vendors of the AI chips that have become the most potent driver of global semiconductor demand.

While TSMC will kick off 2nm volume production in Taiwan next year, its original plans would have offered less powerful 3nm chips only from 2028 in the US, putting it years behind the AI chip cycle, analysts said.

The new plan will allow Nvidia and other sellers of AI chips to shift some of their orders from Taiwan to Arizona.

US chipmaker AMD, one of Nvidia’s biggest rivals in the AI chip market, plans to be one of the first customers of the Arizona plant with high-end graphics processing units and central processing units, according to a person familiar with the company. 

But giving clients the right to choose where their chips are made departs from TSMC’s established practice. It would reduce the company’s flexibility in allocating capacity, which has helped it to generate gross profit margins of more than 50 per cent.

People familiar with discussions between TSMC and its clients said any access to a specific plant will have to be laid down in separate agreements with individual customers, possibly in exchange for a price premium or an upfront deposit.

Industry executives and analysts said despite enhancing options for AI chipmakers, TSMC’s stepped-up investment leaves gaps in bringing the manufacturing of entire chip products onshore.

“We think Nvidia will start adopting 2nm in 2026. So with the concrete plans for 2nm from 2028 at TSMC’s second Arizona fab, that will still be behind,” Xie said.

For TSMC to move more quickly would disrupt one of its key advantages as a chipmaker — its ability to outperform rivals in achieving high yields for new process technology, keeping defective chips to a minimum. Its research and development engineers in Taiwan, managing the start of the production stage, are considered vital.

“It’s not that we don’t want to bring new process [technology] to the US even earlier,” said a person familiar with TSMC’s considerations. “But we need the vicinity to our global research and development centre whenever we ramp up a new node. That means we have to ramp in Taiwan first.”

Mobile chips made for Apple, TSMC’s largest client, may bear the heaviest impact from the resulting gap between capacity in US and Taiwan. TSMC usually makes smartphone chips first with its latest processing technology, serving high-performance computing products a year or two later.

“Apple has always been the first adopter of a node. So if the Arizona fabs are a bit behind, then maybe they could only meet Apple’s needs for older models,” Xie said.

Furthermore, TSMC by itself cannot ensure AI chips will be made in the US, as commerce secretary Raimondo has claimed.

To make the complex devices, various logic and memory components made in South Korea and Taiwan need to be assembled and integrated, a process known as advanced packaging. 

This month, South Korean memory-chip maker SK Hynix announced it would build an advanced packaging facility in the US state of Indiana to produce “high-bandwidth memory” chips (HBM) — made by stacking memory chips on top of a logic base die made by TSMC — to be used in Nvidia’s most powerful GPUs.

But the memory chips themselves, known as Dram, will continue to be produced by SK Hynix’s facilities in South Korea. “Samsung and SK Hynix are making the minimum possible investment in the US, and only then because of geopolitical pressure, so they are unlikely to build separate plants in the US for advanced memory chips,” said CW Chung, an analyst at Nomura.

An alternative source will open up when US memory-chip maker Micron’s leading-edge fab in Idaho starts production in 2027. “Nvidia could get the Dram components out of there if they really want to bring the entire chain onshore,” said one industry expert who declined to be named.

However, an onshore location would still be needed for a different advanced packaging process in which the HBM is installed on the GPU module, which is made by TSMC. The Taiwanese contract chipmaker has shown no appetite for building an advanced packaging facility in the US, in part because its Arizona capacity is too small to make such a plant viable.

A senior US administration official said Amkor, a US-based semiconductor assembly and test provider, could help fill the gap: its US site comes online a year after TSMC’s. But it lacks the ability to make a key packaging component used to connect logic and memory parts.

TSMC’s Korean rival Samsung Electronics, which makes both logic and memory chips, is set to offer an alternative by building an advanced package facility as part of more than $20bn in new investments in Texas due to be announced next week.

A person familiar with the plans said the facility would offer Samsung’s equivalent of the advanced packaging technique that TSMC uses to produce Nvidia’s AI chips. Samsung declined to comment on the planned investment, which was first reported by the Wall Street Journal.

