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Econ Commentators Join TSMC to Declare U.S. Workers' Premature Defeat

The econ blogosphere hasn't really checked, but knows in its heart
American workers aren't up to the job.

A semiconductor fab under construction in the Sonoran desert is becoming
an acid test of President Biden's industrial policy.

Taiwan Semiconductor Manufacturing Company (TSMC), the world's leading
maker of advanced computer chips, announced earlier this summer that it
intends to fly in 500 or more Taiwanese workers
<[link removed]>,
in addition to overseas workers already employed on the site, to
complete construction of the fab. Nikkei has reported that the company
is "in talks" with U.S. government officials to secure the temporary
visas, which are said to be E-2
<[link removed]>
investor treaty permits.

Union leaders have whiplash. In December, President Biden visited the
plant to announce that the fabs would be "built with union labor." He
did not say "exclusively." But it has come as a shock that the vast
majority of work on the roughly 20,000-job site is non-union. TSMC is
seeking some $15 billion in government subsidies for the fab.

In May, I went to Phoenix to interview workers at the site. Some shared
anecdotes of how untrained workers with non-union contractors had made
costly mistakes
<[link removed]>.
Others described grisly injuries. For over a year, the company has
denied labor leaders a project labor agreement, a prehire deal that
ensures union jobs and incentivizes training. Instead, TSMC has brought
in hundreds of non-union contractors like ABM Industries, a company that
staffs Amazon warehouses and is notorious for wage violations
<[link removed]>.

Now, TSMC says the lack of a skilled workforce is causing construction
delays. In response to its decision to bring in more foreign workers,
the Arizona Pipe Trades 469 union has started a petition
<[link removed]> to
block the visas.

TSMC executives emphatically oppose labor unions
<[link removed]>, and run a
business with razor-thin operating costs and extraordinary profits. The
Department of Commerce's CHIPS Program Office, which manages subsidies
from Biden's semiconductor subsidy bill, is currently deep in talks
with prospective grantees. It makes good business sense that TSMC, which
has not yet secured those subsidies, would emphasize its staffing woes
and complain that it is expensive to operate in the U.S.

What is surprising, however, is that the U.S. economics blogosphere has
gone to bat for TSMC, echoing the company line about the urgency of
finding a skilled workforce, and the need to find it abroad.

Responding to the petition to block Taiwanese workers, Samuel Hammond, a
fellow at the Niskanen Center think tank, tweeted
<[link removed]>, "This is
the opposite of how industrial policy actually works. When Korea and
Taiwan were developing, they aggressively courted workers from other
countries to transfer their tacit knowledge."

"America simply doesn't have a lot of people who know how to install
this equipment," economics blogger Noah Smith wrote
<[link removed]> on
Thursday. "American pipefitters simply do not know the technical details
of installing ultraviolet lithography machinery. They need someone to
teach them before they can do it, and the people who can teach them live
in Taiwan."

At an abstract level, Smith is right to pay attention to looming
workforce constraints. Proponents of industrial policy have long pointed
out that you can't stand up advanced manufacturing by reading wikiHow.
You need transfers of specific and tacit knowledge-the many details of
a craft that don't get written down or formalized-and also plenty of
"learning-by-doing." Trust and coordination help, too.

In other words, subsidies aren't enough to ensure that the factories
we're building will churn out competitive goods. China has achieved
rapid dominance in manufacturing electric vehicles, for example, and has
breached impressive thresholds on quality and reliability, at low cost.
As the U.S. attempts to fire up new industries, the ability to learn
through trial and error is critical.

This set of insights is typically applied to engineering and other jobs
within the walls of advanced manufacturing plants, where cutting-edge
skills and iteration are essential. Critics like Smith who are
increasingly anxious about the ability of American workers to tackle new
production challenges have exported the same critiques to
construction-without showing that they belong.

[link removed]

In this case, Smith is so sure American workers are inept, he doesn't
bother to check what they're already doing. Members of Arizona's
Pipefitters Local 469 have built fabs in Ireland and in Israel. In 2015,
around 700 members helped build a GlobalFoundries fab in Buffalo. They
are steadily employed building an Intel plant south of Phoenix that
hopes to compete with TSMC.

OK, Smith might say, but building a state-of-the-art facility is
different. (Smith does not differentiate between leading-edge chips,
like graphics processors, and more basic chips, like power management
circuits, or even between logic and memory chips, but he points out that
TSMC is the world's top chipmaker. The reader is left to conclude that
a leading-edge construction site might involve unique "technical
details," though Smith does not spell out what those would be. Instead,
he defers to the company's expertise. TSMC says American construction
workers aren't up to the job, and ours is not to reason why.)

Smith's one specific claim is that American workers can't install
lithography machines. In fact, union pipefitters are already installing
lithography machines at TSMC, as well as nearby Intel. (The equipment is
not specific to TSMC. Both use equipment from the same Dutch vendor:
ASML
<[link removed]>.)
Workers have their own thoughts on technical details of the job-on
which, more below.

The broader point is that, with all the concern about how Americans have
lost their dynamism and mojo, there's a risk of mystifying the task at
hand.

"What pipefitters, electricians, and others do is hook up equipment,"
Aaron Butler, president of the Pipefitters' local and head of the
Arizona Building Trades Council, told me. "The pipe does not care what
it's going to. My guys don't make the chips, they're not trying to
run the lithography equipment. We connect the piping to the mechanical
connection, pressure-test the line, make sure it's clean and quality,
and walk away."

Like all work, of course, chip fab construction requires distinctive
skills and benefits from experience. One of the weirder things about
building a fab, for example, is the need for extreme cleanliness.
Workers wear protective suits to ensure that skin flakes, hair, saliva,
and other tiny particles do not contaminate the "clean room" as it is
being built. Even as the walls go up, janitors scrub crannies in the
flooring to remove any dust that has been accidentally left behind.

