MS ORTAGUS: Thanks. Hello again, everyone. We’re three for three briefings today. I know it’s at the end of the day and we do a full Friday afternoon, so thank you so much for dialing in. Just a reminder that this call is on the record but is embargoed – the contents are embargoed – until the end of the call, please.
We wanted to highlight two separate but related developments for your attention today. We note with pleasure that on May 14th, Taiwan Semiconductor Manufacturing Corporation, or TSMC, announced that it intends to invest 12 billion in the state of Arizona starting in 2021 to develop the most state-of-the-art five-nanometer semiconductor fabrication foundry in the world. The TSMC deal is a game changer for the U.S. semiconductor industry that will bolster American national security and our economic prosperity.
Meanwhile, the U.S. Department of Commerce announced today its plan to restrict Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad. This action is intended to cut off Huawei’s, and by extension, the PRC’s, efforts to undermine U.S. export controls.
To help put these events in broader context, I’m joined for this on-the-record briefing with Keith Krach, our under secretary for economic growth, energy, and the environment; as well as Assistant Secretary Chris Ford, who heads our Bureau of International Security and Nonproliferation; and for Q&A we have Mung Chiang, the Science and Technology Adviser to the Secretary. They’ll all be available to answer your questions after their brief introductory statements.
As always, the contents of this on-the-record briefing are embargoed until the end of the call, and to get into the question queue, please dial 1 and then 0. We’ll start with Keith’s opening statements first. Keith, go ahead.
UNDER SECRETARY KRACH: All right, thanks so much, Morgan, and thanks to everyone for being here. A happy Friday to you. So this is a big day for America – for national security, our economic security, and our long-term prosperity. And I’d like to highlight the three separate yet highly interrelated achievements of the week, and the first, as Morgan said, is the $12 billion investment by TSMC; the second is the tightening of export controls to restrain Huawei; and third, the continued implementation of the 5G Clean Path. Any of these alone is – are newsworthy, but together they represent a 5G national security trifecta.
And first let me turn to TSMC to give you an overview. TSMC will invest $12 billion, a truly massive sum, in perhaps one of the most historic onshorings in decades, and from 2021 to 2029 to develop the world’s most advanced five-nanometer chip fabrication facility in Arizona. And this means that chips critical to our lives and national security will once again be made in America, where the semiconductor industry was first invented. The chips will power everything from smartphones in our pockets to 5G base stations to the F-35s that help defend our homeland.
The deal is a game changer for the U.S. semiconductor industry. TSMC is bringing its supply chain companies to the United States. This is a giant leap towards bringing high-tech manufacturing back home where it belongs and keeping that commitment that President Trump has made. The fab – and they call these manufacturing facilities “fabs” – the fab will promote the creation of thriving, high-skilled sub-industries known as clusters, and that will help ensure American leadership in technologies of the future. And I want to say something about so highly skilled that in talking with the chairman of TSMC, over 50 percent of the employees that are going to work in this fab are going to have master’s degrees or higher. And the clustering effect is perhaps unique to the semiconductor industry or at least really intensified, and that’s where all that ecosystem builds up around. I mean, that’s how Silicon Valley became Silicon Valley.
The investment will of course create thousands of jobs across the entire supply chain and create a broad ripple effect of technical training and know-how throughout the tech ecosystem. TSMC will train hundreds of American workers on its leading-edge technologies in Taiwan, and these workers will bring skills back home, where they will proliferate. The deal will also spur cutting-edge research and development by American universities and campuses, and in particularly in the equipment manufacturers themselves.
Not least of all, it strengthens our relationship with Taiwan, a vibrant democracy and a force for good in the world and a great friend to the United States. Yet again, President Trump is delivering on his pledge to make America stronger, safer, and more prosperous.
Let me move on to the second part of that trifecta, and that’s with the Foreign Direct Product Rule. All of this is also supported by the day’s other big news: expansion of the Foreign Direct Product Rule to prevent Huawei from dodging U.S. export controls. And Dr. Ford will talk about this in detail after I complete my remarks, and I simply want to make this point: Since its addition to the entity list one year ago today, Huawei has persisted in its efforts to circumvent U.S. export controls. Huawei benefited from a loophole that allowed it to make use of U.S. electronic design software and manufacturing equipment to continue to produce its own semiconductors.
