The TSMC Bottleneck

The Empty Shelf

One way to think about the US-China chip war is that it is a contest of government decrees. The US Department of Commerce says “you can’t sell that chip,” and so Nvidia can’t sell that chip. Then, after some high-level meetings and a change of heart, the White House says “okay, you can sell that chip again,” and so Nvidia can. Simple enough.

But then a funny thing happened. Last week, after the Trump administration reversed course and gave Nvidia the green light to resume sales of its H20 AI processor to China, Nvidia reportedly turned to its eager Chinese customers and said, in effect, “Great news, but we don’t really have any to sell you.” This is a weird state of affairs. The political obstacle was removed, only to reveal a much more stubborn, physical one. It is worth asking how a $4 trillion company, having just won a major policy victory, finds itself with an empty shelf. Here's Reuters on the underlying problem:

The U.S. government's April ban on sales of the H20 chips had forced Nvidia to void customer orders and cancel manufacturing capacity it had booked at chipmaker Taiwan Semiconductor Manufacturing (TSMC), said the report in tech publication The Information, citing two people with knowledge of the matter.

TSMC had shifted its H20 production lines to produce other chips for other customers, and manufacturing new chips from scratch could take nine months, Nvidia CEO Jensen Huang said at a media event in Beijing this week, according to the report.

This gets at the core of the issue, which is that the semiconductor supply chain does not operate like a software update. You can’t just flip a switch. Making advanced chips is one of the most complex, expensive, and time-consuming manufacturing processes in the world. A company like TSMC, which has a near-monopoly on this process, runs its multi-billion-dollar fabrication plants, or “fabs,” on a rigid, long-term schedule. Its capacity is a scarce and precious resource, booked solid by the world’s biggest tech companies months or years in advance.

Think of it like an airline that has sold every single seat on every flight for the next year. If a major corporate client is suddenly forced by the government to cancel its entire travel budget, the airline doesn’t fly those planes empty. It immediately sells those now-vacant seats to the long line of other customers on the waitlist. If, a few months later, the government changes its mind and the original client wants its seats back, the airline can only shrug. The seats are gone. The client has to get back in line and wait for an opening.

This is, roughly, what happened to Nvidia. The abrupt policy change in April forced it to cancel its production slots at TSMC, which were then filled by other customers. Now that the policy has been un-changed, Nvidia has to get back in the queue.

This supply chain whiplash has broader consequences. For one, it makes American suppliers look profoundly unreliable. For a Chinese tech company planning its data center buildout over the next several years, a superior American chip that might be banned at a moment's notice is a much riskier bet than a slightly less powerful, but dependable, chip from a domestic supplier like Huawei. In a sense, the policy volatility is an unintended gift to Nvidia’s biggest rival. It seems that in the high-stakes game of AI, the decisions made in Washington or at Nvidia’s headquarters are only one part of the equation. The other part is the unyielding, months-long production schedule of a factory in Taiwan.

Breaking Up With SpaceX Is Hard to Do

One way to think about the relationship between a government and its biggest contractors is that the government holds all the cards. It has the money, it writes the contracts, and it can, if it gets angry enough, take its business elsewhere. When President Trump, in the midst of a public feud with Elon Musk, threatened to “terminate” SpaceX's federal contracts, it seemed like a straightforward exercise of that power.

The threat, however, soon ran into the hard wall of operational reality. The Trump administration, according to The Wall Street Journal, actually went and looked into it. The review, intended to find waste and cut ties, instead underscored a rather awkward truth: for many of its most critical needs, the U.S. government has no one else to call. Breaking up, it turns out, is hard to do when the other person owns the only spaceship.

The story of the review itself is a wonderful piece of bureaucratic drama. After Trump’s public threat, a senior official at the General Services Administration reportedly began sending out spreadsheets, or “scorecards,” to the Pentagon, NASA, and other agencies, asking them to list all their SpaceX contracts and evaluate whether a competitor could do the job better. The Wall Street Journal reported on what happened next:

Instead of terminating SpaceX contracts after reviewing the data, White House and agency officials, including those at the Pentagon, determined that most of the deals were vital to the missions of the Defense Department and NASA, according to some of the people familiar with the matter. One of the people said some SpaceX contracts could face continued scrutiny.

This gets at the central dilemma. Over the last decade, SpaceX has quietly become a piece of critical national infrastructure. It is not just one vendor among many; in several key areas, it is the only vendor. The administration's own review effectively confirmed that SpaceX has a functional monopoly on:

1. Getting Americans into space. SpaceX’s Crew Dragon is the only U.S. vehicle certified to fly NASA astronauts to and from the International Space Station. There is no Plan B.
2. Affordable, reliable rocket launches. The company’s reusable Falcon rockets have become the workhorses for launching everything from GPS satellites for the Space Force to classified payloads for intelligence agencies.
3. A dominant satellite internet service. Its Starlink and Starshield divisions provide crucial communications capabilities to the military and other government agencies.

This is a unique predicament. The government has outsourced its access to space to a private company run by a notoriously mercurial CEO, creating a situation where political threats run headlong into the unyielding reality of industrial dominance. While rivals like Blue Origin and United Launch Alliance are years away from offering comparable services, the government finds itself in a co-dependent relationship it can't easily exit. The White House may write the checks, but Elon Musk still holds the keys to the rocket.

The Scoreboard

• Cybersecurity: Microsoft to Stop Using Engineers in China for Tech Support of US Military, Hegseth Orders Review (Reuters)
• Social Media: Blackstone Drops Out of Consortium Bid for TikTok US, Source Says (Reuters)
• E-commerce: China’s Top Market Regulator Summons Alibaba, Meituan, JD.com Over Delivery Price War (SCMP)
• Startup: Elon Musk’s Neuralink Filed as ‘Disadvantaged Business’ Before Being Valued at $9 Billion (CNBC)