A man passes the TSMC logo at the company’s headquarters in Hsinchu, Taiwan. TSMC is the largest semiconductor foundry in the world.
Sam Yeh | AFP | Getty Images
Taiwan’s outsized role in chip making came into the spotlight when a global semiconductor shortage forced several automakers to suspend production.
Countries like the United States and Germany turned to Taiwan to help ease bottlenecks in chip production. The shortage was a result of increased demand for electronic products during the Covid-19 pandemic, and was exacerbated by ex-President Donald Trump’s trade war with China.
Taiwan dominates the foundry market, or outsourcing semiconductor manufacturing. Its contracted manufacturers together accounted for more than 60% of global foundry revenue last year, according to data from TrendForce, a research firm based in Taipei.
Much of Taiwan’s dominance can be attributed to Taiwan Semiconductor Manufacturing Co or TSMC, the world’s largest foundry that has major technology companies such as Apple, Qualcomm and Nvidia as customers. TSMC accounted for 54% of the total foundry revenue globally last year, TrendForce data showed.
Semiconductors are essential components that power electronics, from computers and smartphones to car brake sensors. Chip production involves a complex network of companies that design or manufacture them, as well as those that provide the technology, materials and machinery for that.
TSMC focuses exclusively on manufacturing and has been the benchmark producer for many high-end semiconductors, said Dan Wang, technology analyst at research firm Gavekal, in a podcast at Singapore’s DBS bank.
“So TSMC, if you take a look at market share, I believe it makes about 50% of all semiconductors in the world. And I think it still underestimates how important it is, because these are some of the most advanced chips out there , “said Wang.
Semiconductor designers and manufacturers are on a quest to make chips smaller and better. Currently, TSMC and its South Korean rival Samsung are the only foundries capable of making the most advanced 5-nanometer chips.
TSMC is already preparing for the next generation of 3 nanometer chips, which are supposed to start production in 2022.
China playing catch up
Some countries are planning to increase their own semiconductor production – one of which is China, which aims to be more self-sufficient.
But China’s technological struggle with the previous U.S. government is holding back its biggest chipmaker, Semiconductor Manufacturing International Corporation, or SMIC, said Paul Triolo, head of geotechnology practice at risk consultancy Eurasia Group.
TSMC is so dominant. In fact, he doesn’t have much competition at the high end anymore.
Dan Wang
technology analyst, Gavekal Dragonomics
Last year, the Trump administration put SMIC on a black list known as the entity list, which limits the company’s access to the technology and machinery it needs.
SMIC was the fifth largest semiconductor smelter globally in revenue in 2020 – behind TSMC and UMC in Taiwan, Samsung in South Korea and GlobalFoundries in the U.S., data from TrendForce showed.
“The goal now is to be able to compete at the forefront with companies like TSMC, Samsung and Intel,” Triolo told CNBC’s “Squawk Box Asia”.
“The problem that SMIC is in now, the dilemma, is that the US government has put them on the list of entities,” he said. “But the big picture is that SMIC has been prevented, at least for the time being, from acquiring the really cutting edge equipment it needs from ASML, which is a Dutch company.”
ASML manufactures the so-called extreme ultraviolet lithography equipment, used to produce the most advanced chips, such as those manufactured by TSMC and Samsung. Reuters reported last year that the Trump administration pressured the Dutch government to stop selling the machine to SMIC.
Even if SMIC has access to ASML equipment, it would take years to start producing high-tech chips in large quantities, said Triolo.
Until then, it appears that TSMC will maintain its leadership position.
“TSMC is so dominant. It doesn’t have much competition in the high-tech segment anymore. So it took a while for this model to really work. But at this point, it can be a very profitable company,” said Wang de Gavekal.
– CNBC’s Eustance Huang and Arjun Kharpal contributed to this report.