Taiwan Semiconductor Manufacturing (TSMC) could face a fine of $1 billion or more following a U.S. export control investigation over a chip it made that ended up in a Huawei AI processor, sources familiar with the matter said.

The Investigation

The U.S. Department of Commerce is investigating TSMC’s involvement with Sophgo, a China-based company. TSMC made a chip that matched one found in Huawei’s high-end Ascend 910B AI processor. According to two anonymous sources the chips were likely supplied to Huawei, a company on the U.S. trade blacklist restricting it from receiving goods manufactured with U.S. technology.

  • TSMC’s involvement: TSMC has produced nearly 3 million chips in recent years that matched the design ordered by Sophgo. These chips likely ended up being used by Huawei.
  • Export control regulations: The $1 billion-plus penalty is based on U.S. export control laws. These regulations allow for fines up to twice the value of the transactions that violate the rules.

Impact of U.S. Regulations

As TSMC’s manufacturing process uses U.S. technology its Taiwan-based factories fall under U.S. export controls. This restricts the company from producing chips for Huawei or any Chinese entity without a U.S. license.

  • TSMC’s violation: Due to the AI-focused design of the chip,  Lennart Heim a researcher at RAND Technology and Security Policy Center, noted that TSMC should not have made chips for any company in China, given the risk of the chips being diverted to restricted entities like Huawei.
  • Market reaction: Following the news TSMC shares in the U.S. saw a reversal of nearly a 3% gain dipping slightly into negative territory.

U.S.-Taiwan Relations at a Critical Juncture

The potential fine comes during a sensitive period in U.S. Taiwan relations. Recently, former President Trump imposed a 32% tariff on imports from Taiwan although semiconductors were exempt from the tariffs. Despite this the Trump administration has hinted at possible future tariffs on semiconductor products.

  • TSMC’s commitment to the U.S.: In March, TSMC announced plans for a $100 billion investment in the U.S. including building five new chip facilities in the coming years.
  • Trump’s stance: It remains unclear how the Trump administration will move forward with the investigation or what actions will be taken against TSMC. Some officials have suggested pursuing higher penalties for export violations.

Commerce Department’s Role

A Commerce Department spokesperson declined to comment on the matter. However Nina Kao, a TSMC spokesperson, confirmed that the company is committed to complying with all laws. TSMC has not supplied to Huawei since mid-September 2020 and is fully cooperating with the investigation.

  • Next steps: The Commerce Department typically issues a “proposed charging letter” when it believes a company has violated export control laws. This letter usually includes the alleged violations, the value involved and a proposed penalty giving the company 30 days to respond.

U.S. Officials Focus on Export Control Violations

At a conference in Washington, U.S. Commerce Secretary Howard Lutnick highlighted the increasing focus on export control enforcement, particularly regarding violations from companies dealing with China.

“We are going to seek a dramatic increase in enforcement and fines for those who break the rules,”

Lutnick stated, emphasizing the importance of curbing activities that could threaten U.S. interests.

Jeffrey Kessler, confirmed as Under Secretary of Commerce for Industry and Security in March, also expressed concerns about TSMC’s involvement in the Huawei issue, calling it “a huge concern.” He emphasized the need for strong enforcement in such cases.

Historical Precedents for Fines

In rare cases, companies have faced multi-billion-dollar penalties for violating export control regulations:

  • In 2023, the Bureau of Industry and Security (BIS) imposed a $300 million penalty on Seagate Technology Holdings for shipping over $1.1 billion worth of hard drives to Huawei.

TSMC Under Scrutiny Since Fall 2023

TSMC’s dealings with Huawei came under intense scrutiny in the fall of 2023, following a TechInsights report. The Canadian tech firm found a TSMC-made die in Huawei’s Ascend 910B AI accelerator.

  • Actions taken: Following this finding, TSMC suspended shipments to Sophgo and was later ordered by the Commerce Department to halt shipments of seven-nanometer or more advanced chips to China, as these could be used in AI applications.
  • Sophgo’s involvement: In January, Sophgo was added to the Commerce Department’s restricted trade list, joining Huawei. Sophgo denied any business relationship with Huawei but did not respond to requests for comment.

The Ascend 910B AI Chip

Huawei’s Ascend 910B AI chip is considered one of the most advanced mass-produced AI chips from a Chinese company. It serves as an alternative to leading AI chips from Nvidia in the global market.