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Sept. 22, 2024 at 1:48 pm ET

Taiwan Semiconductor Manufacturing Co.’s campus in Hsinchu, southwest of Taipei. Photo: An Rong Xu/Bloomberg News

Two chip-making giants have discussed building huge factory complexes in the United Arab Emirates that could transform the industry in the coming years and become a cornerstone for artificial-intelligence investments in the Middle East.

Top executives at Taiwan Semiconductor Manufacturing Co. TSM -1.21%decrease; red down pointing triangle, the world’s largest chip maker, have visited the U.A.E. recently and talked about a plant complex on par with some of the company’s largest and most advanced facilities in Taiwan, according to people familiar with the interactions.

Samsung Electronics 005930 0.32%increase; green up pointing triangle also is considering major new chip-making operations in the country in the years ahead, according to other people with knowledge of its strategy. Senior leaders of the South Korean company have visited the U.A.E. recently and discussed the possibility, they said.

Discussions are still in the early phases and face technical and other hurdles that mean they might not pan out. Under initial terms being discussed, the projects would be funded by the U.A.E., with a central role for Abu Dhabi-based sovereign development vehicle Mubadala, which is eager to develop a domestic tech industry. The broader goal would be to increase global chip production and help bring chip prices down without hurting chip-makers’ profitability, some of the people said.

A Mubadala spokesman said MGX, a state-backed company that is spearheading some of Abu Dhabi’s most prominent AI investments, had made semiconductor manufacturing a pillar of its strategy and was “in regular dialogue with partners around the world,” although there are no specific plans currently for a facility in the U.A.E.

U.A.E. sovereign investment vehicle Mubadala has a portfolio that was valued at around $300 billion as of 2023. Photo: Ali Haider/Shutterstock

The discussions with TSMC and Samsung reflect both the U.A.E.’s growing tech ambitions and a global push to fund expanded chip production, in large part to satisfy the needs of the AI boom. Costs have ballooned in recent years, to the point that a single cutting-edge chip factory can require $20 billion. Projects on the scale being discussed in the U.A.E. involve complexes that could contain numerous factories and cost over $100 billion in aggregate.

Abu Dhabi has one of the world’s largest pools of sovereign wealth, and Mubadala said its portfolio of investments was valued at about $300 billion as of last year.

Government officials and industry executives say substantial technical and political hurdles remain. One concern is that chip manufacturing requires large amounts of super-clean water for uses such as rinsing the silicon wafers that microscopic circuits are etched onto. Much of the U.A.E.’s water is produced through desalination and would require substantial purification.

There also are concerns about the availability of engineering talent to staff major new factories far from the companies’ home bases, in a country without much of an existing chip-making supply chain.

If TSMC and Samsung were to go forward, the projects could usher in a next wave of industry expansion following an era of manufacturing growth driven by government subsidies in the U.S., Europe and East Asia.

The U.S. is putting $39 billion of grants into domestic chip-making under 2022’s Chips Act, coupled with tax incentives expected to be worth much more. European leaders have cobbled together their own incentive packages, drawing in companies including Intel and TSMC.

As they consider new projects in the U.A.E., TSMC and Samsung have had discussions with U.S. government officials who are concerned about shipments of advanced AI chips into China, a U.A.E. trading partner. The parties have spoken to Biden administration officials about giving the U.S. oversight on the production and shipments of chips coming from any U.A.E. factories, although details have yet to be worked out.

“We have worked extensively with the U.A.E. on areas of advanced technology over the last two years, and the partnership is moving in the right direction, ” a U.S. National Security Council spokesman said.

The chip makers aren’t expecting a resolution of U.S. concerns about China to materialize soon, and construction on the factories likely won’t start until that happens, according to people involved in the discussions.

Senior Samsung leaders discussed the possibility of establishing major chip-making operations in the U.A.E. Photo: Adam Berry/Getty Images

The U.A.E. is a member of the Organization of the Petroleum Exporting Countries, and Abu Dhabi, its capital, is a major producer of oil and natural gas. Like other natural-resource powers in the region, Abu Dhabi has sought to diversify its economy in recent decades, using its oil wealth to invest in industries such as aluminum production.

The U.A.E. has made headway recently in its effort to be a player in advanced technologies. OpenAI Chief Executive Sam Altman has talked with investors in the U.A.E., among other places, about dramatically expanding production of chips, power and other essential inputs for developing AI—efforts that ultimately could entail investment of as much as $5 trillion to $7 trillion, The Wall Street Journal reported in February.

Emirati entities have forged ties with other big companies in AI, including a stake in the startup Anthropic of nearly $500 million and recent talks about participating in the latest funding round for Altman’s OpenAI. The country’s leading AI company, G42, received a $1.5 billion investment from Microsoft this year.

MGX also has partnered with companies including BlackRock and Microsoft on a fund announced this month to invest up to $100 billion expanding and building artificial-intelligence data centers.

Abu Dhabi has invested in the chip industry before, taking control of the former manufacturing operations of Advanced Micro Devices in 2008 as part of a spinoff. There were discussions then about a potential chip plant in the U.A.E. that never materialized. The spinoff, called GlobalFoundries, was listed in a U.S. initial public offering in 2021.

Yang Jie, Berber Jin and Tom Dotan contributed to this article.

Write to Asa Fitch at asa.fitch@wsj.com, Alexander Ward at alex.ward@wsj.com and Jiyoung Sohn at jiyoung.sohn@wsj.com