Key Points

• TSMC is exploring rare-earth-free motors for semiconductor manufacturing equipment
• China's export restrictions have exposed another vulnerability in the AI chip supply chain.
• Taiwan plans to establish domestic rare earth production capacity within three years

Taiwan's integrated circuit manufacturing company (TSMC) is exploring the removal of rare earth components from its factory equipment in order to reduce its exposure to Chinese export controls. Such controls could disrupt the production of advanced chips for NVIDIA, Apple, and other technology companies.

Reuters reported on October 22 that this measure focuses on motors that power automated machinery within semiconductor manufacturing facilities.

Three industry executives familiar with the discussions said that TSMC has already approached equipment suppliers regarding alternative solutions to rare earth magnets that are no longer needed.

This work is still in its preliminary stages, and the company has not yet incorporated this technology into its manufacturing network.

While TSMC explores motors that do not use rare earths, China is tightening export controls.

Rare earth magnets play an important role in industrial motors, especially in scenarios where equipment requires precise motion, high efficiency, and a compact design.

Inside semiconductor factories, automated machinery moves silicon wafers and other components through strictly controlled manufacturing processes.

Therefore, a shortage of specialized motors or replacement parts can make equipment maintenance, factory expansion, or production scheduling more complicated.

According to Reuters, TSMC is evaluating with its suppliers whether it is feasible to replace motors that rely on rare earths in the factory automation system.

As relevant discussions emerged, device manufacturers were already under pressure to expand their production capacity. Dutch semiconductor supplier ASML recently announced plans to produce over 110 units of EUV equipment per year by 2028.

China will implement export controls on certain rare earth materials, magnets, and related technologies by 2025, requiring permission for any international shipments.

These restrictions bring uncertainty to manufacturers that rely on specialized components, even if their direct suppliers do not operate in China.

However, Reuters has not confirmed that TSMC is currently facing a shortage, nor has it confirmed that its manufacturing output has been affected.

Why does China's rare earth restriction matter to NVIDIA and AMD?

TSMC manufactures advanced processors for large technology companies, including NVIDIA and AMD, making its production capacity crucial to the artificial intelligence industry.

TSMC recently expects its revenue for the fourth quarter to be between $52.3 billion and $54.3 billion, due to the ongoing expansion in demand for advanced computing.

Meanwhile, AMD has outlined its large-scale investments in the Asian supply chain, reflecting the industry's efforts to secure components and manufacturing capacity several years in advance.

Rare earth supply, however, brings another type of risk.

This restriction does not directly affect the design of the AI processor, but it may make the supply of equipment required for manufacturing these processors more complex.

Developing alternative motors may reduce some of this dependence, but the alternative systems still need to meet the stringent requirements of semiconductor factories for performance and reliability.

Such changes may also require additional testing and modifications to the existing manufacturing equipment.

TSMC has not disclosed any expected costs or deployment timelines for its transformation.

As TSMC expands globally, Taiwan plans to develop rare earth production

Taiwan is also separately promoting the enhancement of its domestic rare earth capabilities.

In February this year, Taiwan's Economic Minister Kung Ming-hsin stated that the government would support the Industrial Technology Research Institute in developing a pilot production line within three years.

The project aims to establish the necessary production capacity, with the ultimate goal of meeting approximately 50% of Taiwan's local demand for rare earths.

U.S. officials have also expressed interest in cooperating with Taiwan to diversify the supply chain of key minerals and expand processing capabilities.

This effort coincides with TSMC's broader expansion of its facilities in Arizona, however, building semiconductor factories overseas does not necessarily eliminate the dependence on equipment from international sources.

China's mineral export policy has also attracted investors' attention to alternative producers, including USA Rare Earth. The company is developing local mining and magnet manufacturing capabilities in the United States.

At the same time, despite the strong infrastructure demand for AI, semiconductor stocks are once again facing selling pressure.