TSMC: The Unlikely Story of How the Brainchild of Morris Chang Evolved into the Linchpin of the 21st-century World Order (Part I)

Posted on June 17, 2023 by Morgan Tseng

Morris Chang, TSMC Founder, at the 2018 AELM Conference
"Morris Chang at the Office of President, Taiwan 20181112", 總統府, CC BY 2.0

Emerging victorious from a 50-year-long nuclear standoff with the Soviet Union was the United States, who pursued an aggressive containment policy that aimed to debilitate communist powers, mainly the Soviet Union. While the United States implemented stringent embargoes and waged a taxing economic war against its communist adversaries, its technological prowess allowed it to form strategic allies worldwide in the likes of Japan and South Korea. More specifically, the United States’ cutting-edge transistor technology allowed it to firmly entrench itself as the de facto vanguard of the global semiconductor movement. This competitive advantage translated into military supremacy during the latter half of the 20th century through the rapid development of advanced weapon systems that eclipsed those of the Soviet Union.

Remnants of the Berlin Wall, whose fall in 1989 signaled the end of the Cold War
"Berlin Wall strip - Sarah Stierch A 02", Sarah Stierch, CC BY 4.0

As part of the war against communism, the United States aimed to integrate Japan and South Korea into its web of semiconductor dependence and ensure its capitalistic influence over the Eastern hemisphere. However, what the United States failed to anticipate was the potential for these countries to streamline transistor production capabilities and eventually produce superior semiconductor chips more efficiently. This outburst of efficient production was buttressed by these countries’ moves into electronic consumer products, spurring innovations that improved the quality of life for everyone around the world.

The final blow that signaled the end of U.S. chip dominance came when Morris Chang, a former Texas Instrument vice president, moved to Taiwan and founded Taiwan Semiconductor Manufacturing Company (TSMC) in 1987, backed with titanic financial support from the ROC government. Morris Chang’s astute leadership pushed TSMC to the forefront of global chip production. If you’re reading this, you’re likely in possession of electronics that use chips created by TSMC — these chips are ubiquitous among electronics of all kinds.

I believe that the chipmaking technology that TSMC controls within the confines of its four gigafab locations in Taiwan is imperative in determining the new world order of the 21st century and will likely be a point of perpetual tension between the United States and China moving forward. The fact is that whoever controls TSMC controls the technological know-how of producing most anything electronic, and if you control that, well, you control the means of shaping the new world order.

The Stage is Set

The semiconductor industry for consumer markets during the founding of TSMC was dominated by a handful of firms that each carved out a portion of the market for themselves, namely:

• South Korea’s Samsung
• United States’ Micron
• Japan’s Toshiba and Fujitsu

Most U.S. memory-chip firms were displaced by Asian firms with cheaper operating costs at this point. Intel, for one, shifted to producing microprocessors and still has a firm grasp on that market today.

Texas Instruments was another titan of the industry at the time, but they were most renowned for forming the backbone of the U.S. defense sector during the height of the Cold War (along with inventing the integrated circuit). Morris Chang, a 25-year tenured member of TI and vice president, pitched the idea of a chip foundry to his TI contemporaries during this time. He envisioned a chip-manufacturing behemoth that would leave chip design in the hands of its partners and solely build them. It was a most controversial idea to pitch to TI executives. TI was a well-established firm and didn’t see the reason to push into hypothetical markets, not to mention the fact that all semiconductor firms designed chips in-house at the time.

Texas Instruments Headquarters in Dallas, Texas

The idea of a chip foundry wouldn’t resurface until 1985 when Chang was convinced by the ROC government to relocate to Taiwan and help build the nascent semiconductor industry. With generous tax breaks and copious amounts of financial support, Chang sprung his foundry plan into action and created the empire that is TSMC today.

Morris Chang’s Leap of Faith: A “Fabless” World

Morris Chang said something in an interview at a Stanford lecture that stuck with me. He said that the foundry concept that TSMC bases its business model on was a “solution looking for a problem.” Chang acknowledged that at the time, he didn’t know if the foundry concept could succeed. You see, most semiconductor firms were vertically integrated with large operating costs, each in possession of expensive semiconductor fabricators (fabs), which are often multi-billion dollar investments that only the most established firms could make. Experts were convinced that the introduction of foundries would add little value to the global supply chain since incumbent firms already oversaw the entire wafer manufacturing process, from silicon wafers to functioning semiconductor chips. The future of a foundry firm seemed dubious.

