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How Taiwanese semiconductors reign supreme

Thomas Kohlmann
August 4, 2022

While Russian gas can be replaced with other forms of energy, microchips made in Taiwan cannot. The country's chip giant TSMC has attained a global market dominance of truly systemic proportions. But why is that?

A picture showing a TSMC technicians working at a plant in the Hsinchu Science Industrial Park in Taiwan
TSMC's 65,000 workers in Hsinchu produce more than 10,000 different chip designsImage: Tao-Chuan Yeh/AFP/Getty Images

During her whirlwind tour of Taiwan, US House of Representative Speaker Nancy Pelosi was not only talking geopolitics with the Asian country's political leaders; but also business at the island's most-valuable firm, the Taiwan Semiconductor Manufacturing Company, also known as TSMC.

Pelosi's meeting with TSMC chairman Mark Liu on Wednesday highlighted the outsized technological weight of the chipmaker in the global economy. From aerospace to consumer electronics, the world is massively dependent on TSMC semiconductors in virtually all sectors.

TSMC is located in the Hsinchu Science Park in northwestern Taiwan, and even the slightest disruption in the company's production output is, for example, bound to halt assembly lines in the global auto industry, idling thousands of workers worldwide. 

But how did one company's product become so indispensible?

TSMC logo on a company building
Taiwan is home to industry-leading chip factories as well as an industrial base that supplies key components to industriesImage: David Chang/EPA/dpa/picture alliance

30 years on the cutting edge of technology

Established in 1985, the Hsinchu Science Park is divided into six satellite parks —Hsinchu, Zhunan, Tonglu, Longtan, Yilan and the Biomedical Park in Hsinchu — employing a total of about 150,000 people. Its main sector is the integrated-circuit industry, which accounts for 70% of the park's total output value.

"Taiwan's Silicon Valley," as the area is also called, is just about 150 kilometers (93 miles) away from mainland China. It has also successfully birthed businesses in other tech sectors such as telecommunications, optoelectronics, precision machinery and biotechnology.

Hsinchu's 20 chipmakers — first and foremost TSMC and UMC — are the world's biggest contract manufacturers of semiconductors. TSMC, for example, is the exclusive supplier of Apple's silicon processors for iPhones and Mac PCs, as well as the manufacturing partner of other US companies like AMD, Broadcom and Qualcomm.

'Systemic foundry' with ambitions

In apparent retribution for Pelosi's visit to the island, China on Wednesday suspended some trade with Taiwan, escalating existing tensions between Taipei and Beijing over the status of the self-governing island.

Under its "One China policy," Beijing has refused to recognize Taiwan as a sovereign nation for more than half a century.

In a rare public interview, TSMC chairman Mark Liu told CNN on Monday that in a war between China and Taiwan, everyone would lose.

"If you take a military force or invasion, you will render TSMC factory nonoperable," he said, adding that TSMC's sophisticated manufacturing facility "depends on the real-time connection with the outside world," and that "nobody can control TSMC by force."

A picture of demonstrators take part in a protest against Nancy Pelosi's visit to Taiwan
Nancy Pelosi's visit to Taipei also raised strong pro-China sentiments among TaiwaneseImage: Ann Wang/REUTERS

Many of the world's Big Tech companies are "fabless," meaning they have no production sites of their own. They commission TSMC and other so-called foundries to produce the chips they design.

Peter Fintl, chip market analyst with consultancy Capgemini, recently told German business daily Handelsblatt that TSMC has "obtained a systemically important position" in the global market.

The semiconductor industry as a whole has loomed large over Pelosi's visit to Taiwan. A global chip shortage as a result of the COVID-19 pandemic has delayed production of cars, TVs, and computers, as well as helping fuel global inflation. A larger conflict between China and Taiwan, where the US is likely to take a side, could cause further disruption.

Global race for chipmaking dominance

During the meeting between Liu and Pelosi, the two sides discussed the recently passed Chips and Science Act in the US aimed at reshoring the semiconductor supply chain. The new legislation includes a $52 billion (€51.1 billion) package to support chipmaking in the US, and TSMC will likely benefit from the program as a result of the $12 billion chip factory it's planning to build in Arizona.

The factory won't be the company's first on American soil. TSMC has already set up silicon-wafer production on the US West Coast, and a chip design and research center in Texas. Washington underscored, however, that subsidies will only flow if manufacturers are making sure sensitive chip technology doesn't end up in the hands of China.

Europe overhauls its semiconductor strategy

Alexander Görlach, a China expert at Oxford University, said there was probably no other country in the world doing more to seek technological dominance than China.

"China has a huge interest in gaining access to Taiwan's chipmaking knowhow because it would perfectly match China's own vast deposits of rare earth minerals," he told private German TV station Welt recently.

"That is why countries like Germany and the US must not stand idly by when the People's Republic is attempting to take over Taiwan. No car would roll off assembly lines anymore if Taiwan ceases to deliver its microchips."

Meanwhile, the European Union is also working on legislation attempting to strengthen the continent's chipmaking industry. Its European Chips Act will include subsidies to the tune of €43 billion aimed at boosting European chip production from currently 10% of the global market to 20% by 2030.

A rendering shows early plans for two new Intel processor factories in Magdeburg, Germany
EU subsidies have drawn chipmaker Intel to the town of Magdeburg in eastern Germany, where it wants to build a factoryImage: Intel Corporation

In the foreseeable future, however, Taiwan will remain the world's biggest chipmaking location, covering about 90% of high-end semiconductor demand worldwide, according to recent data published by the US Semiconductor Industry Association lobby group.

When CNN asked TSMC chairman Mark Liu why China still isn't capable of producing such high-quality chips like Taiwan, he smiled and replied: "Oh, they can, but a few years later." 

This article was originally written in German.