Taiwn-Chp maker

 Economist-11 May 21; 

Taiwan-Chipmakers

Chipmakers’ craft can seem magical. They use light to stamp complex patterns on a dinner-plate-sized disc of crystal silicon, forming arrays of electric circuits. Once cut out of the disc, each array is called a chip. The chip’s job is to shuttle electrons in a mathematical shimmer prescribed by computer code. They do the maths which runs the digital world, from Twitter and TikTok to electronics in tanks. Without them, whole industries cannot function properly, as carmakers forced to pause production because of microprocessor shortages are discovering.

The most important firm in this critical business is Taiwan Semiconductor Manufacturing Company (TSMC). It controls 84% of the market for chips with the smallest, most efficient circuits on which the products and services of the world’s biggest technology brands, from Apple in America to Alibaba in China, rely. As demand for the most sophisticated chips surges thanks to the expansion of fast communication networks and cloud computing, TSMC is pouring vast money into expanding dominance of the cutting edge.

This has proved to be a successful business model. Last year TSMC made an operating profit of $20bn on revenues of $48bn. It is, in the words of Dan Hutcheson of vlsiresearch, a firm of analysts, “the Hope Diamond of the semiconductor industry”—and, with a resplendent market capitalisation of $560bn, the world’s 11th-most-valuable company. It is also an astute geopolitical actor, navigating the rising Sino-American tensions, including over the fate of its home country, which China claims as part of its territory and to which America offers military support. In 62% of tsmc’s revenue in 2020 came from customers..in North America and 17% from those domiciled in China. It has managed the geopolitical divide by making itself indispensable to the technological world.

ambitions of both superpowers.

TSMC founded in 1987 made mostly unremarkable microprocessors during first 25 years. That began to change in 2012, with its first contract to make powerful chips for the iPhone. Apple wanted TSMC to push its manufacturing technology as far and as fast as it could, to gain an edge over rival gadget-makers. The notoriously secretive American firm liked the way Morris Chang, TSMC founder, made trade-secret protection one of his priorities; guests to TSMC premises would have their laptops’ usb  ports sealed even if they only visited a conference room. Two years later the Taiwanese firm’s chips were powering the iPhone 6,the best-selling smartphone of all time. Revenue from the 220m unitskick-started tsmc’s ascent. Some of Apple’s competitors also used TSMC as a supplier, and wanted the same thing. All paid handsomely for the chipmaker’s efforts.

Reflecting this, 97% of tsmc’s $57bn-worth of long-term assets reside in Taiwan (see chart 3). That includes every one of its most advanced fabs. Some 90% of its 56,800 staff, of whom half have doctorates or masters degrees, are based in Taiwan.

This creates a positive feedback loop. Developing the latest technology before anyone else allows tsmc to charge higher prices and earn more profit, which is ploughed back into the next generation of technology—and so on. The cycle is spinning ever faster. Four technological generations ago it took TSMC 2 years for those cutting-edge chips to make up 20% of revenues; the latest generation needed just 6 months to reach the same level (see chart 2). Operating income, which grew at an average rate of 8% year in the decade to 2012, has since risen by 15% on average. Combined with revenues that chip-designers make from semiconductors ultimately forged by tsmc, the company and its customers account for 39% of the global market for microprocessors, according to vlsiresearch, up from 9% in 2000 and a third more than once-dominant Intel.

This is an enviable position to be in. But it is not an unassailable one. The experience of Intel, which has fallen behind in the last two generations of chips because of technological missteps, shows that even the most masterful manufacturers can trip up. Chipmaking is also notoriously cyclical. Booms lead to overcapacity, and to busts. Demand may slacken as the rich world emerges from the pandemic, when purchases of gadgets that made it possible to work and relax at home were brought forward. That would hit TSMC’s bottom line and strain its balance-sheet. The company has $13bn of net cash, a modest rainy-day fund for a big tech firm. To help finance its most advanced fabs, it has issued $6.5bn-worth of bonds in the past six months.

The most serious danger to tsmc comes from the Sino-American ructions. The company’s position at the cutting edge offers a buffer against geopolitical turmoil. Chip-industry insiders say that the Taiwanese government encourages all its chipmakers, including TSMC, to keep their cutting-edge production on the island as a form of protection against foreign meddling. Taiwanese contract manufacturers account for two thirds of global chip sales.

The firm has made soothing noises to America and China, offering to invest more in production lines based in both countries. But it is hard not to see this as diplomatic theatre. Its Chinese factory in Nanjing, opened in 2018, produces chips that are two or three generations behind the cutting edge. By the time its first American fab, designed to be more advanced that the one in Nanjing, is up and running in 2024, TSMC will be churning out even fancier circuits at home. By our estimates, based on disclosed investment plans, the net value of TSMC fabs and associated equipment will roughly double by 2025, but 86% will still be in Taiwan.

In the past three years the American government has begun to disrupt the delicate balance. It has tightened export controls that prohibit any foreign company from using American tools to make chips for Huawei, a Chinese technology giant. That applies to tsmc, which in 2019 sold more magical. chips They use light to to Huawei than to any other customer bar Apple. Most of these were stamp destined complex patterns on for smartphones, and other Chinese handset-makers such as a dinner-plate-sized disc of Oppo happily snapped up what Huawei (which on April 28th reported crystal its second silicon, forming year-on-year decline in quarterly revenues in a row) could not. arrays of electric circuits.

Further American attempts to prevent tsmc from doing business Once with cut out of the disc, China could invite meddling by the regime in Beijing, which refuses each array to rule is called a chip. out taking back Taiwan by force. President Joe Biden’s administration  also announced a $50bn government plan to revive chipmaking electrons at home: it is doubtful whether subsidies will restore Intel’s supremacy, but shimmer the prescribed by initiative could involve putting more pressure on tsmc to put cutting-edge computer code. They do the production in America, a strategic trap the firm has been keen maths to resist. which runs the digital world, from Twitter and The rival powers have so far refrained from interfering with tsmc directly, TikTok to electronics in perhaps concluding that this is the most reliable way of achieving their tanks. Without them, whole technological objectives. If the chipmaker’s importance keeps industries growing, one of them may decide that it is too valuable to be left alone. properly, as carmakers ■ Dig deeper forced to pause production 

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