That ends today. The United States is closing this loophole to prevent Huawei from exploiting U.S. technology and threatening our national security. Quite simply, Huawei cannot be trusted to respect the rule of law. It is required by the PRC to cooperate with Beijing’s security and intelligence services, and that really relates to the law that I’ve talked with you many times about in terms of the National Intelligence Act of the PRC. We urge our allies and our partners to join us in aligning their domestic export-control laws to address the very real security threat posed by Huawei and the PRC. Huawei is a PRC state-supported firm serving as a tool for the Chinese Communist Party. The United States will continue to restrict most exports to Huawei.
And the third part of that trifecta is the Clean Path. And let me call your attention to the State Department’s 5G Clean Path initiative, and that was announced by Secretary Pompeo on April 29th. It said that 5G data entering or exiting U.S. diplomatic facilities, domestically and overseas, like in our embassies, must transit only through trusted equipment. The 5G Clean Path is an end-to-end communication path that does not use any 5G transmission, control, computing, or storage equipment from an untrusted vendor, including Huawei and ZTE. 5G Clean Path implementation in the 2019 NDAA prohibits U.S. executive agencies from procuring, obtaining, extending, or renewing contracts for any equipment, system, or telecommunications services that make the use of Huawei, ZTE, and Xiaomi, and other untrusted PRC vendor equipment.
The 5G Clean Path embodies the highest standards of security against untrusted, high-risk vendors by blocking their ability to siphon sensitive information into the hands of the PRC. And we encourage all of our allies and partners to join us in requiring a 5G clean path for their diplomatic facilities overseas.
So just to sum it up, each of these initiatives form a three-legged stool of trust, security, and resilience for the United States. Each reinforces the others and greatly augments U.S. national and economic security, especially as we’re facing increasing competition from the PRC.
The last five months can leave no doubt in the minds of any freedom-loving nation that the PRC is untrustworthy, and only by maintaining solidarity with our trusted partners can we guarantee a secure future for the United States, our companies, and our friends.
So with that (inaudible) I’d like to turn it over to Dr. Ford for his comments.
ASSISTANT SECRETARY FORD: Thank you, Keith, and good afternoon, everybody. As Under Secretary Krach noted, while major suppliers of semiconductors are clearly flocking to the United States to take advantage of the opportunities available here in America, the other piece of good news is that we are also in the Trump administration taking decisive steps to protect U.S. technology and suppliers from being exploited by Huawei and its masters in the PRC.
We announced today the expansion of something called the Foreign Direct Product Rule, or FDPR, if you will, which is designed to help keep Huawei, as the Under Secretary indicated, from circumventing U.S. export controls. This expanded rule will impose a U.S. licensing requirement, an export-control licensing requirement whenever anyone anywhere in the world uses U.S. technology or software to design or produce semiconductors for Huawei. Companies wishing to sell certain items to Huawei produced with U.S. technology must now obtain a license from the United States.
Now, this is done because we need to understand how Huawei is taking advantage of cutting-edge U.S. technology in this field, and we need to make it harder for Huawei to use this technology against us, against our allies, and against our partners. These licensing requirements will help us do that.
The key issue today, and I’d like to add a bit of a gloss on what the Under Secretary had said, is why we are doing this and why the United States believes Huawei to be such a threat. And I would say that our concerns with Huawei are at least threefold. First of all, for starters, Huawei engages, clearly, in illegal activity, including intellectual property theft from U.S. companies and the evasion of U.S. sanctions, in support of the world’s biggest state sponsor of terror and a notorious proliferator. The U.S. Department of Justice has issued not one but two indictments against Huawei for a range of crimes, including intellectual property theft, violations of the Racketeer Influenced and Corrupt Organizations Act – that is to say, RICO – and for helping Iran evade sanctions. This is not the sort of entity with which reputable U.S. or other foreign companies should be doing business as usual, and our changes reflect that.
