Arizona’s Chip Manufacturing Support is Dwindling

Arizona, a key player in the bipartisan effort to boost American chip manufacturing, is facing a significant challenge as it prepares to lose over a quarter of its annual water intake from the Colorado River. This 1,400-mile river is vital for the region and other western states, and a recent federal decision regarding its diminishing flow has hit Arizona and its drought-prone desert communities particularly hard. The river supplies more than a third of the Grand Canyon State’s water. Arizona has long been a manufacturing stronghold since the semiconductor industry began, and it’s currently the site of major expansions by TSMC and Intel, which are building large factories to produce advanced chips for AI—a process that requires substantial water resources.

City planners and industry leaders are already taking steps to conserve water and explore alternative sources. As reliance on the Colorado River decreases, the cost of water is expected to rise for both manufacturers and residents. This shift is creating tensions over who will bear the financial burden of new infrastructure needed to adapt, as well as debates about the most valuable uses of water. The challenges of managing a limited water supply will only intensify as AI’s demand grows.

“Our economy is changing, and that’s really painful,” says Kathryn Sorensen, research director at the Kyl Center for Water Policy at Arizona State University. “When there’s a water scarcity issue, you have to start looking at what the uses of that water are that bring the most value to the community.”

Agriculture has been a cornerstone of Arizona’s economy since statehood, consuming over 70 percent of the state’s water. In contrast, industrial uses, including chip manufacturing, account for just 6 percent. While the water usage of semiconductor factories, or fabs, is relatively small compared to agriculture, the chip industry is rapidly expanding. Fabs require “ultra-pure” water for cleaning surfaces and etching sensitive chips, and producing this ultra-pure water through deionization and reverse osmosis demands more municipal water. A typical facility might use 10 million gallons of ultra-pure water daily, which can necessitate up to 16 million gallons of municipal water.

New chip factories are emerging in Arizona’s desert, bolstered by federal funding. The CHIPS and Science Act, signed into law in 2022, allocated $52.7 billion to enhance domestic chip manufacturing. With a $7.86 billion government grant, Intel plans to invest $32 billion in two new factories and expand an existing facility in Arizona. In 2025, Intel’s operations in Chandler are projected to withdraw over 2.7 billion gallons of freshwater, according to its latest corporate responsibility report.

TSMC, the largest chipmaker globally, received up to $6.6 billion in funding from the CHIPS Act and is set to build at least six new semiconductor fabs in Phoenix. The first fab in Arizona reportedly uses around 4.75 million gallons of water daily, equivalent to the daily water usage of over 14,000 homes, or about 2 percent of Phoenix’s housing. This figure will increase with each new fab and as TSMC develops more advanced manufacturing processes. The company claims to recycle 65 percent of the water it uses in Arizona, with plans to boost that to at least 90 percent upon completing a water reclamation plant.

The Colorado River is Arizona’s primary renewable water source, but the Colorado River Basin has been experiencing “unprecedented” drought for over 25 years, according to the US Bureau of Reclamation. Climate change is exacerbating the situation, as rising water demand compounds decades of overuse.

“There’s not enough water for everything we want to do with it,” Sorensen notes. “So what do we have enough water for? What are the uses we most value? Is it cotton or is it microchips?”

With 40 million Americans from Denver to Los Angeles depending on the Colorado River, states have been negotiating water allocations for years. The guidelines for managing this water, known as the “Law of the River,” are set to expire this year. After states failed to reach a consensus, the US Department of the Interior finalized a plan in August that outlines significant cuts for downstream states: Arizona, Nevada, and California. Arizona is expected to bear the brunt of these cuts, losing at least 760,000 acre-feet of water annually starting in 2027. An acre-foot is the amount of water needed to cover an acre to a depth of one foot, sufficient to supply about three homes for a year in the Phoenix area. The City of Phoenix consumes about 300,000 acre-feet of water each year.

Maricopa County, home to Intel and TSMC’s fabs, relies less on Colorado River water than other counties. Its main resource is groundwater, but surface water from the Colorado and Salt rivers still accounts for nearly 40 percent of the county’s supply.

Local leaders assert that Phoenix and surrounding cities are ready for water cuts, citing plans to compensate for shortages with underground water reserves and other surface sources. “For the most part, they’ve planned accordingly and can fall back onto water that was previously stored underground,” Sorensen explains.

However, even without immediate water shortages, Sorensen anticipates rising utility bills over time. Transitioning to alternative water sources will require new infrastructure, such as wells and pipes, which will likely drive up tap water prices.

Meanwhile, the city of Phoenix is voicing its concerns, with Mayor Kate Gallego stating that the federal decision to reduce the state’s water intake “does not provide the fair, basin-wide leadership the Colorado River crisis demands.” She added, “Phoenix is prepared for this moment because of decades of planning and conservation, and we will push for new federal support to mitigate the rising cost of water that will result from this federal decision.” A spokesperson for the city declined to provide further comments during an interview.

TSMC, located in Phoenix, will also face the same price increases as its neighbors. Phoenix is unique in that it charges the same water rates for businesses as it does for residential customers, unlike many cities that offer lower rates to attract industrial clients.

“The cost of water will increase for TSMC,” Sorensen states. “Everyone pays the same rate for water in the city of Phoenix, whether you’re a mom-and-pop store, a family of eight, or TSMC.”

TSMC and Intel declined to comment for this story, but both companies have publicly committed to reducing their fresh water consumption.

“A stable supply of water is critical to chip production,” said TSMC deputy spokesperson Nina Kao in an emailed statement. “One of the reasons the city of Phoenix was selected for our US expansion is because of their long-term water plan, which includes varied water supply sources and preparations for reduced water supplies over decades.”

Concerns are growing about the impact of AI and the tech industry on the region. The rise of AI has led to a new wave of semiconductor factories, chip packaging plants, and data centers across Arizona.

“It’s almost happening at a level that’s difficult to wrap your head around,” says Jennifer Martin-McLeod, a program manager for the Grand Canyon chapter of Sierra Club. “To try to say ‘Everybody take a breath and think through what we’re doing’ is difficult when you have that steamroller of money coming at your state to try to make it all happen overnight.”

She expresses broader worries about the health of the Colorado River and the wildlife that depends on it. Sorensen points out that a shortage of water from the Colorado River will lead to the depletion of groundwater in Central Arizona, as cities increase their reliance on local aquifers. “It’s something they can sustain, but it is only sustained at a cost to future generations,” she adds.

The impact of water cuts next year will primarily affect everyday residents, according to Martin-McLeod. “For me, that’s going to mean serious lifestyle changes. … But to a massive chip manufacturer, that’s maybe just part of the cost of doing business, you know?”