Intel's recent agreement to make chips for Taiwan's UMC at its fabs in Arizona marks a strategic alignment with the US CHIPS Act, which seeks to increase chip manufacturing capacity on US soil. It also signals a significant shift in the semiconductor industry, intertwining technological expansion with geopolitical dynamics.

UMC and Intel will together develop a new manufacturing technology targeting applications such as networking, mobile, and communication infrastructure, with production expected to begin in Ocotillo, Arizona, in 2027. This, they said, will give customers "access to a geographically diverse semiconductor supply chain."

Enterprises have already seen the consequences that an over-concentrated semiconductor supply chain can have on supplies of PCs, phones, and other electronic devices, some of which were in short supply for months after the COVID lockdowns. 

UMC's customers include mobile chip makers Qualcomm and MediaTek. Most of its 12 fabs are in Taiwan, with others in China, Japan, and Singapore. Current geopolitical tensions in Taiwan raise further concerns about diversity in the supply chain.

The genesis of this deal begins with Intel's need for more manufacturing capacity when many other chip makers have become design-only businesses. 

Intel's change in strategy

Historically, Intel has done everything from designing through to manufacturing and marketing its chips itself. In 2021, Intel announced its Integrated Device Manufacturing (IDM) 2.0 plan, where CEO Pat Gelsinger outlined an aggressive plan to expand the company's manufacturing capacity. 

Going fabless is a trend, given how it's more capital-efficient to specialize in design versus manufacturing chips. But at the time, Gelsinger identified that now there's money to be made on the fab side given the duopoly GlobalFoundries and TSMC have on the fab business. 

Intel's partnership with UMC represents a strategic shift from its traditional IDM role of solely designing and manufacturing its own devices to entering the foundry, or contract semiconductor manufacturing, business, becoming an agnostic manufacturer. This really is IDM 2.0 in full swing. 

As TrendForce pointed out in a recent note, the two firms complement each other well when it comes to cost-efficient capacity expansion. 

Impact on semiconductor prices

The deal, TrendForce writes, could reshape the semiconductor industry by reducing costs, enabling UMC's entry into the FinFET market, all while enhancing Intel's foundry model transition.

There's not yet enough data, they say, to determine how this will impact prices even though many analysts are confident that the market will welcome more competition.

UMC, for its part, won't comment as a spokesperson said via email that "the rest of the deal is not yet ready to be discussed in public."

The politics of chip-making

The US desperately wants more semiconductor capacity onshore and is frustrated that progress in Arizona -largely with TSMC -has been slow and fraught with labor disputes and technological setbacks. 

Washington's CHIPS Act earmarks tens of billions of dollars to encourage semiconductor companies to set up manufacturing capabilities in the US. As it's written, the bill allows for money to flow to foreign companies, provided they are setting up shop stateside. 

But there are growing calls to make sure Intel, a US firm, gets the largest slice of the pie.

"If Samsung and TSMC and others are building in the US, we should be happy about that," Gelsinger is quoted as saying. "All of my essential R&D is done here. Most of their work is done overseas. We [Intel] should benefit more." 

Partnering with UMC would allow Intel to leapfrog ahead in capacity on mature process nodes.

On the Taiwan side, there's also a push to de-couple from China and expand trade with the US and other countries. Right now, Taiwan's largest trading partner is China, and the government in Taipei would certainly like to change this by pushing for diversification. 

The government's Go South policy is encouraging investment in India and Vietnam, but these nations simply don't have the mature technology industry that the US has. 

There's also the issue of the upcoming US presidential election, and trying to appease a possible Trump White House. 

The former President has already told Fox News that Taiwan has taken away U.S. business, and while it may be difficult to read the tea leaves on his potential foreign policy, this sort of rhetoric appeals to a base that's sympathetic to protectionism. 

But it is a difficult tightrope for Taiwan to walk. One of the guiding principles of its defense is a so-called '"silicon shield" that serves as a form of deterrence. The theory is that China would be deterred from attacking Taiwan as the consequences to the world's supply of semiconductors would be so damaging that it would do considerable harm to China's economy. 

If the world were to be less reliant on Taiwan's chips, and more dependent on semiconductors made elsewhere, then the shield would no longer be such an effective piece of armor.

That would be bad for Taiwan - and also for the world's semiconductor buyers, who would still suffer from any disruption to the island's manufacturing capacity.