TSMC: The world's leading innovators in semiconductor technology
TSMC (Taiwan Semiconductor Manufacturing Company) is setting the trajectory of the global semiconductor industry, and accordingly, is informing strategic decision-making in international trade and politics.
When Dr Morris Chang established TSMC in 1987, most semiconductor companies were Integrated Device Manufacturers (IDMs), which meant they both designed and manufactured semiconductor chips. In the modern age of the semiconductor industry, however, these processes are usually separated into design, by dedicated or ‘fabless’ designers, and fabrication, by ‘fabs’ or foundries.
Under Chang’s guidance, TSMC has become so dominant in the manufacture of advanced and cutting-edge chips that it is now, in effect, the world’s fab.
TSMC's approach has shaped the semiconductor industry
The separation of design and manufacture was a ‘Gutenberg moment’ for the digital era in democratising chip design. Fabrication, on the other hand, became monopolised. TSMC achieved this through not only its capabilities but also its position as a neutral player around which other companies could design their products.
TSMC’s single value proposition of manufacturing excellence has allowed designers to hone their own highly industry-specific monopolies. Compatibility with TSMC thus became, and still is, crucial for almost every fabless company. This has equipped TSMC and consequently Taiwan with critical levers of power in markets and global politics.
TSMC positioned itself well to work with global tech leaders
By monopolising the manufacturing of cutting-edge chips, TSMC captured customers of scale early and leveraged long-term relationships to achieve order repeatability. Nvidia, for example, has been a customer since 1997. However, the outstanding illustration of this process involves Apple, TSMC’s largest customer, to which it has been the main supplier since 2008.
Apple requires critical chips for its flagship products (iPhone, iPad, Mac) at a consistent rate and scale. The relationship extends beyond chip purchases and has contributed to symbiotic R&D and capital investment. Joint development by the two companies led to the creation of the 5nm (nanometre) and 3nm process technologies that enhance the performance of Apple devices and solidify TSMC’s position as an unrivalled technological leader.
Serving such high-profile companies has equipped TSMC with invaluable knowledge to cross-reference various chip designs and needs, creating an armoury of expertise.
How TSMC continues to succeed in challenging market conditions
Among competitors with leading-edge capabilities, Intel and Samsung are arguably TSMC’s peers. But even with this competition, it has captured around 78% of the ‘pure-play’ foundry market share, according to the Taiwan Semiconductor Industry Association.
The US International Trade Commission also noted that in 2024, it accounted for 92% of advanced chip manufacturing capacity.
Competitors can't keep up
By comparison, Intel, TSMC’s American competitor, remains stunted by missing critical shifts in semiconductor architecture needed for artificial intelligence. Likewise, its strategy of sticking to an integrated design and manufacturing model has compromised any potential leadership in fabrication and accordingly even Intel relies on TSMC’s superior execution for some of its most advanced technology.
By proposing a single-value model, TSMC became the manufacturer for many companies, giving it more chances to hone its skills and more demand for its services. Whereas Intel saw chip design start-ups as a threat, TSMC saw them as an opportunity. Ultimately, this resulted in Intel’s resources being spread between design and manufacturing, and hence too thinly.
TSMC is locked into supply chains
TSMC has also retained long-term business by cultivating close relationships with fabless customers (80% are fabless, while less than 20% are IDM) and by striving to enable customer innovation for mutual success, as with Apple and Nvidia. These relationships are entrenched by the switching costs and TSMC’s unparalleled ability to produce the world’s most advanced chips (with the 7nm process and below). The company’s long-term value in the supply chain is therefore cemented not only by a lack of alternatives but also by a unique and comprehensive understanding of its customers' needs.
Protection from market cyclicality
By becoming the foundry for a wide range of industries and needs, TSMC has achieved natural diversification and benefits from reduced exposure to market cyclicality. A certain portion of smartphone chip demand, for example, is recurring. Each year, some customers will replace their smartphones irrespective of whether individual chips (each device is typically stuffed with more than a dozen different types) have been upgraded by designers.
AI positioning
Having become a leader in process knowledge, TSMC is well positioned to meet emerging demand from artificial intelligence, and by 2029, AI-related revenue is projected to account for around 50% of total revenue at around 200bn USD. AI demand has dampened the seasonality of the business; smartphone appetite has typically accounted for the bulk of capacity in the second half of the year, whereas now this is balanced by AI’s strong consumption in the first half.
The foundry industry is currently forecast to outgrow the broader semiconductor industry, and TSMC will be one of the primary beneficiaries. The company anticipates growth driven by structural megatrends (including AI) regardless of macroeconomic cycles.
For instance, in 2023, a deep industry-wide inventory correction resulted in a revenue decline of 8.7% in USD terms; despite this, TSMC was sold out of 3nm and 5nm chips. Its leading-edge capacity tends to be fully utilised by customers, and TSMC is the only answer to this continued demand pressure.
TSMC was born out of Taiwan wanting stronger US integration
TSMC is more than a company; it is part of the spine of a nation which has found itself at a potential geopolitical flashpoint. For Taiwan, its crucial importance to the production of cutting-edge chips has formed a ‘silicon shield’ against the threat of Chinese invasion. Indeed, it was on this very premise that TSMC was built. In the aftermath of North Vietnam’s victory in the Vietnam War, Taiwan sought deeper US integration to insulate itself against the growing communist bloc in Asia.
