I'll explain the reason for the chip crisis (and what TSMC has to do with it)

tsmc chipset crisis

Today chip crisis it is no longer a topic just for insiders, but it is something that is shaking the whole of society from its foundations, especially since the pandemic and lockdowns have slowed down factories around the world. And if today experiencing this crisis means not being able to easily buy a console or a latest generation graphics card, tomorrow it could mean not being able to buy a new car, given that it is starting to hit the automotive world hard. But the reason why we are experiencing this crisis is not exclusively the pandemic: there are many reasons, but today I want to talk to you about what I think is most fascinating but also worrying. I'm talking about TSMC, a company that you may have heard of from time to time, but on which a large part of our lives depend.

Chip Crisis: What's going on and what TSMC has to do with it

First, a few numbers: only in the 2020, TSMC grossed something like 48 billion dollars, and in recent years its stock on the stock exchange has grown by more than 200%, with a peak between 2020 and 2021, not surprisingly, when the chip crisis began to be felt. This is because, even if it does not technically have a monopoly, an unimaginable amount of chips comes out of TSMC's factories. First of all the chips of practically all smartphones in circulation since it produces for Qualcomm e MediaTek, therefore consequently for Xiaomi, OPPO, vivo, OnePlus, Realme, Honor and various company. The only exception is Samsung which makes them by itself but which still uses Qualcomm chips every now and then. But the list also includes proprietary chipsets that Apple use on iPhone, iPad, Apple Watch, PC and notebook. Before the American ban, then, TSMC also produced the chips of the then best-selling smartphones Huawei. Not to mention that among its main customers there are NVIDIA, AMD e Intel, that is, all the chips that we find in the CPUs and GPUs of all computers, notebooks, tablets and consoles in circulation.

In short, in the hands of TMSC there is more than half of the global market and maybe you are starting to understand where I want to go. Estimates show that in 2021 world semiconductor sales will exceed 500 billion dollars. We are therefore talking about one of the richest markets in the world, but despite this, a single company keeps everyone in check. But how is this possible?

tsmc larger customers

The importance of Taiwan

How is it possible, then, that the world of semiconductors is in the hands of a single company but not in the United States, China or Japan, but in Taiwan. A big island poco more than Sardinia but which at the same time has more than 23 million inhabitants and one of the richest nations in the world, more than Germany, the United Kingdom and Japan. Today more than ever, Taiwan is at the center of the ongoing geopolitical clash between USA e China and the reasons, as always, are both historical and economic. We could say that China has always had a mixture of admiration and jealousy towards Taiwan, which in the 80s was one of the so-called 4 Asian Tigers along with South Korea, Singapore and Hong Kong. All nations that have become very rich at a time when China was still struggling to catch up with the rest of the world. The reasons I explained in the video "Why are smartphones all from China?".

Unlike China, Taiwan long lived like western colony, enjoying or being influenced by European societies which tend to be more liberal than Asia. Not surprisingly, Taiwan was the first Asian state to legalize same-sex marriage, for example. But its history is very troubled: between 1600 and 1800 it was the domain of the China, except to go to Japan at the end of 1800. A Japan that made it a model island with higher than average quality standards for education, health, infrastructure: all to convince the other Asian nations to pass under their own empire of the Rising Sun. With the surrender of Japan in 1945, Taiwan returned to China again, but it was in the post-World War II that the intervention and therefore theinfluence of the United States, in a troubled historical period in which its transition from an island of China to an independent island began.

We could talk for hours about the affair between China and Taiwan, especially since China has widened its expansionist aims also towards “controversial” territories such as Hong Kong, Tibet and Mongolia. But also in the rest of the world in a certain sense with the New Silk Road, even going so far as to influence countries in Africa and Eastern Europe, but this is another discourse that maybe we will deepen in another video. What matters is that today the tensions between China and Taiwan are more tense than ever and in my opinion not by chance. If Taiwan is so rich today and has had one of the highest economic growth in the world in 2020, that is in pandemic issues, it is above all thanks to TSMC, which alone represents a quarter of the Taiwanese market. And although China is considered the factory of global technology, it is almost absent in the chipmaker market, unlike the United States, South Korea, Europe and, indeed, Taiwan. In short, you can understand for yourself why China is reaching out to this island today that the semiconductor crisis is raging and risks impoverishing those nations that have no say in the matter. Nor is it by chance that the United States, Taiwan's historical allies, promptly responded to Chinese provocations.

top 15 chipmakers in the world

The influence of the USA and Silicon Valley

After the Second World War, the United States helped Taiwan a lot investing in its economy, which in the 50s was a modest agricultural economy and therefore needed to evolve. The agricultural economy nevertheless helped it generate money capital and labor, and in the 70s Taiwan converted to an industrial economy and in the years' 80 in a 'technological economics. But entering the tech market was not easy at all, on the contrary, it was definitely a gamble. At the time, the United States but also Japan were the historical leaders of chipsets, with Intel, Texas Instruments and Motorola on the American side and NEC, Hitachi, Toshiba and Fujitsu on the Japanese side.

