No Water, No Workers, No Chips

All roads lead to Phoenix. On the gravy train of greenfield investment riding on the back of Inflation Reduction Act legislative incentives in the United States, no county ranks higher than Arizona’s Maricopa. The county leads the nation in foreign direct investment, with Taiwan Semiconductor Manufacturing Corp. (TSMC), Intel, LG Energy, and others expanding their footprint in the Grand Canyon State. But Phoenix is neither the next Rome nor the next Detroit. The reasons boil down to workers and water.

First, the labor. America’s skilled worker shortage has been well documented since before the Trump-era immigration slump and pandemic border closures. Especially in the tech industry—the United States’ most productive, high-wage, and globally dominant sector—a huge deficit in homegrown engineering talent and endlessly bungled immigration policies have left Big Tech with no choice but to outsource more jobs abroad.

Arizona dangled its low taxes and sunshine, but TSMC has had to fly in Taiwanese technicians to jump-start production at the 4 nanometer chip plant that was meant to be completed by 2024, but has been delayed until 2025 at the earliest.

The salvage operation calls into question whether the more advanced and miniaturized 3 nanometer plant—scheduled to open in 2026 will stay on course. (With two-thirds of its customer base—including Apple, AMD, Qualcomm, Broadcom, Nvidia, Marvell, Analog Devices, and Intel—in the United States, it’s no wonder TSMC wants to speed things up.)

From electric vehicles to gaming consoles, the forecasted demand for the company’s industry-leading chips is projected to rise long into the future—and its market share is already north of 50 percent. Given the geopolitical risks it faces in Asia, a well-trained U.S. workforce could give it the comfort to establish the United States as a quasi-second headquarters. After all, Morris Chang, the company’s founder, had a long first career with Texas Instruments.

Water risk brings political risk for companies. It would be better to direct capital allocation to climate resilient regions.But the next slowdown they may face is Arizona’s dwindling water supply. In just the past year, Scottsdale cut off water to Rio Verde Foothills, an upscale unincorporated suburb on its fringes, due to the region’s ongoing megadrought and its curtailed allocation of Colorado River water. This was followed by Phoenix freezing new construction permits for homes that rely on groundwater.

Forced to find other sources, industry players have stepped up buying water rights from farmers, essentially bribing them to stop growing food that would serve the region’s fast-growing population. Then there are the backroom deals involved in an Israeli company receiving the green light for a $5.5 billion project to desalinate water from Mexico’s Sea of Cortez and pipe it 200 miles uphill through deserts and natural preserves to Phoenix.

Water risk brings political risk for companies. Especially in Europe, governments are carefully weighing the short-term benefits of corporate investment versus the climate stress it exacerbates. They have good reason to be suspicious: Firms such as Microsoft have been notoriously inconsistent in reporting their water consumption, and promises to replenish consumed water haven’t been delivered on. And even if data centers are becoming more efficient, growing demand just means more of them. Some European provinces have blocked data center development, pushing them to locations with high heat risk.

Europe’s regulatory stringency has long been off-putting to foreign investors, which is what makes European officials so weary of Washington’s aggressive Inflation Reduction Act, CHIPS and Science Act and Infrastructure Investment and Jobs Act.

But to fulfill its promise of putting the United States on a path toward sustainable industrial self-sufficiency, these policies need to better align investment with resources, matching companies to geographies that best suit their needs. It would be better to direct capital allocation to climate resilient regions than to throw good money after potentially stranded assets.

Furthermore, Taiwan knows that its real special sauce is precisely the technically skilled workforce that the United States lacks. Yet TSMC has doubled down on Phoenix, a place without a reliable long-term water supply for industry, little in the way of renewable energy, and a construction freeze that will make it challenging to house all the workers it needs to import.

With all the uncertainty over both water and workers, this begs the question of whether the semiconductor company the entire world is courting would have been better off establishing its U.S. beachhead in the upper Midwest or northeast instead? Ohio, upstate New York, and Michigan rank high in greenfield corporate investments, resilience to climate shocks, and are abundant in quality universities and technical institutes.

Amid accelerating climate change and an intensifying war for global talent, how can those devising U.S. industrial policy better select the appropriate locations to steer investment to?

States with higher climate resilience than Arizona are starting to flex for greater investment. According to recent data, Illinois has climbed to second place nationally for corporate expansion and relocation projects. The greater Chicago area and state as a whole are touting their tax benefits, underpriced real estate, growth potential, and grants to prepare businesses to cope with climate change.

Other parts of the Great Lakes region, such as Michigan and Ohio, are also regaining confidence in their industrial revival, pitching heavily for both domestic and foreign commercial investment while emphasizing their affordability and climate adaptation plans.Canada hasn’t yet rolled out Inflation Reduction Act-style tax breaks to lure investors, but it abounds in critical minerals for EV batteries.

Just over the border, Canada has been wildly successful in poaching foreign skilled workers unable to secure or maintain green card status in the United States while also investing heavily in economic diversification—all with the benefit of nearly unlimited natural resources and energy supplies. While Canada hasn’t yet rolled out Inflation Reduction Act-style tax breaks to lure investors, it abounds in critical minerals for EV batteries (nickel, cobalt, lithium and rare earths such as neodymium, praseodymium, and niobium) as well as hydropower.

The more that climate change warps the United States, the more grateful it should be that its most natural and staunch ally occupies the most climate resilient real estate on the North American continent, even taking into account the raging wildfires of this summer. But rather than covet Canada the way China does Russia—as a vast and depopulated resource bounty—the United States and Canada should cooperate far more proactively on a continental scale industrial policy that would bring about true self-sufficiency from the Arctic to the Caribbean.

One can easily imagine Greenland joining one day—the country already enjoys autonomy from its colonizer (Denmark) and is now pushing for complete independence, driven partly by the desire to control more of the riches that climate change has revealed it to possess.

Meanwhile, in Taipei, there are far more complex geopolitical consequences to consider. TSMC has long been considered Taiwan’s “silicon shield,” a leader of industry so important that a conflict that took it offline would be a major own-goal for China. But it is precisely the combination of the China threat, environmental stress, and pandemic-era supply chain disruptions that convinced TSMC’s customers that its home nation represents too large a concentration risk.

Now TSMC and its rivals are expanding production from Japan to the United States, Europe, and India. This globally diversified set of chip manufacturers is easier for China to exploit as countries more susceptible to Chinese pressure become less rigid in compliance with U.S.-led export controls over advanced technologies.

At the same time, if the United States no longer depends on Taiwan itself for the majority of its semiconductor supply in just five to seven years, will it be as willing to defend Taiwan militarily? This, not Ukraine, is what Beijing is watching for as it pursues its own “Made in China” quest for self-sufficiency.

Industrial policy is back in vogue as a national security and economic strategy. But to get it right requires aligning investment into industry and infrastructure with the geographies of resources and resilience. The countries that build climate adaptation into their strategies will be the ones that build back better.

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