TSMC, the World’s Biggest Chip Manufacturer

Semi-Conductor Chips are one of the most essential technological products in the world right now. These are the chips that power almost all the important electronic items in use daily such as mobile phones, laptops, refrigerators, washing machines, electric cars, microwave ovens, gaming consoles and so on.

There are 2 types of Semi-Conductor chips manufacturing companies

1. Fabless
2. Foundry

Fabless companies specialize in research & development and design of semi-conductor chips and do not own manufacturing facilities of their own. Qualcomm, Broadcom, AMD and NVIDIA are the world's largest fabless companies.

Foundry companies, on the other hand, specialize in manufacturing and testing the chips. The world's largest Foundry chip-making company is TSMC, which is short for Taiwan Semiconductor Manufacturing Company.

TSMC is the world's largest chip manufacturing company. TSMC and Samsung together control 75% of the foundry market. But TSMC holds 90% market share in the Advanced chip manufacturing sector. Even though the Chinese and US governments have poured billions of dollars and a ton of energy into creating chip manufacturing facilities in their countries, it has largely been unsuccessful thus far.

A foundry business is quite difficult to run due to the following reasons

• It is capital intensive
• Requires highly skilled labour
• Requires a lot of customer trust (Take Apple vs Samsung incident)
• Economies of scale

These challenges along with others, have resulted in the number of big companies in the Foundry business declining from 20 to just 2 over the last 2 decades or so. Right now, there are only 2 major players in the Foundry chip-making industry

1. TSMC
2. Samsung

Chip manufacturing is a very expensive business to run. In 2021 TSMC announced it would spend over $100 Billion over the next 3 years to increase production capacity. Now that capital expenditure capacity becomes an instant moat preventing many players from even thinking of entering the chip manufacturing industry.

TSMC is the largest company in Taiwan and is the top destination for the country's best talent. The company has 35 years of unparalleled experience in the field, and this has become the most prestigious industry to work in Taiwan. A recent development is China poaching Taiwanese chip-making talent from TSMC to mainland China.

Now let's get to the point about customer trust. Back in the days, Apple used to outsource their chip manufacturing to Samsung. Apple became furious when Samsung started making its own phones to compete with the iPhone. TSMC was able to win over the Apple Account following this. The assurance TSMC gives its customers is that it will not directly compete with them (the way Samsung did). TSMC has stayed true to its word and has focused solely on Chips manufacturing. This has helped build enormous amounts of trust with their customers as they know there is no conflict of interest between them and TSMC. According to Taipei Times, Apple is still the largest customer of TSMC. In 2021, Apple spent $13.83 Billion on TSMC, and the earnings from Apple for TSMC is projected to be more than $17 Billion in 2022.

Very few companies can match the volumes and economies of scale possible by TSMC. Every node of process technology requires more challenging development and larger investments in new production capacities. The steeper the cost of production became, the more other chip makers over the years began outsourcing chip manufacturing to TSMC while focusing only on R & D and design.

Currently the world is facing a severe chip shortage, and this pushes the importance of TSMC even higher. TSMC is one of the biggest economic weapons that is delaying China's threat to invade Taiwan. This is largely because the world's biggest companies, including the biggest tech manufacturing companies in the US, are heavily dependent on TSMC. A potential invasion that could make TSMC Chinese could tip the balance heavily in favour of China on the geo-political front. This would be of serious national security concern for US and its allies.

Even though companies like Intel have announced plans to build 2 new fabs (chip manufacturing plants) in Arizona, TSMC’s importance in the world will not be overtaken anytime soon.