The world relies on one chip maker, leaving everyone vulnerable

The world relies on one chip maker, leaving everyone vulnerable. By Yang Jie.

Taiwan Semiconductor Manufacturing Co.’s chips are everywhere, though most consumers don’t know it.

The company makes almost all of the world’s most sophisticated chips, and many of the simpler ones, too. They’re in billions of products with built-in electronics, including iPhones, personal computers and cars — all without any obvious sign they came from TSMC, which does the manufacturing for better-known companies that design them, like Apple Inc. and Qualcomm Inc.

Third-bottom line of the writing on the processor chip

TSMC has emerged over the past several years as the world’s most important semiconductor company, with enormous influence over the global economy. With a market cap of around $550 billion, it ranks as the world’s 11th most valuable company.

Its dominance leaves the world in a vulnerable position, however. As more technologies require chips of mind-boggling complexity, more are coming from this one company, on an island that’s a focal point of tensions between the U.S. and China, which claims Taiwan as its own.

Analysts say it will be difficult for other manufacturers to catch up in an industry that requires hefty capital investments. And TSMC can’t make enough chips to satisfy everyone — a fact that has become even clearer amid a global shortage, adding to the chaos of supply bottlenecks, higher prices for consumers and furloughed workers, especially in the auto industry. …

Being dependent on Taiwanese chips “poses a threat to the global economy,” research firm Capital Economics recently wrote. … Its technology is so advanced, Capital Economics said, that it now makes around 92% of the world’s most sophisticated chips, which have transistors that are less than one-thousandth the width of a human hair. Samsung Electronics Co. makes the rest. Most of the roughly 1.4 billion smartphone processors worldwide are made by TSMC. …

The U.S., Europe and China are scrambling to cut their reliance on Taiwanese chips. While the U.S. still leads the world in chip design and intellectual property with homegrown giants like Intel Corp., Nvidia Corp. and Qualcomm, it now accounts for only 12% of the world’s chip manufacturing, down from 37% in 1990, according to Boston Consulting Group. …

Analysts say that broader trends in the industry, along with TSMC’s hard-driving culture and deep pockets, will make it hard to create a more diversified semiconductor supply chain anytime soon.

Semiconductors have become so complex and capital-intensive that once a producer falls behind, it’s hard to catch up. Companies can spend billions of dollars and years trying, only to see the technological horizon recede further.

A single semiconductor factory can cost as much as $20 billion. One key manufacturing tool for advanced chip-making that imprints intricate circuit patterns on silicon costs upward of $100 million, requiring multiple planes to deliver. …

Other countries would need to spend at least $30 billion a year for a minimum of five years “to have any reasonable chance of success” in catching up with TSMC and Samsung, wrote IC Insights, a research firm, in a recent report. …

Taiwan’s silicon shield:

Many analysts believe China won’t try to reclaim Taiwan in the near future because the move could disrupt its own supply of chips.

Taiwanese leaders refer to the local chip industry as Taiwan’s “silicon shield,” helping protect it from such conflict. Taiwan’s government has showered subsidies on the local chip industry over the years, analysts say. …

How TSMC came to dominate — a singularity feedback developed, whereby all the money went to the most advanced:

With the Taiwanese government providing about half of its initial funding, TSMC gained traction by positioning itself as the Switzerland of semiconductors. Companies like Nvidia and Qualcomm found that by pairing with TSMC, they could focus more on design without the hassle of running their own factories, or worrying about handing their intellectual property to a competitor to manufacture. AMD sold off its fabs and became one of TSMC’s biggest customers, as did other major players, until there were only a few advanced chip makers left.

Each new client that TSMC picked up added to the company’s war chest, enabling it to spend heavily on its manufacturing capabilities. “The power of the model didn’t become evident until they reached very large scale. Once that calculation changed, it changed the name of the game,” said David Yoffie, a Harvard Business School professor and former member of Intel’s board of directors. …

A pivotal moment came in 2013, when TSMC began work on mass-producing mobile phone chips for Apple, now its biggest customer. Before that, Samsung — which had its own smartphones — had been the exclusive microprocessor supplier for iPhones.

To fulfil Apple’s first order, TSMC spent $9 billion, with 6,000 people working around the clock to build a fab in Taiwan in a record 11 months. TSMC is now the exclusive supplier for the main processors in iPhones.

When TSMC was trying to develop cutting-edge chips in 2014, it reorganised its research and development team to work 24 hours a day, with 400 engineers handing off work over three shifts, current and former employees say. Some employees dubbed it the “liver buster” plan, because they felt working late harmed their livers.

Silicon chips are the most complicated artifacts produced by humans, ever, by a country mile.

People nowadays think they are so smart, using Smartphones and all. But really, that “smartness” comes down to a collaborative effort by a couple of thousand engineers spread across a handful of companies, led by TSMC. The technology is incomprehensible magic to all but a few.

Chip manufacture is not just very capital intensive, it is very talent intensive. To build any part of the chip making tool chain requires a lot of smart, serious people working obsessively for years on end. Huge rewards take huge efforts.

Ultimately the limiting factor on chip manufacture is not money, but talent. Any banking system can create as much “money” as they like. But human ingenuity and talent are scarce, and cannot be created at the push of a button. People smart enough and well enough educated don’t grow on trees, and are becoming scarcer as the world dumbs down.

Btw, Australia used to have a silicon chip design industry in the early 1980s. In 1984 I left Australia to study at Stanford University in California. After completing two Masters degrees and a PhD, I worked in silicon Valley for a year, at KLA-Tencor, one of the big six companies producing the machines in the chip manufacturing chain. But when I returned to Australia in 1990, the Australian chip design industry had died. Easier to make money in real estate, mining, and agriculture.

At KLA I had a Taiwanese boss and a Taiwanese co-worker. They asked me once what Australia produced — cameras, cars perhaps, what do you guys make? They were surprised and confused when I said it was just mainly minerals and farming goods.