TSMC in the UAE: What we can learn from Germany’s semiconductor FDI coup

Excuse the mixed and tenuous analogy, but it highlights the scale of the new Taiwan Semi-Conductors Manufacturing (TSMC) FDI project in Germany, where it has committed to building a major semiconductor fabrication plant in the eastern city of Dresden.

And why Dresden you might ask.

Firstly, European manufacturers as a whole have suffered from chronic chip availability issues in recent years due to the well-publicised COVID-related supply chain blockages and dislocations, with the all-important German auto sector being particularly badly hit.

This has galvanised a political response from the EU – the European Chips Act – which seeks to attract, build and sustain a microchip and semiconductor sector in Europe, with approximately €40 billion ($43 billion) set aside to fund the scheme. (Europe currently manufactures only 10 percent of the global chips market.)

Building on this EU support, both the German federal government and the local state authorities have also opened their chequebooks to provide, collectively, €5 billion ($5.4 billion) of funding to attract a behemoth that manufactures more than 50 percent of the world’s chip supply.

The other partners in the deal are private sector giants Bosch, Infineon and NXP who will each have a 10 percent share in the venture, to TSMC’s 70 percent, meaning that funding and risk is very well spread.

Dresden is the favoured German location based primarily on its depth of technological talent, skill and experience, stemming right back to when it was part of communist East Germany, where it was a centre of excellence for engineering. This has remained in the local DNA through to this day and is why the wider region is dubbed ‘Silicon Saxony’ with existing fabs and research facilities already employing a workforce of more than 50,000.

Now that semiconductor supply chain security is considered a matter of national security, particularly with the rise of AI which, in turn, has made chip maker NVIDIA the hottest property on Wall Street and the newest member of the $1 trillion market cap club, how could the UAE become part of this 21^st Century story?

UAE’s semiconductor future

Firstly, it must be noted that the UAE already has its own putative chip champion in the shape of Globalfoundries, where Mubadala is a very significant shareholder, which produces around 7 percent of the world’s chip supply (the 4^th largest).

The company has 14 overseas locations – including a fab in Dresden – but no current presence in the UAE. Bringing a portion of their production or research back to Abu Dhabi would provide a major foundation for the sector and act as an anchor for a semiconductor cluster to develop.

The UAE obviously doesn’t have anything like the same density or scale of proximate industrial semiconductor demand that Germany has, however Israel’s $25 billion deal to attract a major Intel fab earlier this year shows that this isn’t an absolute prerequisite for these projects to succeed. Also, with the UAE’s burgeoning network of FTAs and CEPAs, tariff-free access to major production markets like India and Indonesia is secured, allowing for easy export of any UAE chip output.

Clearly, TSMC was very heavily motivated by the massive government grants it was able to access, and whilst the exact mechanisms for such support in the UAE aren’t so publicly visible, there’s no doubting the current appetite to attract major FDI in future-facing industries, and that major funding sits behind this at both federal and emirate level, so you imagine that similar levels of incentive would be possible here too.

So far so possible.

Which leads us to the most obvious issue: Skilled talent. Dresden has been building its STEM sector depth for decades and obviously has the critical mass of employees that comes from a pre-existing sector cluster, R&D activities and specialised higher education institutes. The UAE would be coming from a standing start in the semiconductor world, and whilst laudable initiatives to build a strong indigenous workforce of qualified scientists and technicians are underway, they will obviously take years to bear fruit.

As such, policies like the Golden Visa scheme to attract skilled workers are vital and could help to provide the short-to-medium term solution that would be necessary to successfully attract and implement FDI projects of this nature, particularly given that the other preconditions can be largely met. That may seem like a long shot, but we’ll soon have a casino in RAK; Emirates Airlines started with two leased aircraft in 1985; Abu Dhabi is home to The Louvre Museum. Were any of these even foreseen as success stories before they actually started?

TSMC in the UAE? Now that would be fab.