In a significant move amidst tightening U.S.-China technology tensions, Taiwan Semiconductor Manufacturing Company (TSMC) has informed its Chinese AI and GPU clients that it will stop shipments of all 7nm and more advanced chips to them starting November 11, 2024. This decision, reportedly enforced through direct emails to customers, aligns with U.S. government demands, with the goal of preventing any bypass of U.S. export restrictions on advanced semiconductors.

This action, initiated under pressure from the U.S. Department of Commerce, follows previous incidents where sanctioned Chinese companies obtained chips through intermediaries. Sources indicate that the Biden administration, working with TSMC, is in the process of creating a more stringent review framework that will require U.S. approval before TSMC can supply advanced chips to Chinese entities. 

The restrictions are anticipated to affect not only AI chips but may extend to broader applications, depending on future negotiations. While TSMC has sought to limit the impact on non-AI clients, such as smartphone chip producers, ongoing U.S. regulatory discussions leave the final scope of restrictions uncertain.

Adding to the complex geopolitical landscape, the recent U.S. presidential election, with Donald Trump as the victor, brings further uncertainty. It remains unclear whether the Biden administration will rush to establish the new regulations before Trump's inauguration or defer to his administration's policies.

Amidst these shifts, TSMC stands to gain additional support for its U.S. manufacturing initiatives. Reports from Bloomberg and Reuters highlight that the company is close to finalizing substantial grant and loan agreements, which will provide billions in funding for its semiconductor facilities in Arizona. The anticipated support package includes approximately $6.6 billion in grants and up to $5 billion in loans, strengthening TSMC's strategic position in the U.S. and securing its role in America's chip manufacturing future.

For Chinese AI companies, TSMC's decision represents a major setback. Without access to TSMC's advanced processing technologies, they face increased costs, longer development timelines, and potential declines in competitiveness. Some may look to domestic foundries, such as SMIC, which has made strides in developing 5nm chips. However, SMIC's capabilities currently trail those of TSMC, both in cost and production yield, leading Chinese companies to reassess their production strategies amidst a reshuffling supply chain.