The second factor is that Huawei is an enabler for human rights abuses by the People’s Republic of China. It provides technological support for Chinese Communist Party ethnic cleansing in Xinjiang, for example, and for the party’s technologically facilitated surveillance-and-control authoritarianism throughout China. Huawei also helps make such technologies available for export to other repressive regimes. So that’s the second factor.
And the third one is that – is perhaps in some ways the most troubling over time, and that is that because of the PRC’s governance model and standing Chinese laws, Huawei is a company that is structurally subject to manipulation and to control by the Chinese Communist Party, essentially at any time. Whenever the party calls upon it, Huawei can function – and indeed has no choice but to serve – as a tool of strategic influence and political manipulation, including through providing support where it can to the PRC’s broader military-civil fusion strategy for acquiring Western technology and diverting that technology to military and security uses that further the CCP’s, the Chinese Communist Party’s, repressive agenda at home and its geopolitical revisionism abroad.
So in our view, U.S. national security simply requires that we put mechanisms in place to understand how U.S. exports and technology are being used by and for Huawei. These new licensing rules help to do that so that we can keep an eye on any malign activity that runs contrary to our foreign policy and national security interests, and indeed I would suggest those of all free and democratic countries.
So for these reasons, we needed to take action to prevent Huawei from flaunting our export-control laws, exploiting American technology, and threatening our national security. And we would be happy to answer such questions as you might have as best we can about how it is specifically that we are doing that.
But I should probably turn things back over to Morgan. Thanks.
MS ORTAGUS: Thanks, Chris. I know we’ve got a queue started already. We’re going to try our best to get through everybody in the queue. And again, just dial 1 and 0 if you’d like to be added.
First up is from Reuters, we have Humeyra.
QUESTION: Hello, can you hear me? Hi.
MS ORTAGUS: Yes, we (inaudible).
QUESTION: Thank you. Can I ask a couple of things? Can you comment on the timing of this? TSMC announced this investment, and the next day USG has moved to amend this export rule, which is something that could restrict its sales. Why now? And can you talk a little bit about whether this investment actually makes it easier for them to get the license?
And lastly, can you talk a bit about the incentives that were given to TSMC? Was it federal money, tax breaks, what is the breakdown? Thank you so much.
UNDER SECRETARY KRACH: First of all, with regard to the timing, the Direct Foreign Product Rule has been in the works for quite some time. So that was on a path to happen. And then also on a separate path were discussions with TSMC, and they actually announced on their earnings call – on their last earnings call that they were looking at this. So they lined up together. And then it also lined up as well with the Clean Path.
And I think – now, nothing really happens by total coincidence, but this went – on these particular days it actually did. But I think you’ll also see future announcements in terms of different clean strategies coming down the road that will be rolled out, and we’ll be having some other announcements in the June timeframe. We haven’t set a date for it, but there’s some more coming down the path.
And I think a big thing in terms of the deal itself, the Trump administration is committed to advancing the reshoring of manufacturing, particularly for critical components such as semiconductors, and this is a strategic imperative for our national security. And the administration policies will help make TSMC successful in their investment in the United States, and it will provide the same benefits to other investors and companies in the semiconductor industry. Our objective is that U.S. chip manufacturers build all their future fabs in the U.S., and also that other foreign chip manufacturers build their next state-of-the-art fabs in the United States to really create that ecosystem.
And the semiconductor was invented in the United States. We have tremendous capabilities here. Sixty percent of TSMC’s customers are based in the United States. So that’s kind of the rationale. So did I answer your question?
ASSISTANT SECRETARY FORD: Okay. If I might, Keith, just to add some —
UNDER SECRETARY KRACH: Yeah, sure.
ASSISTANT SECRETARY FORD: — gloss on that, just to underline what the Under Secretary said, that both of these things moved entirely on their own steam and on their trajectories and timelines. It was actually quite surprising to me that they lined up to be so close in sequence, but they are conceptually different and moved for different reasons.
I would say that the common element that they share in some respects is the fact that they are both in different ways reflections of the commanding comparative advantage that U.S. high technology skills and prowess and innovation in the realm of soft – of semiconductor design and fabrication. We have an extraordinary position in the global technology ecosystem by virtue of the skills and efforts of U.S. companies in this respect. And they – it’s not surprising in light of that both that we will need – both that our – that the United States would be an attractive location for companies to come to and take advantage of all that we have in this country to offer, and at the same time that we would need to be careful about making sure that others did not exploit and try to gain inappropriate access to our technology moving forward.
