Simone Gao:
Hello everyone, and welcome to Zooming In China. I’m Simone Gao. In 2020, the world’s largest and most advanced chip maker, Taiwan Semiconductor Manufacturing Company, announced plans to build a $12 billion plant in Arizona where they would produce 3 nanometer chips. This is the largest onshoring in U.S. history. What is the full strategic meaning of this onshoring for America? The U.S. also recently passed several bills that will help America compete effectively with China in the high-tech arena. How impactful will that legislation be? What are China’s vulnerabilities? And how will U.S. capital markets react to the recent disastrous IPO of Didi, China’s version of Uber? I had these discussions with former Under Secretary of State Keith Kroch. Take a listen.
Simone Gao:
Thank you, Secretary Krach for joining Zooming In China today.
Keith Krach:
Thanks so much, Simone, for having me here. I really appreciate it.
Simone Gao:
Okay, so you were responsible for securing the crucial semiconductor supply chain and led the largest onshoring in U.S. history with a $12 billion manufacturing facility of TSMC from Taiwan. TMSC started to construct their plant in Arizona just recently, and they plan to invest, over the years, up to $70 billion into this Arizona facility. So tell me about it, the context and the significance of this effort.
Keith Krach:
Sure, Simone. So, as you know, I just returned from Arizona where I met with Governor Ducey to thank him for helping the onshoring of TSMC. He was a vital partner on that. And I also spent a good amount of time with TSMC when I was there. And the deal is an absolute game changer for securing the U.S. semiconductor supply chain. When we did the deal with TSMC, we had basically five theories that actually all came true. And the first one was that TSMC would increase their historic $12.5 billion investment over time. And during my trip, it was great news to hear that that investment will now grow to over $70 billion over the next six years. And that is way faster and bigger than we anticipated. The second theory we had is that TSMC would also bring its ecosystem of suppliers all the way to the United States.
Keith Krach:
And indeed, they are. TSMC is bringing nine major suppliers, and those major suppliers are bringing their own suppliers. And so, this is what we call in the semiconductor business the clustering effect. It’s more so than in any other industry. And that’s how Silicon Valley originally got formed. The third catalyst, the third theory is really a catalyst about congressional funding. And we worked with Senator Warner and Senator Cornyn to discuss and design the $5 billion chip act, which is, which is now incorporated into the $250 billion innovation and competitive act that just got passed in the Senate, and now it’s on its way to the House. The other big thing, I think, you know, a theory was, was there to be a giant leap towards bringing high tech manufacturing back home to the U.S. where it belongs. And this really means training of Americans and more high paying jobs. And most importantly, bringing critical know-how, which we’ve lost over the years, which is so vital to stronger national security. And then finally the fifth one is that it would also be a catalyst for getting other semiconductor companies, foreign and domestic, to bring their manufacturing back to the U.S., and indeed, that is happening.
Simone Gao:
Right. Right. I see Intel is definitely following suit. So, in addition to recently meeting with TMSC and the governor in Arizona, you also met with the executives at Intel. So, tell me about that meeting, and do you think the onshoring of TMSC will also help the U.S. chip manufacturers to pick up speed to build in the U.S.?
Keith Krach:
The answer is absolutely yes, Simone. We had a great meeting with Intel. You know, that’s really our fifth theory came true in a big way. The TMSC deal is not only bringing an ecosystem, but it really sparked an investment from other chip companies like Intel and Samsung. My old friend Pat Gelsinger, the new CEO at Intel, didn’t waste any time in terms of announcing that he’s going to expand their $20 billion fab in Chandler and expand it by $20 billion. And I think it goes without saying, we got a warm reception from governor Ducey because now over $100 billion of semi-conductor ecosystem investment is going into Arizona. It’s, it’s going to end up being the new Silicon Valley. You know, it gets better. Samsung, the number two player, will be building a $17 billion fab in the U.S. in a yet disclosed location. So, I really think the onshoring with TSMC, with everything combined, it sparked what will go down in history I think as the most strategic onshoring the world has ever known.
Simone Gao:
Right. That said, you know, China has the most complete industrial manufacturing capability in the world right now. It is the only country that has all 41 major industrial categories, 207 medium industrial categories, and 666 industrial subcategories. So as part of your global economic security strategy, you designed two pieces, two bipartisan pieces of legislation: the $50 billion Chips for America Act and the $150 billion Endless Frontier Act. Both have been combined to form the new $250 billion Innovation and Competition Act. If America wants to rebuild its industrial manufacturing capabilities, where should it start? Does the U.S. Innovation and Competition Act set a good direction?
Keith Krach:
Yes, yes. Yes, it does, Simone, and our global economic security strategy had three pillars. You know, the first is to turbocharge U.S. economic embeddedness and innovation. The second was safeguard American assets. And the third was to build a trust network of like-minded nations and companies that operate by a set of democratic principles. So, the $250 billion U.S. bipartisan Innovation and Competition Act that incorporates the two pieces of legislation we designed, which was that $50 billion chip act and the $150 billion Endless Frontiers act adds key monies, also, for alliance building and economic statecraft. And, and, you know, just like we did in the semiconductors, the bipartisan $250 billion bill aims to secure 10 tech-intensive sectors through research funding that vital American industries simply cannot cede to China, Inc. And these include things like advanced communications, like 5g, 6g, AI, clean energy, cybersecurity, quantum, robotics and advanced manufacturing, biotechnology, there’s a few others. And I think, you know, dictator Xi’s biggest fear is the U.S. has another Sputnik moment and commits to the equivalent of a moonshot. Well, this bill is designed to do exactly that by taking away the technological advantage from China, Inc. and return it to the U.S. So, the U.S. ICA, as it’s known, will help ensure tomorrow’s technology is trusted technology and that it empowers free societies facing perpetual authoritarians threats.