But Chang shattered industry dogmas and took it by storm in the following decade, and the doubts proved unfounded. He harnessed his connections in Silicon Valley and brought in industry gurus, secured hundreds of millions of dollars from investors, and purchased cutting-edge fabrication technology. TSMC promised to build the chips that firms would design in-house while never designing chips of their own. The immense barrier of entry that firms couldn’t previously scale had been torn down by TSMC in an industry-defining revolution — firms no longer needed to purchase billion-dollar manufacturing facilities to participate in the market.

To this day, TSMC has yet to design a single semiconductor chip.

The advent of these fabless companies expedited innovation at an unprecedented rate. With TSMC promising to be a steadfast chip supplier, firms could focus their efforts on designing chips with novel functions and outsource the manufacturing to TSMC. The harmonious nature of TSMC’s business model was its biggest competitive advantage: instead of competing directly with other semiconductor firms, a foundry like TSMC thrived if other semiconductor firms thrived as well. Because of this, the arrival of TSMC signaled a seismic shift in structure from traditional, vertically integrated semiconductor super-firms to smaller start-ups focusing on innovative chip design. The birth of some of the most prominent fabless companies today like Qualcomm, Nvidia, and AMD can be attributed to TSMC, and they rely on TSMC for chip manufacturing even today.

The TSMC-manufactured Apple A16 Bionic SoC powers the iPhone 14.

Global Reliance

Much of the world today relies on TSMC for chip manufacturing. Virtually all smartphones used today are powered by ARM (Advanced RISC Machines) processors, which are largely manufactured by TSMC. iPhones operate using its A-series ARM-based system on a chip (SoC), with the latest A16 version powering the iPhone 14. Even Samsung, which has its own fab cluster in South Korea, turned to TSMC to manufacture the cutting-edge Qualcomm Snapdragon 8 Gen 2 SoC in its newest Samsung Galaxy S23 smartphone series, admitting that TSMC’s wafer-producing technology still trumps its own. Computers uniformly use microprocessors that firms like Nvidia, AMD, and Intel design in-house, which TSMC then builds. The bottom line is that TSMC chips have woven their way into commonplace appliances without the world realizing it.

Jensen Huang, president of Nvidia, joked that the only things in universal possession are “air and TSMC.” While just a quip, Huang sheds light on the ubiquity of TSMC products in our everyday lives and our continued dependence on its chips. The world grows increasingly reliant on TSMC, and the appetite for computing power will only rise in the coming age of automation, quantum computing, and AI. TSMC and Samsung are the only firms in the world with 3-nanometer chip technology, yet TSMC’s technology is still about a year ahead of its rival counterpart. Apple has exclusively used TSMC’s 3nm process for its A17 Bionic chip in the iPhone 15, which is to debut this coming September.

Jensen Huang, founder and current CEO of Nvidia
"Jensen Huang at Computex Taipei 20160531b", NVIDIA Taiwan, CC BY 2.0

TSMC continues to make strides in cutting-edge technology and is set on using a 2nm manufacturing process by 2025. TSMC produces a whopping 90% of all advanced chips in the world and controls around 55% of the market in global chip manufacturing. In the modern era of globalization, it is extraordinary that the manufacturing of everyday appliances we often take for granted is contingent on the productivity of a single firm. Just recent memory of the detrimental effects that a global chip shortage had on the automotive industry reminded us of the stranglehold chipmakers have on many global supply chains.

The TSMC bottleneck is a brittle thread that the tapestry of the current world order is hanging from, creating a semblance of consonance between the world’s superpowers. In reality, technology and trade wars have already broken out, forcing otherwise neutral entities to pick sides. We have a storm brewing in the South China Sea that could very well cultivate into a full-blown cyclone, pulverizing this mirage of 21st-century peace we have.

In part II, I will talk about how China is surging into contention as the world’s dominant superpower, threatening to supplant the US, and how TSMC’s technology can turn the tide in favor of either side as Taiwan’s largest bargaining chip.

For a more comprehensive understanding of the history of semiconductors, I highly recommend Chris Miller’s Chip War: The Fight for the World’s Most Critical Technology, as it provides a more holistic account of the struggles firms and nations faced to reach the standoff we have today.