Ironically, TSMC may be crushing the opportunity for learning-by-doing
to emerge in the construction stage of the fab. TSMC has outsourced most
of the job site-like its janitorial work-to temp contractors with
little training and high churn. Even where it has brought in union
workers with a career in the building trades, it has done so grudgingly
and kept them on precariously, disincentivizing investment in training
and growth.

The company, in other words, has opted to work wherever possible with
the least-skilled segment of the American workforce. Now, as it turns
around to bring in its own skilled workers, would-be supporters of
industrial policy are declaring that this was inevitable.

IN THE CASES WHERE TSMC

**HAS** USED UNION WORKERS, workers in the building trades have plenty
of notes on how they're doing the job.

Luke Kasper of the sheet metal workers union, for example, worries about
the quality of the Teflon-coated stainless steel ductwork. Where
non-union contractors have done the work, he says, gaskets are missing
in areas, and not all of the ductwork achieves an airtight seal. "Even
though it's negative-pressure exhaust ductwork, it's not supposed to
be done like that," he said. Corrosive exhaust passing through the
ductwork could leak.

Butler, with the Pipefitters, described ongoing disagreements over
welding techniques. Polyvinylidene fluoride (PVDF) pipes are the
arteries of a fab, carrying pure, ultraviolet-treated water to the clean
room. Arizona Local 469 pipefitters have been installing mechanical
piping in clean rooms since Motorola production sites sprung up in the
1980s, and many members learned to weld the PVDF by hand, using socket
welding, which requires a paddle.

Butler says socket welding can be leaky, and he favors the Bead and
Crevice Free (BCF) process, which is automated and produces data on
quality. But TSMC favors socket welding, so they have continued to use
the older technique.

In a higher-trust atmosphere, this might be a fruitful debate, and
exactly the sort of exchange you would want to encourage as workers aim
to boost productivity on advanced sites. In the current hostile climate,
the notion that this is cheery and collaborative learning-by-doing seems
more far-fetched.

Smith, Hammond, and others might argue that workers should just defer to
TSMC on questions like socket versus BCF welding, rather than raising
concerns. They might assume that the company knows best, since it is the
single producer of the world's most sophisticated chips.

But that same observation-that TSMC currently has no peers-might
point in the opposite direction. Perhaps we should assume TSMC isn't
running the tightest possible ship. If it were holding its own among a
pack of competitors, that would be a much more robust signal that it had
optimized across all operations. But TSMC's cutting-edge logic chip
production is not really subject to competitive market pressures, like
the market that exists in memory chip production, for example. There,
competition is brutal, margins are tight, switching costs are low, and
competitors stay neck and neck.

****This is not to minimize TSMC's technical prowess. The U.S. media
came late to recognizing that TSMC achieved its global status through
truly sublime skill, and is now making up for lost time with rhapsodic
praise
<[link removed]>.
In a particularly memorable extolment, the historian Adam Tooze remarked
on a podcast, "Our ability to do this stuff at nanoscale is us up
against the face of God."

But if TSMC is doing modern alchemy in its clean rooms, it is also
employing more pedestrian business strategies to stay ahead. Earlier
this week, The Information reported
<[link removed]>
on the cozy terms TSMC has set for Apple. It is the sole supplier of
processor chips for iPhones. Most tech companies place an order of chips
and pay for them all, including bad batches. With Apple, TSMC has agreed
to eat the cost of defective chips.

Apple has long thrown around its volume to win sweetheart deals. And
regulators used to be more critical of TSMC's monopoly status. Five
years ago-before the pandemic and supply chain shocks-both EU and
U.S. officials were considering challenging
<[link removed]>
TSMC's monopoly hold. With the U.S. staking major national-security
objectives on TSMC's timely delivery of electronics for key weapons
systems, the criticism is getting more awkward.

That isn't some grand indictment of Bidenomics. It's just
trade-offs. Economists love tradeoffs! But when the government gets back
in the business of weighing competing interests, the reaction can get a
little hysterical.

Biden's state-led economic development strategy has three pillars:
Industrial policy, labor revitalization, and antitrust-that is, market
competition. If industrial policy is about quickly standing up new
industries and maybe also national champions, there are immediate,
obvious frictions between these goals.

There has already been a mini boom in proposals aimed at making those
goals of Bidenomics more mutually compatible. Now comes the hard part in
industrial policy, as they say, and it's essential to be specific
<[link removed]>.

Smith writes that "Germany has much higher rates of collective
bargaining coverage, due to something called sectoral bargaining that
lets even non-union workers be covered by union agreements." There is
indeed plenty to be learned from German corporatism. One wonders whether
Smith is aware that right here in the United States, under the flawed
American unionism that troubles him, non-union construction workers on
sites with federal funding are covered at collectively bargained rates.
The Biden administration recently strengthened this system with a
sweeping reform
<[link removed]>
to the Davis-Bacon Act, which may soon apply to TSMC.

Some of the most interesting research on chip market structure is being
done by Todd Achilles, a former HP executive who also ran American
operations for the Taiwanese consumer electronics company HTC. In a
forthcoming report, Achilles proposes a bevy of ways he believes the
U.S. government could reduce the risk that chips subsidies entrench the
monopoly power of tech giants like TSMC. For example, he argues that the
Biden administration should require fabless chipmakers like Apple to
dual-source their semiconductors, diversifying their supply chain beyond
a single champion.

For my money, the sharpest proposals to make markets, labor, and
industrial policy work together seem to be coming from people like
Butler, Kasper, and Achilles, who are closest to the action.

~ LEE HARRIS, STAFF WRITER

Follow Lee Harris on Twitter <[link removed]>

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