The computer chips made by the Taiwan Semiconductor Manufacturing Company (TSMC) aren’t just the brains inside smartphones, laptops, and video game consoles — they’re also core components of almost every kind of electronic equipment in the world, from that used in data centers to F-35 fighter jets. Apple, Huawei, Sony, Qualcomm, Broadcom, and HiSilicon are all clients, along with nearly 500 others.
“Wherever in the world it is, TSMC is a significant part of the supply chain,” Risto Puhakka, president of semiconductor analytics firm VLSI Research, told Rest of World. “There’s no avoiding it.”
TSMC fundamentally shaped the semiconductor industry — which makes tiny slivers of silicon into the computer chips inside electronic devices. Many leading companies, like Huawei and Apple, design but don’t actually manufacture their own chips. Unlike integrated device manufacturers, such as Intel and Samsung, which design and then make the chips used in their own products, TSMC’s model is that of a dedicated “pure play” foundry: it only operates on a contract basis and doesn’t sell devices of its own design.
In their business-to-business model, companies can even design the tools TSMC will use when making their chips.
Over the past three decades, TSMC has invested in 18 state-of-the-art chipmaking facilities — called “fabs,” for “fabrication facility” — in Taiwan. Today the firm accounts for more than half of the $42 billion foundry segment of the semiconductor industry.
“TSMC is an absolutely critical supplier to those companies who want to get the most advanced chips available,” Puhakka said. “There is no one else who has the capacity as a foundry to deliver the volumes and capabilities that those companies are asking for.”
Fabulous versus fabless
While companies like Apple and Samsung have built their businesses on instantly recognizable designs, it’s the hidden brains inside a device that ultimately determine its true capabilities. And inside all of them are microchips — bits of cobalt and copper fused onto a charged silicon wafer.
Morris Chang, who founded TSMC in 1987, has been called the godfather of computer chip manufacturing. He spent 25 years at Texas Instruments developing its semiconductor business. By the time former Premier Yu Kuo-hwa recruited Chang to move to Taiwan and lead a government-backed technology development project, the semiconductor industry was extremely competitive — and Taiwan didn’t have many advantages. In an interview with the Computer History Museum, Chang said he already knew how tough it would be to carve out a new niche. At the time, Taiwan had few strengths in research and development, intellectual property, circuit design, or marketing. “The only possible strength that Taiwan had, and even that was a potential one, not an obvious one, was semiconductor manufacturing, wafer manufacturing,” he recalled. “And so what kind of company would you create to fit that strength and avoid all the other weaknesses? The [answer] was a pure-play foundry.”
With the foundry model, Chang thought the country could lean on its manufacturing potential. Though most leading firms in the 1980s — Intel, NEC, Fujitsu — designed and made the chips used in their devices, TSMC paved the way for a future where those companies could design their chips and contract their production out, saving the enormous investment of time and capital required to keep up their own fabs.
“The foundry business model has enabled the emergence of the fabless industry by eliminating the financial burden associated with semiconductor manufacturing,” a TSMC spokesperson told Rest of World. “It allows efficient vertical specialization and democratizes the innovation process, resulting in greater product diversity and faster innovation, at lower cost.”
Basically, new companies that want chips for their ideas no longer have to invest in their own foundries, or rely on their competitors to produce them.
Opening the market for the fabless semiconductor industry put TSMC in the position of making essential components for top tech companies in Silicon Valley and Beijing alike. In a blog post about TSMC’s geopolitical relevance, analyst Ben Thompson wrote, “Today there are thousands of chip designers in all kinds of niches creating specialized chips for everything from appliances to fighter jets, and none of them have their own foundry.”
Stuck in the middle
Up until recently, TSMC mostly played a background role as the supplier of the processors inside the signature devices of top brands like Apple and Huawei — but Washington and Beijing’s attempt to disentangle their supply chains have now made this a sticking point. TSMC’s importance to major Chinese and American companies over the past 30 years has raised Taiwan’s profile as a center of high-tech manufacturing. But Taiwan’s position as an earthquake-prone island that is not recognized as a nation by most others makes it a precarious location for the nerve center of global microchip manufacturing. Last year, Chang told a crowd at a company event that TSMC was “gaining vital importance in geostrategic terms.”
After successfully becoming an essential link in hundreds of supply chains on both sides of the Pacific, TSMC remains light years ahead of other chipmakers. This year, TSMC started mass production of 5 nanometer (nm) chips, beating out competitors like Shanghai’s Semiconductor Manufacturing International Corporation (SMIC), which is still making 14 nm ones. But because of the trade war between the United States and China, TSMC faces the prospect of losing one of its biggest customers: Huawei. The Chinese telecom giant relies on TSMC-made chips for everything from network processors to smartphones to 5G base stations, and U.S. regulators want TSMC to cut ties. Now that TSMC has stopped taking new orders from Huawei, the company is left to source more chips from SMIC, which already makes parts for some of its gear.
Though the vast majority of their production has always taken place in their 18 fabs in Taiwan, TSMC operates two fabs in China and an older subsidiary facility in Washington state. In May, the company announced plans to build a fab in Arizona, and chairman Mark Liu said that U.S. government subsidies were a key factor in the decision. But according to Mark Li, senior research analyst at Sanford C. Bernstein & Co in Hong Kong, by the time the new Arizona fab hits full capacity in 2024, it will account for less than 2% of the company’s output. “The scale and technology is similar to what TSMC did in China, suggesting a balance between the U.S. and China,” Li told Rest of World. “Overall, this is probably the minimal price to stay neutral.”