The ‘poorly designed’ U.S. CHIPS and Science Act will hurt Taiwan Semiconductor’s business and the country’s economy “There simply are too few U.S. workers with the skills necessary for semiconductor manufacturing.”

The concentration of advanced semiconductor manufacturing in Taiwan has raised fears in the United States about the vulnerability of this supply chain should China blockade or invade the island. The U.S. CHIPS and Science Act seeks to address that vulnerability with $52 billion in subsidies to encourage semiconductor manufacturers to relocate to America.

But the legislation, as designed, will fall short of its objective; it may even weaken Taiwan’s most important industry, further threatening the island’s security.

Today’s semiconductor industry is dominated by specialized companies located around the world. Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) TSM, +4.06% in Taiwan focuses only on contract manufacturing, primarily of high-end chips, whereas other equally important parts of the semiconductor ecosystem include U.S. companies such as Advanced Micro Devices Inc. AMD, +5.25%, Nvidia Corp. NVDA, +4.00% and Qualcomm Inc. QCOM, +3.36% (which only design chips); the lithography specialist ASML Holding ASML, +4.13% ASML, +2.70% in the Netherlands; Japan’s Tokyo Electron Ltd. 8035, +4.10% (which makes chip-manufacturing equipment); and Britain’s Arm Holdings Plc ARM, +0.41% (which produces software used to design chips).

All this specialization offers two main benefits. First, it means that each part of the global supply chain can focus and improve on what it does best, which benefits other parts of the supply chain. Second, global capacity has increased in all segments of the supply chain, which has made the industry more resilient to demand shocks.

The cost of specialization is that the industry is vulnerable to supply shocks. Although this problem is not isolated to Taiwan — since all segments of the supply chain are potential choke points — no other segment faces territorial claims by China. As a result, the U.S. and Japan have offered large subsidies to TSMC to relocate, and TSMC now plans to build new facilities in Kumamoto, Japan, and Phoenix, Ariz.

The facility in Japan will be completed as planned, and many of TSMC’s suppliers are also setting up there. But the Phoenix project is already substantially behind schedule, and fewer of TSMC’s suppliers have plans to locate there.

TSMC’s experience in Camas, Wash., (in the greater Portland, Ore., area) over the past 25 years casts further doubt on the promise of the Phoenix facility. Despite the initial hope that the Camas facility would become TSMC’s beachhead in the U.S. market, the company struggled to find the workers it needed to stay competitive. Even after a quarter-century of the same training and the same equipment, production costs there are 50% higher than in Taiwan. As a result, TSMC chose not to expand the Camas operation.

The fundamental problem is that while U.S. workers are skilled in chip design, the U.S. lacks workers with the desire or skills necessary for chip manufacturing. Yet specialized skills are critical in this domain. Workers must be meticulous, attentive to detail and dedicated to consistency, perfection, and timely production. They must have a strong command of the working principles of their equipment — much of which is highly advanced or customized — and of data in the field.

TSMC Phoenix will continue to struggle because there simply are too few U.S. workers with the skills necessary for semiconductor manufacturing. Seeking economic security by relocating semiconductor manufacturing to the U.S. is thus an “expensive exercise in futility,” as TSMC founder Morris Chang warned in 2022. The $52 billion in the CHIPS Act may seem like a large number, but it will not be enough to create a self-sustaining semiconductor ecosystem in Phoenix.

Industrial policy can work, but only under the right circumstances. TSMC is a testament to that. Taiwan’s industrial planners explicitly chose a niche that built on their existing strengths in manufacturing. They did not attempt to replicate Intel Corp. INTC, +1.79%, the leading semiconductor company at the time, because too few Taiwanese workers had the necessary design skills. By the same token, Japan’s subsidies to lure TSMC are likely to be successful, because Japan already has an ample supply of skilled manufacturing workers.