Chip maker’s dominance leaves world vulnerable
By Yang Jie, Stephanie Yang, Asa Fitch
Dow Jones, Wall Street Journal
Sunday, June 20, 2021
Taiwan Semiconductor Manufacturing Co.’s chips are everywhere, though most consumers don’t know it.
The company makes almost all of the world’s most sophisticated chips, and many of the simpler ones, too. They’re in billions of products with built-in electronics, including iPhones, personal computers and cars — all without any obvious sign they came from TSMC, which does the manufacturing for better-known companies that design them, like Apple Inc. and Qualcomm Inc.
TSMC has emerged over the past several years as the world’s most important semiconductor company, with enormous influence over the global economy. With a market cap of around $550 billion, it ranks as the world’s 11th most valuable company.
Its dominance leaves the world in a vulnerable position, however. As more technologies require chips of mind-boggling complexity, more are coming from this one company, on an island that’s a focal point of tensions between the US and China, which claims Taiwan as its own.
Analysts say it will be difficult for other manufacturers to catch up in an industry that requires hefty capital investments. And TSMC can’t make enough chips to satisfy everyone — a fact that has become even clearer amid a global shortage, adding to the chaos of supply bottlenecks, higher prices for consumers and furloughed workers, especially in the auto industry.
The situation is similar in some ways to the world’s past reliance on Middle Eastern oil, with any instability on the island threatening to echo across industries. Companies in Taiwan, including smaller makers, generated about 65% of global revenues for outsourced chip manufacturing during the first quarter of this year, according to Taiwan-based semiconductor research firm TrendForce. TSMC generated 56% of the global revenues.
Being dependent on Taiwanese chips “poses a threat to the global economy,” research firm Capital Economics recently wrote. TSMC, which is listed on the New York Stock Exchange, reported $17.6 billion in profits last year on revenues of about $45.5 billion. Its technology is so advanced, Capital Economics said, that it now makes around 92% of the world’s most sophisticated chips, which have transistors that are less than one-thousandth the width of a human hair. Samsung Electronics Co. makes the rest. Most of the roughly 1.4 billion smartphone processors worldwide are made by TSMC.
It makes as much as 60% of the less-sophisticated microcontrollers that car makers need as their vehicles become more automated, according to IHS Markit, a consulting firm. TSMC said it believes its market share for those microcontrollers is about 35%. Company spokeswoman Nina Kao refuted the idea that the world depends too much on the company, given the many areas of specialisation in the world’s semiconductor supply chain.
The US, Europe and China are scrambling to cut their reliance on Taiwanese chips. While the US still leads the world in chip design and intellectual property with homegrown giants like Intel Corp, Nvidia Corp and Qualcomm, it now accounts for only 12% of the world’s chip manufacturing, down from 37% in 1990, according to Boston Consulting Group. President Biden’s infrastructure plan includes $50 billion to help boost domestic chip production. China has made semiconductor independence a major tenet of its national strategic plan. The European Union aims to produce at least 20% of the world’s next-generation chips in 2030 as part of a $150 billion digital industries scheme.
In March, Intel announced a $20 billion investment to build two new chip factories in the US. Three months earlier, then-chief executive Bob Swan had flown a private jet to Taiwan to see if TSMC would take over some of the manufacturing for its newest generation of chips, people familiar with the meeting said — a contract potentially worth billions of dollars. TSMC executives were eager to help but wouldn’t do it on Intel’s terms and disagreed on price, one of the people said. The negotiations still aren’t settled, the person said. Intel ousted Mr Swan in January as it tries to recover from missteps that left it potentially reliant on TSMC. Intel’s market cap is around $225 billion, less than half that of TSMC’s.
The Taiwanese maker has also faced calls from the US and Germany to expand supply due to factory closures and lost revenues in the auto industry, which was the first to get hit by the current chip shortage. A meeting between chip and automakers facilitated by the Biden administration in May saw some progress but left simmering frustrations, with US automakers feeling they had yet to get detailed plans on TSMC’s efforts to increase production, said people familiar with the meeting. TSMC said it has taken unprecedented actions and increased microcontroller production by 60% compared with 2020.
