TSMC to Cut Off All Chinese AI Clients From Its Advanced Chips

The world’s biggest contract chipmaker, TSMC, has notified all its Chinese artificial intelligence chip customers that it will stop producing their most advanced AI semiconductors starting next week.

The Taiwanese chipmaker notified all current AI chip customers in mainland China it will not be shipping 7-nanometre (nm) and higher-advanced process chips to them starting November 11, Chinese media site ijiwei reported, citing sources.

The move came after US officials visited Taiwan last week to discuss concerns about the continuing flow of advanced AI chips to China — as evidenced by the discovery of a TSMC chip on Huawei’s Ascend 910B processor.

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That controversial discovery was, in part, behind TSMC’s decision to halt advanced chip shipments to Chinese buyers, ijiwei noted.

The decision is also influenced by recent sharp comments by Donald Trump — the newly-elected president of the United States — against Taiwan, the report noted.

During his presidential campaign, Trump accused the island of stealing chip business away from America and said he would impose tariffs on Taiwanese semiconductors if elected president.

TSMC — a major supplier of cutting-edge chips to Nvidia and Apple — will face an outsized impact from such tariffs, with sales to North America accounting for more than 70% its total in the third quarter of the year.

To manage those risks, TSMC has now developed “a set of strict review systems” with the US Department of Commerce to completely stem the flow of its advanced chips to China, ijiwei reported.

Under the system, Chinese firms looking to acquire advanced AI chips from TSMC will now need a licence from the US Commerce Department, according to a separate report from SEMICONVoice. The requirement will apply to any Chinese firm requiring a 7nm or below chip for AI chips, GPUs, and autonomous driving ADAS systems, the outlet said.

However, other chips, such as those for smartphones and automobiles, will not be subject to the same restrictions, ijiwei noted.

Far-reaching consequences

TSMC’s decision will be the biggest setback for Chinese tech firms after losing out on advanced chips made by Nvidia, a company that once held a 90% share of China’s AI chip market.

It will have far-reaching consequences for China’s semiconductor supply chains and tech giants that have been betting on the chipmaker to make their advanced AI chips.

For instance, Baidu — the maker of China’s ChatGPT rival Ernie Bot — had planned to develop a full stack of software and hardware for its AI business using its Kunlun series of chips. The chips are made by TSMC on its 7-nanometre level of miniaturisation, according to the Financial Times.

Not being able to use TSMC’s chips advanced chips will hit Chinese firms’ performance and market competitiveness, ijiwei noted. That’s because using less advanced chips would make the development of AI tools slower and costlier.

Chinese chip design companies will also have to now find new fabs to make their semiconductors, which means they will also be forced to restructure their supply chains.

“TSMC’s decision may become a watershed in the future development of technology,” the ijiwei report said.

US vs China market

But while cutting-off clients such as Baidu will impact TSMC’s earnings from China in the short-term, the chipmaker might gain greater opportunities in the US by complying with its effort to hobble Beijing’s AI growth.

TSMC is a major recipient of subsidies under the Joe Biden Administration’s CHIPS and Science Act. The chipmaker received a $6.6 billion subsidy for advanced semiconductor production in Phoenix, Arizona.

Meanwhile, the chipmaker is also investing $65 billion in new factories in Arizona. The US fabs are key to TSMC’s ongoing effort to diversify production out of Taiwan, given the island faces the constant threat of a Chinese invasion.

After Trump’s re-election this week raised uncertainty around this plans, TSMC clarified on Friday that its US investment plans remain unchanged.