TSMC. Why the Taiwanese chip manufacturer is the most important company in the world

The beginning of this story dates back to the 1980s. In 1986, the Taiwanese government, observing the development of Asian tigers producing electronics - primarily Japan - decided to focus on the semiconductor industry. Taiwan Semiconductor, or TSMC, was established in 1987 with capital mostly owned by the Taiwanese government and local shareholders, with significant stakes from Dutch Philips.

At the helm of the company was Morris Chang, a Chinese-American manager educated at Stanford, who gained experience at Texas Instruments - a company that was a leading American semiconductor manufacturer. However, the beginnings of TSMC were not easy, as the semiconductor market was extremely competitive from the very beginning.

TSMC: From the first chip to the power of Asian tigers 

Chips, or integrated circuits and microprocessors, are made of silicon, one of the most common elements on earth. However, the art of creating these devices is definitely not common - chips are some of the most complex systems constructed by humans.

All this is possible thanks to photolithography - a process that uses light masks to expose layers of silicon to pack as many transistors into them as possible. The idea to use light to "sculpt" integrated circuits in silicon was conceived in the late 1950s by two American scientists: Jack Kilby and Robert Noyce (the latter later improved this idea).

Chip production requires microscopic precision. The first commercially available processor, the Intel 4004, created in 1974, contained as many as 2250 transistors, which were located on an area of only 12 square millimeters. The smallest elements in it were only one hundredth of a millimeter in size. Processors available in 1986-1987, when TSMC was established, already contained hundreds of thousands of transistors.

With the end of the 70s and the beginning of the 80s of the twentieth century, American companies began the production of semiconductors, first the less advanced ones, such as microcircuits for Asian calculators. They did this primarily due to much lower costs, but also out of admiration for the precision and work culture of local companies - first assembly plants, and then gradually more advanced factories. Two countries dominated here - Japan and South Korea. Due to the level of advancement and technology developed mainly in the USA, other countries did not have access to this level of specialization. Meanwhile, the USSR, then in a cold war with the West, despite huge expenditures, could not match the States and was always a few years behind in the semiconductor industry.

Today, however, there are many companies creating the most advanced integrated circuits and processors in the world, but only some of them have their own factories, so-called fabs. Even fewer are companies that deal with both design and production of their own circuits. These are so-called IDM - Integrated Device Manufacturer and they include, among others, Intel, Samsung and Texas Instruments.

The second category is companies that create chips but do not own their own factories, so-called fabless. They include the largest and most well-known technology players in the world: Apple, AMD, NVIDIA or Qualcomm. However, in order for them to be able to deliver their chips to customers, someone must first produce them. These are so-called pure-play players, which include TSMC.

TSMC - the future of the chip industry and a contract from Apple

The genius of TSMC was that this company quickly understood that the future of the semiconductor industry would look like there would be many companies designing integrated circuits and only a few manufacturers. That's why the Taiwanese giant has always focused on research and development and the most efficient production technology, always offering the latest available semiconductor manufacturing process. It's about the designation indicating the level of precision - expressed first in microns, and then in nanometers, which are millionths of a millimeter.

An important moment in TSMC's development was the second decade of the 21st century, when the company received a contract from Apple to produce parts of the A5 and A6 processors, powering the iPhone and iPad. However, even then, Apple outsourced most of its production to Samsung. The breakthrough came in 2014, when TSMC completely took over the process of manufacturing the next generation A6 - the A9 processor, which was on board the second most popular smartphone model in history - the iPhone 6S.

TSMC was the first company in the world to introduce a production process using extreme ultraviolet lithography (EUV). It is also the first in history to manufacture processors using 3 nanometer technology. Currently, the Taiwanese giant produces the most advanced chips in the world, powering the latest iPhones Pro and Macbook Pros. Their processors contain tens of billions of transistors.

TSMC is therefore the jewel in Taiwan's crown and the largest company in the country, controlling over 80% of the global chip market. With a market capitalization of $518 billion, it is among the largest companies in the world. In addition to Taiwan, it also has factories in other parts of the world, including Japan, the United States, and mainland China. It also plans to open new factories, for example in Arizona and Germany.

The most advanced TSMC factory, the one producing chips using 3 nm technology, is located in Taiwan. It is also probably the most expensive factory in the world, with construction costs estimated at $20 billion. For comparison, Tesla's gigafactory in Berlin cost about $5 billion. Despite global diversification, almost 90% of TSMC employees live in Taiwan. 

TSMC and its key importance in global geopolitics

TSMC is unique for another reason - it has enormous geopolitical significance. On the one hand, chips are now the heart of most devices - from refrigerators, through cars, to weapons. On the other hand, the company itself is inextricably linked with Taiwan, whose autonomy is not recognized by the People's Republic of China. However, in the event of a conflict, the United States would most likely side with Taiwan, not only because of the democratic values it upholds, but primarily because of the key importance of this country for global technology chains and its inextricable links with the largest American technology companies.

Meanwhile, TSMC is playing this geopolitical game wisely. The company has its factories both in the United States and China, where it is constantly expanding its customer base. One of them was Huawei - the second largest contractor of the Taiwanese company after Apple. However, the cooperation was interrupted after the Americans imposed sanctions on the Chinese company.

Currently, the power of TSMC seems to be so large that the potential destruction of the company's most valuable fabs could be too risky for all involved parties. And although China is trying to neutralize the American-Taiwanese advantage in chip production, they are still lagging behind. Indeed, Huawei recently produced a phone with a 7-nanometer technology processor, which is only two generations less advanced than 3 nm, but according to experts, the Chinese production process is extremely expensive and insufficiently efficient. 

According to analysts quoted by The Economist, TSMC's advantage will last at least another 8-10 years. Currently, NVIDIA, the largest manufacturer of integrated circuits for AI products, is becoming an increasingly important customer of the company.  

Chris Miller, author of the multiple award-winning book The Great Chip War. How the USA and China are fighting for technological dominance over the world, argues that catching up with the rest of the pack is currently almost impossible for China. Mainly due to the complicated supply chain based on the most advanced companies located in the USA and Europe. It seems, therefore, that the power of TSMC will remain unthreatened for the next few years.