Still, analysts doubt this will be enough to convince TSMC customers to jump ship.

“Samsung manufactures all the memory in Korea, so shipping memory to the US to do HBM packaging might not be ideal. But it would make sense if they’d also make the second stage of packaging in the US,” Xie said.

But Xie said Samsung was a laggard in HBM technology. “Customers would rather go for best in class rather than an all-in-one facility,” he said.

Fine porcelain maker Maruwa becomes the hottest bet for cooling AI data centres

Japanese ceramics manufacturer’s two centuries of pottery experience help it take the heat out of the latest technology

A Japanese company with more than two centuries of history in ceramic art and fine porcelain tableware has emerged as a surprise beneficiary of the rise of generative AI, electric vehicles and the technology sector’s intensifying war against heat.

Maruwa, which dominates globally in a range of specialist ceramics, has seen its shares almost double over the past year and leap to an all-time high since the start of April.

The Aichi-based company, virtually ignored by securities analysts previously, now has a market capitalisation of $28bn and has become the focus of a hefty report by Goldman Sachs, while other houses also say they are preparing coverage.

Their excitement is over how Maruwa has successfully transferred its traditional craftsmanship to the latest ceramic components. The company, once famous for exquisite dishes used in traditional Japanese banqueting, first moved into the business at the start of Japan’s “economic miracle” era in the 1960s. 

Its division produces ceramics for circuit boards and semiconductors and has a forte in materials used for heat dissipation in electronics operating at very high temperatures — the kind of temperatures prevalent in AI server farms and in the critically important inverter power modules of electric vehicles. 

Its hottest products in terms of demand currently are ceramic circuit boards used in high-speed optical communications, as tech giants build ever larger, heat-generating data centres as the hardware backbone of their generative AI projects.

“We expect that next-generation high-speed communications, including those related to generative AI, will be the biggest driver of our business growth over the next few years,” said Maruwa. 

Goldman Sachs analyst Mitsuhiro Icho calculates the company has 60 per cent of the global market for heat dissipation substrates for vitally important optical transceivers. He predicts this market will grow to be worth $12.3bn by 2027 as AI-related demand spirals.

Icho said Maruwa was insulated from competitors as it was “nearly impossible” for any non-ceramic supplier to enter the market at this stage by building a business from scratch. Its long history in ceramics had created deep competitive moats around the materials and the manufacturing processes. Its fundamental advantage, said Icho, was age.

“As the company has more than 200 years of history as a ceramic supplier, all the knowledge and technology accumulated since the early 1800s is the core competitiveness of the company,” he said.

Maruwa has been cautious in its sales forecasts, only raising them by a small notch in February for its financial year that ended in March. However, Goldman’s Icho believes its AI server-related sales of transceivers could have a compound annual growth rate of 60 per cent over the next five years.

However, its strong outlook now seems fully reflected in its shares, according to some analysts. In a note published last week by the UK-based boutique Storm Research, analysts argued that the significant recent increase in Maruwa’s share price meant its growth prospects had now been largely discounted by the market.

State media says Truong My Lan’s crimes eroded public trust in ruling Communist party

Vietnamese property tycoon Truong My Lan has been sentenced to death by a court in Ho Chi Minh City for embezzling more than $12bn in the country’s largest financial fraud, state media reported.  

Lan, 67, had committed crimes with serious consequences and with no possibility of recovering the lost funds, state media quoted the court verdict as saying on Thursday.

Her actions had also eroded the public’s trust in the leadership of the ruling Communist party and the state, it said.

Lan, chair of property developer Van Thinh Phat Group, was found guilty on charges of bribery, embezzlement and abuse of power following a trial that began last month. 

Lan had denied the charges against her. Her lawyer said Lan would appeal the verdict.

Lan was accused of embezzling 304tn dong ($12bn) from Vietnam’s Saigon Joint Stock Commercial Bank (SCB) by illegally controlling the bank through proxies, using “ghost” companies to take out loans and giving bribes of millions of dollars to government officials who discovered the fraud.

Other than Lan, a further 85 people have also been charged in the case, including central bank officials.