Analysts say that broader trends in the industry, along with TSMC’s hard-driving culture and deep pockets, will make it hard to create a more diversified semiconductor supply chain anytime soon. Semiconductors have become so complex and capital-intensive that once a producer falls behind, it’s hard to catch up. Companies can spend billions of dollars and years trying, only to see the technological horizon recede further.
A single semiconductor factory can cost as much as $20 billion. One key manufacturing tool for advanced chip-making that imprints intricate circuit patterns on silicon costs upward of $100 million, requiring multiple planes to deliver.
TSMC’s own expansion plans call for spending $100 billion over the next three years. That’s nearly a quarter of the entire industry’s capital spending, according to semiconductor research firm VLSI Research.
Other countries would need to spend at least $30 billion a year for a minimum of five years “to have any reasonable chance of success” in catching up with TSMC and Samsung, wrote IC Insights, a research firm, in a recent report.
US officials have said they believe the chance of a conflict has grown after an increase in Chinese military activity near Taiwan — an issue that was noted in a public rebuke of China issued by Group of Seven leaders this week. Still, many analysts believe China won’t try to reclaim Taiwan in the near future because the move could disrupt its own supply of chips.
Taiwanese leaders refer to the local chip industry as Taiwan’s “silicon shield,” helping protect it from such conflict. Taiwan’s government has showered subsidies on the local chip industry over the years, analysts say.
TSMC’s Ms Kao said the company’s success comes from being in the right place at the right time, with the right business model. While Taiwan’s government played a crucial role in its founding investment, she said, the company doesn’t receive subsidies to build facilities.
When Morris Chang founded TSMC in 1987 with the idea that more chip companies would outsource production to fabrication plants, or “fabs,” in Asia, success was far from assured. Mr. Chang — now 89 years old, with a fondness for playing bridge and reading Shakespeare — spent his early years in mainland China and Hong Kong before moving to the US in 1949 to go to Harvard University and then the Massachusetts Institute of Technology. He spent nearly three decades working in the US, spending most of his career at Texas Instruments.
When TSMC was founded, titans like Intel and Texas Instruments took pride in designing, branding and making their own chips. Advanced Micro Devices Inc founder W.J. “Jerry” Sanders III famously declared: “Real men have fabs.” With the Taiwanese government providing about half of its initial funding, TSMC gained traction by positioning itself as the Switzerland of semiconductors. Companies like Nvidia and Qualcomm found that by pairing with TSMC, they could focus more on design without the hassle of running their own factories, or worrying about handing their intellectual property to a competitor to manufacture. AMD sold off its fabs and became one of TSMC’s biggest customers, as did other major players, until there were only a few advanced chip makers left.
Each new client that TSMC picked up added to the company’s war chest, enabling it to spend heavily on its manufacturing capabilities. “The power of the model didn’t become evident until they reached very large scale. Once that calculation changed, it changed the name of the game,” said David Yoffie, a Harvard Business School professor and former member of Intel’s board of directors.
TSMC doubled down on R&D, even during the global financial crisis. While other firms were cutting back, Mr Chang raised TSMC’s capital expenditures for 2009 by 42% to $2.7 billion, upgrading its capabilities in time for the smartphone boom.
A pivotal moment came in 2013, when TSMC began work on mass-producing mobile phone chips for Apple, now its biggest customer. Before that, Samsung — which had its own smartphones — had been the exclusive microprocessor supplier for iPhones. To fulfil Apple’s first order, TSMC spent $9 billion, with 6,000 people working around the clock to build a fab in Taiwan in a record 11 months. TSMC is now the exclusive supplier for the main processors in iPhones.
When TSMC was trying to develop cutting-edge chips in 2014, it reorganised its research and development team to work 24 hours a day, with 400 engineers handing off work over three shifts, current and former employees say. Some employees dubbed it the “liver buster” plan, because they felt working late harmed their livers.
TSMC also bet big on extreme ultraviolet lithography, or EUV, a technology that used a new type of laser to carve circuitry into microprocessors at thinner widths than previously possible, allowing chips to perform at faster speeds.
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