TSMC Chips Found in Huawei AI Gear--Despite Sanctions. Here's Why Investors Should Worry

The discovery of Taiwan Semiconductor Manufacturing Company (TSMC)-manufactured chips in Huawei’s AI processors, despite stringent U.S. sanctions, has reignited concerns about compliance risks in the global semiconductor supply chain. A 2024 investigation by TechInsights revealed that Huawei’s Ascend 910B AI chip, critical for its cloud and edge computing systems, contained components made by TSMC—a direct violation of U.S. export controls. The chips were reportedly diverted through intermediaries such as Chinese firms Sophgo Technologies and PowerAir, which were later added to the U.S. “entity list” in early 2025. This incident underscores vulnerabilities in TSMC’s supply chain oversight and raises critical questions for investors about operational risks, geopolitical tensions, and the long-term viability of chipmakers’ compliance strategies.

The Sanctions Landscape: Compliance Gaps and Strategic Risks

Since 2020, U.S. sanctions have prohibited TSMC from manufacturing advanced chips for Huawei due to concerns over national security and China’s military-civil fusion strategy. The restrictions, enforced under the Export Administration Regulations (EAR), bar any entity using U.S. technology—such as TSMC’s fabrication tools—to produce semiconductors for Huawei without a license. TSMC, which relies on U.S. equipment from Applied Materials and Lam Research for its 5nm and 7nm processes, has adhered to these rules, halting direct shipments to Huawei since September 2020.

However, the 2024 incident exposed a critical flaw: intermediaries can exploit legal gray areas to bypass sanctions. Sophgo and PowerAir allegedly sourced TSMC-manufactured chips for non-Huawei projects but redirected them to Huawei’s supply chain. TSMC claims it halted shipments to the involved clients and reported the breach to U.S. authorities, but the episode highlights the challenge of tracking end-use in a fragmented fabless model, where foundries like TSMC lack visibility into downstream applications.

Risks for TSMC and Investors

The incident poses three key risks for TSMC and its investors:
1. Operational and Legal Penalties: U.S. authorities could penalize TSMC for indirect noncompliance, even if unintentional. The company faces fines or loss of access to U.S. technology, which is critical for its advanced processes.
2. Reputational Damage: The breach undermines TSMC’s reputation as a reliable, compliant partner. Institutional investors may grow wary of exposure to geopolitical disputes.
3. Supply Chain Complexity Costs: TSMC’s pledge to strengthen due diligence—such as vetting clients and tracking chip destinations—will likely increase operational expenses.

Analysts estimate that compliance costs for semiconductor firms could rise by 5–10% as companies invest in blockchain-based traceability systems or third-party audits. For TSMC, already facing pressure to maintain margins amid a global chip oversupply, these costs could squeeze profitability.

Geopolitical Tensions and the AI Chip Race

The U.S. response to the 2024 breach—blacklisting 16 Chinese firms in early 2025—reflects a broader strategy to curb China’s access to advanced AI and semiconductor technologies. The Biden administration has doubled down on export controls, requiring foundries to enforce stricter checks on Chinese-linked customers. This creates a “lose-lose” scenario for TSMC: comply with U.S. rules and risk losing Chinese market share, or face penalties for noncompliance.

Huawei’s ability to secure alternative chip sources—despite sanctions—also signals a resilience that could force TSMC to reconsider its market exposure. Meanwhile, the U.S. continues to pull ahead in AI chip development, with firms like NVIDIA’s H100 GPUs requiring 2–4 times less computing power than Chinese alternatives like the H800. This technological gap, exacerbated by sanctions, could widen further, with ASML’s CEO warning that China’s semiconductor industry may lag the West by 10–15 years without access to extreme ultraviolet (EUV) lithography tools.

Market Impact: TSMC’s Stock and the Semiconductor Sector

TSMC’s stock has been volatile since 2020, reflecting investor anxiety over geopolitical risks.

While TSMC’s market cap remains robust ($320 billion as of early 2025), its valuation hinges on maintaining access to both U.S. technology and Chinese demand. Competitors like Samsung, which has less U.S. equipment dependency, may gain an edge. Meanwhile, broader semiconductor stocks (e.g., the SOX index) have underperformed tech giants like Apple and Microsoft in 2024–2025, signaling investor skepticism about the sector’s growth trajectory amid trade wars.

Conclusion: Navigating the Compliance Minefield

Investors in TSMC—and the broader semiconductor sector—should worry about three interconnected factors:

1. Compliance Costs: TSMC’s 2024 breach and subsequent entity list expansions signal rising operational expenses. Compliance programs could cut into margins, especially as competitors like Intel and Samsung invest in U.S.-centric foundries.
2. Geopolitical Volatility: U.S.-China tensions over AI and semiconductors show no sign of easing. TSMC’s role as a linchpin in both supply chains and national security debates makes it a prime target for regulatory overreach.
3. Market Fragmentation: The diversion of TSMC chips to Huawei via intermediaries reveals the fragility of global supply chains. Investors must prepare for supply disruptions or reputational hits if similar incidents recur.

The stakes are clear: TSMC’s 2024 compliance failure, while unintentional, has already cost it $1.2 billion in lost revenue from suspended contracts with Sophgo and PowerAir. With the U.S. adding 16 entities to its blacklist in 2025—and likely more to come—investors should expect continued volatility. For now, the semiconductor industry’s golden age may be over, replaced by a new era of geopolitical caution and compliance-driven costs.

In this landscape, investors are advised to prioritize firms with diversified supply chains, minimal exposure to sanctions, and robust compliance frameworks—while remaining wary of TSMC’s delicate balancing act between two superpowers.