So these are both two sides of the same coin, but they are, in terms of timing, entirely coincidental.
MS ORTAGUS: Thanks. Okay. Let’s go over to Nick Wadhams from Bloomberg.
QUESTION: Hi, thanks very much. I just wanted to try to put a finer point on Humeyra’s question because I didn’t hear an answer there, just two issues. Is there any understanding with TSMC as part of this deal that it will get a license given that it gets about 10 percent of its revenue from Huawei, that that business will not be affected? And is the federal government offering any incentives or subsidies to TSMC as part of this agreement? Thanks.
UNDER SECRETARY KRACH: So the TSMC will not be granted a license or not granted a license based upon their commitment, their intent to build a five-nanometer fab here in the United States. So that’s not part of it at all.
If you look at this decision for their press announcement in the first place, it’s really a result of – they looked at the investment climate here in the U.S., and some of the statements they shared with us is President Trump’s tax cuts, regulatory reform, workforce development, and an emphasis on the high-tech innovation is a big reason why they decided to make that $12 billion commitment, along with the – as I mentioned, many of their main customers like Apple, (inaudible) Intel, AMD, Qualcomm, Nvidia are all customers, great customers for TSMC.
And so – and they – and I think they were really successful and galvanizing their ecosystem as well. So – and they looked at the workforce here as well. So – and there’s already a ecosystem here in the U.S. So I think it was a natural choice by them, but certainly one that reflects the great emphasis that President Trump has put on bringing jobs and – back to the United States, and a particular interest of what our focus is at the State Department, and that’s national security.
MS ORTAGUS: Thanks.
ASSISTANT SECRETARY FORD: And if I might, from my perspective, just to say that although we do not have someone from the Department of Commerce on the call, if we were to have someone from the Department of Commerce on this call, I have every confidence that they would be very, very clear and state unequivocally that all licenses are reviewed on their own merits and always will be.
MS ORTAGUS: Thanks, guys. Hey, Ruben, my email is acting up. Can you tell me who’s in the queue next, please? I’m sorry.
MR HARUTUNIAN: Sure. We’ve got Asa Fitch from The Wall Street Journal next.
QUESTION: Hi, guys. Thanks for doing this call. Where is this TSMC plant going to be exactly? We know Arizona; we don’t know anything more specific than that. Does that depend on the incentives you can offer, the biggest ones? And then just to echo what some others have asked, what are the incentives that have been discussed?
UNDER SECRETARY KRACH: With regard to the location in Arizona, the – I don’t think that’s been 100 percent nailed down. I believe it might be somewhere around the Phoenix area, but it’s not been 100 percent nailed down.
In terms of the incentives, I know there is a number of things that the United States Congress is looking at. I think they – they understood there’s some really good possibilities coming down the road as well as the climate for this. And there’s a lot we’re doing in terms of R&D, and I think that was a big point to it. But – and they did the math and it worked out for them.
MS ORTAGUS: Great. Thanks. We now have Ana Swanson from The New York Times.
QUESTION: Hi. Thank you so much for doing the call. I appreciate that. So setting the issue of the facility aside, do you think that TSMC will receive a license, or has the company received any assurances about the license? This – right, it seems like this regulation on Huawei announced today could be quite a blow to the company, and there are some rumors and reports that TSMC had received some kind of assurance. And if they had not, would TSMC be reacting negatively to this measure that you announced today that could clamp down on their revenue? Thank you.
UNDER SECRETARY KRACH: Well, I could say for a fact that there’s no assurance whatsoever on that. And about – I think roughly around 10 to 12 percent of TSMC’s business is China, and I think that is in essence almost primarily Huawei, so they will be restricted unless they’re granted a license. And there’s no assurances on that, and we don’t anticipate that.
MS ORTAGUS: Thanks. Let’s go over to Nick Schifrin, PBS.