Authorities say SCB also gave loans worth more than $44bn to Van Thinh Phat and other companies controlled by Lan between 2012 and 2022, accounting for 93 per cent of the total loans disbursed by the bank, which was placed under central bank control after Lan’s arrest.

The corruption charges against Lan are part of a broader graft crackdown by the Communist party that has slowed down government approval for projects and raised questions over political stability in one of the world’s fastest-growing economies. 

Vo Van Thuong resigned as Vietnam’s president in March after only a year in office because of unspecified “violations” and “shortcomings”. Thuong’s predecessor as president, Nguyen Xuan Phuc, resigned in January 2023 amid an overhaul of the government’s top ranks that also saw the departure of two deputy prime ministers.

Hundreds of high-ranking government officials have been arrested in the crackdown.

The expansion of scrutiny to the private sector has added to the uncertainty. Lan’s arrest in 2022 triggered a slowdown in the property market and corporate bond activity. The tycoon comes from one of Vietnam’s wealthiest families and was the most prominent businessperson to face graft allegations since the crackdown began.

Vietnam has been one of the top choices for international manufacturers diversifying operations away from China amid growing tensions between Beijing and Washington. The south-east Asian country has seen record flows of foreign investment, with FDI hitting an all-time high of $36.6bn last year.

However, the corruption crackdown has dented some of its appeal. Government officials are reluctant to approve licences and projects for fear of being caught up in graft investigations, resulting in what analysts have described as “bureaucratic paralysis”.

Move by Alex Gerko’s market maker bucks trend among financial firms to outsource to Big Tech

UK high-speed trader XTX Markets is building a vast data centre in Finland to handle the information for the $250bn worth of deals that it makes every day, bucking the trend among financial services groups to offload IT to Silicon Valley’s biggest technology groups.

The London-based market maker, which uses complex algorithms to buy and sell, is building a site with a 250 megawatt capacity in the Kajaani district in central Finland. The first building will manage computing power of 22.5MW, according to figures seen by the Financial Times.

The plans, which will take about two years to complete, underscore the scale and importance of processing power for XTX, which employs more than 200 people but no human traders, and makes markets in stocks, bonds, crypto and other assets.

“Modern, deep learning models require vast amounts of compute and so we have secured the Kajaani site to increase our capacity in a maximally sustainable way,” said Joshua Leahy, chief technology officer at XTX.

Space in data centres around Europe is tight, with demand far outstripping supply, according to a survey in February by real estate company CBRE. Last year European supply increased 10 per cent to 561MW, the company said.

Nordic countries are popular locations for hosting data centres, because of their cheap electricity and cold climates which means there is less need to cool servers down. Earlier this year Google said it was building a 240MW data centre in Norway.

The market maker has a supercomputer based in Iceland, according to two people familiar with the matter, while the Finnish data centre will add to its processing power.

In choosing to build its own data centre, XTX is bucking a trend among financial services companies to turn to Big Tech for help, as they try to manage the vast troves of data that power global capital markets.

Citadel Securities, a rival to XTX, has switched storing data and testing its algorithms from its own servers to Google’s cloud services, the FT reported this week, while stock exchange groups such as Nasdaq and the London Stock Exchange Group are also using Big Tech companies’ cloud platforms to store and manipulate their data. 

XTX declined to comment on the size of the data centre investment.

It uses 25,000 graphics processing units to power its research, underscoring the importance of processing power for running its algorithms.

By comparison, the EU’s Leonardo supercomputer has nearly 14,000 GPUs, capable of doing 174mn bn calculations per second when it was unveiled in 2022.

GPUs process data quickly and demand for them has surged amid the artificial intelligence boom, as companies and governments clamour for the ability to train AI models.

Founded by mathematician Alex Gerko in 2015, XTX has grown to become one of the UK’s most profitable private companies, and among the world’s biggest proprietary trading firms. It made a record £1.1bn profit last year, making billionaire Gerko, who owns 75 per cent of the company, the UK’s top taxpayer. The co-chief executive paid £664.5mn in tax last year, according to The Sunday Times Rich List.

No mainstream politician seems to think cutting the military budget is the way out of a fiscal crunch.

