Under the Protection of A High-Tech Sacred Mountain: The Story Behind Taiwan’s TSMC
The beginning of 2021 hasn’t been a quiet few months. Coming off a leadership change in the US, eyes are on the Biden administration regarding the economic implications from potential policy shifts. Positive test results from COVID-19 vaccines also injected a dose of positivity to our economic recovery following a year-long exodus in small businesses around the world. While most of the Q1 headlines centered around the global outlook for an economic recovery from impact of COVID-19, one company didn’t shy away from the spotlight — that is TSMC. A global shortage in semiconductors has forced major electronics producers and car manufacturers to halt production. This increasing demand in semiconductors stemmed from rising demand in electronic devices and cars as the world shifted lifestyle behaviors due to the pandemic. Semiconductors are crucial to activating key electronic devices found in your iPhones, MacBooks, PlayStation 5s, Tesla Model 3s, Google’s data centers, or even F-35 fighter jets. As the current global semiconductor foundry leader, TSMC is on a quest to keep the world’s hardware output up and running.
Who is TSMC?
TSMC, short for Taiwan Semiconductor Manufacturing Company, was founded in 1987 by Dr. Morris Chang in Hsinchu Science Park in Taiwan. Originally, the company was founded under the Taiwanese government’s premise to develop the island’s advanced technology capabilities for an industrial transformation to compete with the world’s best economies. It started as a collaboration project in 1986 between the Industrial Technology Research Institute, a government agency, and the Dutch technology conglomerate Philips; and was spun off as its standalone company about a year later. Morris Chang, then President of the Industrial Technology Research Institute, was appointed to Chairman and CEO of the newly formed company.
Taiwan’s economic transformation from labor intensive industries to advanced technology industries dated back to the 1970s when the government slowly moved away from an authoritarian state as its international relations waned with most western nations. The government needed to solidify its position in the global economy and began to push for privatization, opening up new opportunities for more foreign influence in order to gain more recognition internationally on economic grounds. Taiwan’s opportunity to develop a supply chain of downstream suppliers for semiconductors came when the American firms saw value in outsourcing their manufacturing capabilities to Asia as a cost-reduction strategy in the late 60s. This is when the Industrial Technology Research Institute stepped in to form companies such as UMC and TSMC, setting the roots for establishing Taiwan as a world leader in the semiconductor industry.
Over the next 30 plus years, TSMC would gradually overtake its competitors as the world’s best semiconductor contract manufacturer. There’s simply not a close competitor that could replace its position right now. As Nvidia’s co-founder and CEO Jensen Huang once said, “there’s no plan B”, when asked about the risks of the cross-strait geopolitical issues between Taiwan and China on a potential TSMC replacement. The world heavily relies on TSMC to deliver.
The Sacred Mountain’s Protection
In Taiwan, local media outlets love to refer to TSMC as the sacred mountain that protects the country. By annual revenue, the company would be ranked in the top 100 economies in the world. TSMC’s current annual revenue is about 5% of Taiwan’s overall GDP, which has been consistently ranked in the world’s top 25 GDP by country. Although revenues and GDP can’t be compared directly, it gives you an idea of the significant size of the company. TSMC has seen consistent year-over-year growth in its consolidated sales and net profits over the years, reporting record highs in both categories for the year of 2020. The company’s market capitalization is also the biggest in Taiwan and accounts for about a third of the local stock market. Basically, the company carries Taiwan’s secondary market as the local stock index is heavily weighted on the stock.
In 2020, TSMC is responsible for around 20% of estimated private investment in Taiwan as the company has been expanding its production output by constructing new facilities mainly in the southern part of Taiwan. Currently, TSMC is the only semiconductor foundry capable of producing 5-nanometer chips (Samsung hasn’t begun mass production), which are in high demand for products such as the latest 5G iPhone 12 and MacBook M1 processors. While the company is building new facilities to boost production capacity for 5-nanometer semiconductors, TSMC is also breaking ground for the world’s most advanced 3-nanometer production plant.
Due to an unprecedented demand in the semiconductor industry, Taiwan’s economic growth in 2020 topped its Asian peers such as South Korea, Singapore, and Japan. The country’s GDP growth even outpaced China for the first time in 30 years. Its strong position in the world’s semiconductor industry has further helped solidify the self-governed island’s high strategic importance in world politics. With rising tension between the US and China, TSMC is not only important to Taiwan’s economic prosperity, but also crucial to helping the country secure political support from other major countries.
The Next TSMC
Over the past three and a half decades, Taiwan has built its economy around the semiconductor industry led by TSMC. Whether it’s in the private or public sector, the country has largely benefitted from the success found in this particular industry. However, as time goes by, the local government is aware that the country’s economy has become dangerously dependent on one industry, which makes it extremely vulnerable to external risks. Numerous efforts have been launched to find the next TSMC, particularly from its majority shareholder — the National Development Fund (NDF) of the National Development Council (NDC) in Taiwan. In this golden age of software development, the NDC is eager to help Taiwan develop its software capabilities as the country’s economy is still heavily weighted on hardware manufacturing. Since its inception in 2014, the agency has supported numerous projects such as the technology-focused Taiwan Startup Stadium to help homegrown technology startups find footings in overseas markets. With rising government support and private investments into the local startup ecosystem, the next TSMC might just be around the corner.