Simone Gao:
Right. So, in other words this rebuilding of U.S. industrial capability will start from the high-tech sector. Is that right?
Keith Krach:
That’s absolutely right. That’s the one that’s the critical battleground. It also is the one that drives productivity that affects all of the classic industries. So, it’s absolutely critical. And, you know, at the base of that is semiconductor manufacturing, and then all those technologies on top of that, that help drive productivity.
Simone Gao:
Right. You know, also with the Endless Frontier Act, the U.S. is supporting and subsidizing research, to a certain extent, of the key technology industries. We know China has been doing this for a long time, subsidizing its key industries, and it has worked very well, worked out very well for China in the short term. But such practices are not fair to other companies in the world and, in the long-term, I think it stifles innovation. So, in your discussion with Senator Schumer and Senator Young, did you recommend how America is going to be different when supporting its key industries?
Keith Krach:
I’m sure. You know, America believes in fair trade. We’re free traders. But when somebody comes in the market and doesn’t play by the rules, the market is no longer free, and you have to do something about it. So, you know, since the 1960s, the U.S. government’s long-term investments in research have been declining. We once led the world. Now we rank ninth globally in total R&D and 12th in publicly financed R&D. So, when we designed the Endless Frontiers Act, and we presented Senator Schumer and Senator Young a plan that could take that $150 billion of that Endless Frontier’s money and turn it into $500 billion with private, with a private sector match, and also a match from our closest technological allies. And we also proposed the governance model that would accomplish that. You know, from my experience building companies out here in Silicon Valley, I can tell you that securing these advanced industries is not cheap. You know, however, when the government targets smart investment in research and development, and we partner with the private sector, we get a tremendous bang for our buck and, and just look at the Apollo program. That’s the analogy that I give. You know, over $140 billion in investment put a man on the moon, and the program not only led to American leadership in aerospace and microelectronics, but it also resulted in trillions of dollars in annual reoccurring GDP as a result of that.
Simone Gao:
Hmm. Okay. That, that’s good to know. Let’s talk about Taiwan. Secretary Kroch, you were the highest-ranking U.S. State Department official to visit Taiwan in the past 41 years. You led the signing of the U.S./Taiwan Lee Economic Prosperity Partnership and the U.S./Taiwan Science Cooperation Agreement. Now, trade negotiations between Taiwan and the United States, under the trade and investment framework agreement, resumed on June 30th after a four-year pause. So, how do you foresee the U.S./Taiwan trade relations will developed in the near future?
Keith Krach:
Well, Taiwan is a role model of democracy, not just in the region, but around the world. And, you know, Simone, when I went to Taiwan, the CCP greeted me with 40 fighters and bombers, and I think that shows their contempt for democracy. And it’s reminiscent of the cooption of Hong Kong. The visit was also one of my six Taiwan initiatives to strengthen our ties with Taiwan. Obviously, it included the TSMC onshoring, establishing the Lee Economic Prosperity Partnership, and also assisting Taiwan’s membership in international organizations, as well as forming the science and technology pact and encouraging more high-level exchanges, which all strategically led up to a trade agreement. So, I applaud President Biden for building on those Taiwan initiatives and moving forward with the TIFA, because continuity of policy is really important for our allies. And there’s two reasons a free trade agreement is so strategic for preserving Taiwan’s democracy and also our national security.
Keith Krach:
And the first is the Free Trade Agreement creates, when you do one of those it creates a halo effect for increased U.S. private sector investment, which leads to increased private sector investment from our allies. And if there’s a conflict, then we’re going to need all our allies, and they will be more apt to join if they have a significant investment in Taiwan. The second reason is…political risk is the other threat to Taiwan’s democracy. You know, it was just a couple of years ago we had a deep concern that a pro-Chinese Communist Party candidate would be elected. And before I went to Taiwan, about a week before, President Tsai made a bold and a diplomat, uh, domestically unpopular move to remove the biggest hurdle to a U.S./Taiwan trade agreement by lifting their beef and pork restrictions. And when I was there, I could really see it, and that move cost, I think, a lot of political capital, and a trade agreement would be a big political win for the pro-democracy supporters. It makes sure the bad guys don’t get elected.
Simone Gao:
Right. Do you have any plans to go to Taiwan in the near future?
Keith Krach:
Well, you know, I’d love to take my family there, my five children and my wife, because they’re just such wonderful people. I’ve been doing business over there for, for so long, but they’ve never had a chance to go there. And, you know, particularly, the family could no longer go to China. As you know, my family was sanctioned by dictator Xi about a minute after my term was complete, and it wasn’t because of anything I said. It was because of what we accomplished and all those national security initiatives where we got results.
Simone Gao:
Yeah, that’s right. You are the number three on the sanction list from China, right?
Keith Krach:
I certainly was. And, you know, the way I look at it is why react when you can act, and I’m not going to bend a knee to emperor Xi, that’s for sure.
Simone Gao:
That’s it for today. Please like, share and subscribe to my channel if you like our production. Also, mostly importantly, please subscribe to my membership website, zoomingin.tv. Members get video/audio formats of my show, transcript and members only in-depth reports. I will also do live Q & A with members on the website. $5 a month. Cancel anytime. So, please check it out. Thanks for watching. I’m Simone Gao, and I’ll see you next time.