A question for the ages will be whether German Chancellor Olaf Scholz truly understood what he was doing in February 2022 when, a few days after Russia invaded Ukraine, he announced that his country would transform its attitude toward defense. Yet here we are, more than two years later, with Mr. Scholz’s turning point gyrating in all sorts of interesting—and, mirabile dictu, positive—ways.

The latest example comes via yet another debate on defense spending. When Mr. Scholz proclaimed the turning point (the German word is Zeitenwende), the most important concrete action he proposed was the creation of a €100 billion special procurement fund for Germany’s military. This was the mechanism by which Germany finally would satisfy the North Atlantic Treaty Organization’s expectation that each member state devote at least 2% of gross domestic product to defense expenditure each year, and upgrade its military equipment to be an effective ally.

Money is how governments show they’re serious, and this special fund is demonstrating to German allies that Berlin is committing to its defense plans. Mr. Scholz secured a multiparty agreement for a constitutional amendment authorizing the off-balance-sheet fund, exempting this expenditure from Germany’s rules on government fiscal balance and thereby insulating it from guns-vs.-butter horse trading. A kaleidoscope of political alliances have seen off attempts by one party or another to fritter away the defense fund by devoting the money to climate-related, diplomatic or other ephemeral causes in the name of “national security.”

Inevitably there are a few caveats. Mr. Scholz’s administration has used the special fund in part to support military aid to Ukraine in that country’s struggle to fend off the Russian invasion that prompted the Zeitenwende. It’s a fair criticism that this cash was supposed to boost Germany’s military rather than someone else’s. But the Ukraine war constitutes the most urgent threat to European security in decades, so better that Germany contribute by any means necessary than not at all.

The bigger problem is that the special fund is running out. It was intended to last only a few years, a down payment on a permanently beefier German military. On its current trajectory, the fund likely will be exhausted in 2027, at which point the military, and military procurement, will require funding from the government’s on-balance-sheet budget.

A sign of Berlin’s newfound seriousness about defense is that politicians are fighting about this now rather than waiting until the special fund is actually gone. Germany’s political class has discovered, belatedly, that military procurement takes time. Berlin’s pre-2022 habit of trying to boost defense spending on an ad hoc basis with any cash left over at the end of the annual budget cycle precluded predictable longer-term investment. To avoid relapsing into those bad habits, politicians must think now about where the money will come from for future long-term investments.

Expect this process to be messy. Recent estimates of the size of the post-2027 budget gap range from a low of €20 billion to a high of, well, the sky’s the limit. It will depend partly on the size of the German economy, and also on whether Berlin chooses to treat NATO’s 2% target as a ceiling or a floor. Defense Minister Boris Pistorius suggests defense spending may need to rise to 3.5% of GDP.

These debates are happening while the government faces other enormous fiscal demands, not least from the net-zero energy transition the Greens in Mr. Scholz’s coalition insist on foisting on the country. The country’s highest constitutional court ruled last year that the astronomical subsidies necessary to fund this project must be paid for on-balance-sheet, a decision that already triggered one political crisis and is likely to trigger more.

Most military funding proposals so far are wholly inadequate to the scale of the challenge. Finance Minister Christian Lindner of the free-market Free Democratic Party last week suggested that some esoteric maneuvers concerning debt left over from pandemic spending programs might free up around €9 billion a year for defense, as long as social spending doesn’t increase. Mr. Scholz’s Social Democrats and the Greens—stuck in an unwieldy coalition with each other and Mr. Lindner’s party—predictably objected.

Mr. Pistorius, a Social Democrat, this week warned that rearranging fiscal deck chairs won’t be enough and Berlin should suspend or modify its constitutional debt limit for defense expenditures, an idea Mr. Lindner has criticized. Waiting in the wings are the center-right Christian Democrats, who may be running the government after next year’s election, and it’s hard to say what their plan would be.

Berlin has work to do. But German allies can take heart. Startlingly, no mainstream politician or party in Germany now seems to think that spending less on defense is the way to resolve this looming fiscal debate. That really is a turning point for Germany, and for Europe.