For Taiwan, the creation of TSMC would provide jobs, advanced tech, and strengthened security ties. The semiconductor industry now accounts for 18% of Taiwan’s GDP and 60% of its exports, and its critical role in the semiconductor supply chain serves as a key deterrent to a possible threat from China.
Today, Taiwan once again recognises the need to diversify its strategy. American pressure to relocate chip production (in part) to its own shores has cast doubt on its defence commitments to Taiwan. Increased defence spending by Taiwan of an additional $40 billion this year and a 5% budget increase by 2030 signal this heightened uncertainty.
Equally, geographic diversification for the chipmaker is a balancing act: by moving production abroad – all else equal – the risks to production are reduced, and it is therefore of great importance to TSMC’s manufacturing integrity.
The US aims to reduce reliance on TSMC
Geographic diversification for TSMC’s chip production has a two-fold rationale: to go where customers need its products and to build operational resilience in the face of national security threats. The United States is both the primary recipient of TSMC’s production (with a 70% share of net revenue in 2024) and Taiwan’s major security ally against China’s threat.
This has resulted in an idiosyncratic relationship where the US pushes for the diversification of TSMC chip production on America’s shores, to secure its own independent capacity, and as a result potentially undermines its core security purpose by weakening Taiwan’s silicon shield and (at the margins) reducing the need to protect the region. America is Taiwan’s biggest ally, but American ambition could be Taiwan’s largest adversary.
How has the US put pressure on TSMC?
The Trump administration continues to push for TSMC’s most advanced chips to begin production on American shores, heightening Taiwanese worries that the US could hollow out its domestic chip industry. To appease its ally, Taiwan has agreed to share its model for industrial science parks and committed $165 billion to build a chip fabrication and processing plant in Arizona.
TSMC has protection for years to come
Beyond the supply-demand dynamics of the deal, the construction of the Arizona fab means it will still be several years before it can achieve a profitable yield and therefore some time before the US can efficiently produce high volumes of chips at competitive prices. By then, TSMC’s domestic production is likely to be far more advanced, widening the gap in technological capabilities. This dampens the threat of an obsolescing bargain effect[1] that would undermine TSMC’s leverage once manufacturing begins in the US.
In terms of processing knowledge and labour capacity, the American landscape has multiple obstacles to achieving the same level of production as TSMC's flagship fabs. One is the need for hundreds of engineers with the right education and experience and a willingness to relocate, due to the labour-intensive nature of chip production. Furthermore, bringing Taiwanese workers would be counterproductive to America First policies, which stipulate $100,000 fees for H-1B visas, along with the likelihood that engineers would prefer to stay at home, where cutting-edge production is led.
None of these is insurmountable with the right funding, but even a massive investment is unlikely to dismantle the silicon shield entirely, given TSMC’s rapid domestic production growth. This will increase in the coming years, especially as the company prepares to ramp production at home for the most cutting-edge 2nm process node.
TSMC will continue to be a key player in the semiconductor sector
Regardless of where its less advanced manufacturing takes place, TSMC has carved out its own path in the foundry business. Its masterful ability to innovate has not been emulated. Looking ahead, the semiconductor market is poised for robust growth, with the potential to reach $1.2 trillion by 2034, fuelled by AI and high-performance computing.
The structural trend towards safer, greener, and smarter cars, which increasingly use leading-edge chips, is also an avenue for growth. TSMC, as the world’s foundry, is poised to capitalise on these prospects.
By leveraging its position at the centre of semiconductor innovation, the company can pursue geographic expansion to its own benefit, and plans for production in Europe and the UAE can be viewed in this light. Expansion can reduce the geopolitical risk premium associated with single-location production, making TSMC an even more attractive global partner; create institutional interdependence, which ties Taiwan and the US closer together and motivates them to reduce any disruptions to operations; and position Taiwan as a node of innovation within a global network rather than a single vulnerable point.
All this is to say that TSMC's importance is unlikely to diminish, and for Taiwan, this should ensure the silicon shield remains raised. The company has provided the government with legitimacy and leverage in global diplomacy, especially since the surge in digital demand during the COVID-19 pandemic and the AI build-out stimulated huge growth for the company.
Cindy Wang, an international trade law professor, describes this relationship using the Chinese idiom “the lips and the teeth grow together.” TSMC’s growth has benefited Taiwan, and in return it receives favourable policies and a legacy in its home country that are difficult to replicate elsewhere – ensuring that the industry's heart remains within Taiwan’s borders
Guinness Emerging Markets Equity Income Fund
The Guinness Emerging Markets Equity Income Fund has held TSMC since its inception in 2016, having recognised the company's unique position and growth potential even before the advent of AI technology. The Fund aims to invest in high-quality companies within emerging markets, like TSMC, with the aim of providing investors with long-term capital growth and income. Learn more about the Guinness Emerging Markets Equity Fund here.
Risk: The Guinness Emerging Markets Equity Income Fund is an equity fund. Investors should be willing and able to assume the risks of equity investing. The value of an investment and the income from it can fall as well as rise as a result of market and currency movement; you may not get back the amount originally invested. The Funds are actively managed with the MSCI Emerging Markets Index used as a comparator benchmark only.
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