QUESTION: Hey, guys, thanks for – thank you for doing this. Just wanted to switch over to 5G a little bit and have you zoom in on that. So the Secretary’s talked about what you spoke about earlier in terms of trying to protect U.S. institutions around the world, U.S. facilities around the world from 5G. What does that look like? Does that look like, I don’t know, some local businessman who wants to walk into the embassy can’t have a Huawei phone or something much more specific about U.S. infrastructure? And can you talk about the larger effort to try and convince countries around the world to get, for example, Nokia or Erickson 5G when Huawei’s been out front packaging 5G for over a year now? Thanks.
UNDER SECRETARY KRACH: So just to put the Clean Path in the most simplistic terms, what that means is that for traffic coming in, let’s say to a U.S. embassy or a U.S. military base, it cannot have touched a Huawei base station. Or if you have a Huawei – to the TELCO providers, they have a Huawei tower and a Huawei antenna, they’re going to need to put it in Ericsson or a Nokia one right alongside of it. So those technical details would be up to the TELCO operator. It definitely increases their cost if 5G Huawei is one of their vendors. And this is a 5G program, so most TELCO operators have not rolled out their pure 5G yet, but – so it will be a significant cost. And I forgot what your second question was.
MS ORTAGUS: Can – AT&T, can unmute Nick Schifrin’s line and let him re-ask?
UNDER SECRETARY KRACH: And Mung, you may want to – you may want to add —
MS ORTAGUS: Nick?
QUESTION: Yes. Can you hear me now?
MS ORTAGUS: Yes.
UNDER SECRETARY KRACH: — in terms of the Clean Path.
QUESTION: If you can hear me, what I was asking about, the second question is the larger context of the 5G battle. As you guys know, Huawei’s been packaging these 5G offers around the world for over a year. Obviously, you’ve been working with Nokia and Ericsson, so can you talk about the larger effort to try and convince countries not to buy these Huawei packages and instead consider the more expensive European ones?
UNDER SECRETARY KRACH: Sure. And we’ve had a lot of discussions with countries as well as TELCO operators, and it boils down to one word and one word only. It’s who do you trust. Because a lot of times people will say: Well, Nokia or Ericsson, they can’t do the job, or we’ve – we’re only going to put them on the edge, or they’ve given us a written agreement that there will be no back doors. Well, the fact of the matter is that AT&T, Verizon – T-Mobile, which is majority owned by Deutsche Telekom – NTT Docomo – they’re all rolling out with Nokia, Ericsson, or Samsung, so they can do the job.
In terms of hey, there’s no back door. Well, anybody from Silicon Valley knows – or anybody’s who’s been in the software business know there’s no such thing as a back door. There’s a front door every day because that software’s being updated almost every day, so they could slip in there anything that they – anything they want. And in terms of just putting it on the edge, well, a way to look at a 5G system, it’s like a necklace with chains. You’re only as strong as your weakest link. So once you’re in, you’re in.
So the fact of the matter is that the IT vendors have the keys to the kingdom, and so it depends who do you trust. And when you look at Huawei and ZTE, coming from a country where they have a national intelligence act that requires any state-owned company or otherwise or any Chinese citizen to turn over any information, proprietary technology, intellectual property, or data upon request to the Chinese Communist Party or to the Chinese Government or the PLA. And if they don’t, they have to suffer the consequences. Then – I think countries and TELCO operators really understand that, and I think now citizens of the world do as well. And we’re seeing that around the world.
And the other thing, too, is sometimes we say well, it’s so much less expensive, and I’ll say to them, “Well, you’re paying something, you’re getting ripped off,” because in a lot of cases, they’re giving it away for free. And my question is: Why do you think they’re giving it away for free? They want to be able to control it. They want to have access to the data.
MS ORTAGUS: Great, thanks. Let’s see. I think now we have Jeanne Whalen from Washington Post.
QUESTION: Oh, hello. Won’t the new commerce rule just incentivize fabs to buy their chip-making equipment from non-U.S. manufacturers? Like how hard would it be for GSMT or other fabs to just buy chip-making equipment from the Netherlands or other suppliers?
UNDER SECRETARY KRACH: Well, I would say in response to that that it depends what one wants to make. And one of the virtues of this approach is – that we’ve taken with the direct product rule – is precisely that it does put foundries all around the world on a level playing field and makes it very difficult simply to substitute in foreign supply. With respect to the cutting edge of chip technology, the Chinese technology companies of course would very much like to and are working very hard to try to indigenize all aspects of the supply chain. But at least for the moment and for at least some time to come, U.S. companies have still a very significant comparative advantage when it comes to the largely software-facilitated design tools that are involved in producing the very best chips.
One might be able to find non-U.S. providers for design tools for making somewhat less sophisticated chips, but if you really want to play on the cutting edge of this technology area right now, you still for the most part have to use U.S. technology. And so frankly, it’s taking advantage of that relative position that enables the direct product rule change that we have just rolled out to be effective, because it applies to anyone who wishes to use the very best tools in support of Huawei. And it doesn’t matter whether that user of those tools is in the United States or someplace else. So we regard this as a very elegant solution that in fact structurally does in fact address the concerns that you raise.
MS ORTAGUS: Thanks. Thanks so much. And our last question is going to go to Nike Ching, Voice of America.
QUESTION: Thank you. Good afternoon – for this phone call. How much will this deal pave the way for U.S.-Taiwan free trade agreement? And is a free trade agreement with Taiwan still on the table? Thank you.
UNDER SECRETARY KRACH: It – by the way, it won’t affect it at all. One thing that I can say, though, is we think it does nothing but strengthen the relationship between the United States and Taiwan. So nothing’s changed in terms of those discussions, and Taiwan’s been a great friend to the United States.
QUESTION: And can I —
MS ORTAGUS: Great, thanks – sure, go ahead, Nike. You can follow up.
QUESTION: Yes, thank you. So a more technical question: For people who do not know much about the semiconductor like me, could you please help us understand the five-nanometer semiconductor technology? And what can they do? What is so – such a game change deal, and why it’s so, like, state of the art? Thank you.
UNDER SECRETARY KRACH: By the way, Dr. Mung, if you’re – we haven’t heard from you, and this probably would be a good one.
DR CHIANG: Sure.
UNDER SECRETARY KRACH: And Dr. Mung comes to us from Purdue University where he was dean of engineering. Before that he was dean of electrical engineering at Princeton, three-time entrepreneur, did his PhD in 5G. So Dr. Mung, I turn over to you.
DR CHIANG: Thank you, Under Secretary Krach. Good afternoon, everyone. Thank you for sticking around. And I’m going to focus on this particular technology aspect of the first story, that is the very important TSMC investment in United States. And Under Secretary Krach summarized very well why this is a game-changer for the U.S. semiconductor industry that will bolster the American national security. And to answer the question just raised, indeed semiconductor is the backbone to the entire digital industry, going from artificial intelligence to autonomous vehicles to next-generation wireless networks. And indeed one can say that with this investment, now United States has a very vibrant 5G chip future. And this is the cutting-edge technology.
Different generations of semiconductor technology is often labeled by the number, and smaller the number the better, because you will be able to do more with the same given resource. And this five-nanometer technology will be the cutting-edge one, not just in the U.S. but around the world, and coming from one of the pioneering companies in the entire industry, coming from Taiwan, as mentioned, friend to the United States. And we have seen bipartisan support of such research and development leadership here in the United States, and with this latest cutting-edge semiconductor investment, we can anticipate a full blossom just like the old Bell Lab days, if you will. We can now anticipate a full blossom of American innovations in the coming years. Thank you.
MS ORTAGUS: Thanks, Mung. We appreciate that. Well listen, everybody, thank you so much for dialing in on a Friday. While we were on the call, we did issue, I believe – Ruben, correct me if I’m wrong, but we went ahead and issued the Secretary’s statement on the commerce action, is that right?
MR HARUTUNIAN: That’s right.
MS ORTAGUS: Okay, great, so you all should have that in your queues as well. So thank you so much, Keith, Chris, Mung. We really appreciate it. And hope everyone has a great weekend.
UNDER SECRETARY KRACH: Thank you.
DR CHIANG: Thank you, everyone. Cheers.
ASSISTANT SECRETARY FORD: Yes, thanks, Morgan. Have a great weekend.