Thus we come to 1980, the year in which the Taiwanese Minister of Science and Technology visited the USA, being extremely fascinated by the Silicon Valley and from all the fervor that arose in the technological field. The desire was born in him to do the same in the motherland and thus he was created Hsinchu Science Park, practically a Taiwanese Silicon Valley near two of the main national universities Tsing Hua University and Chiao Tung University. Just like in California, with Silicon Valley near the famous universities of Stanford and Berkeley. In this way, the park would have hosted the best students in the nation and, on the contrary, for example from South Korea which has historically encouraged large corporations such as Samsung and LG, incentivized the creation of startups. What Taiwan did was seek a balance, giving students houses, offices and tax incentives but in moderation, encouraging competitiveness even by foreign companies to grow the entire technology industry rather than individual companies.

In those years, then, Taiwan was experiencing a real one economic boom, to the point that the brain drain that had occurred in previous years was reversed and some decided to return to their native land. One of these brains was morris chang, and what a brain: he graduated from Harvard, MIT and Stanford, then went to work for Texas Instruments. His return to Taiwan is a very important element for the technological development of the country, because after becoming president of ITRI in 1986, a year later he founded the then startup that today we know just as TSMC.

And TSMC wasn't Taiwan's first chipmaker anyway. The primacy is in fact of UMC, a historic company that has never taken off, relegating itself to the production of low-cost chips for products such as watches and toys. On the contrary, Morris Chang's more typically Western view changed the business model and the semiconductor market he had had up to that moment.

morris chang tsmc

First aspect: unlike UMC, it aimed for one production devoted to export: According to Morris, only by competing with the rest of the world can you aspire to become the best. Second aspect: foresight, by setting the price of the chips in advance and sacrificing immediate gains but to increase market share and have more long-term gains. But above all, third aspect: to create what we know today as the distinction between chipmaker fab and fabless. In short, to act as intermediaries between those who think the chips and those who use them. Let's take the Snapdragon 888 for example: the chip is indeed engineered by Qualcomm, but Qualcomm is a fabless chipmaker, i.e. without factories. This means that once the chip has been conceived and designed, it must be sent to a fab chipmaker (in this case TSMC) who has the factories and machinery needed to print the chip. Finally, the printed chips are sent to various manufacturers such as Xiaomi, OnePlus and so on.

But the same is also true for Apple and it was true for Huawei before the American ban, that is, two companies that make their own chipsets but still need TSMC to print them for them. In this way, fabless chipmakers can focus on design, while fab chipmakers can focus on manufacturing. A winning strategy on both sides and in fact it has been gradually adopted by other companies in the sector: MediaTek with UMC and TSMC, Samsung Exynos with Samsung Semiconductors and AMD with GlobalFoundries. And it is probably no coincidence that Intel is the only one that continues to do it all by itself and is increasingly blaming the competition.

fabless chipmaker
Source: TechAltar

Why does everyone want TSMC?

At this point, someone might say: yes, but how does TSMC manage to be the only company that all these manufacturers rely on? As I told you, in antiquity Taiwan it was a western colony, one to be precise Dutch colony. And even when it became an independent nation, the links with Holland remained. Just think that in the 70s Mr. Philips was the largest foreign investor in Taiwan. And it was also thanks to Philips that it was born TSMC, practically a joint venture between Taiwan and the Netherlands. Philips invested heavily in the chipmaker, providing them with 80% of the first patents and technologies to have a 1,5 micron production process, modern but not too modern to compete on its own.

Also in the 80s, Philips understood the crucial importance that the semiconductor market would have from then on. So he decided to ally with the still Dutch ASM and found ASML, another company almost unknown to most but on which the fate of the global technology market depends. Yes, because ASML manufactures machinery for lithographic print, that is the fundamental process for the creation of the chips. After becoming the world leader against rivals Canon and Nikon, ASML is today the only supplier of EUV (Extreme Ultraviolet Litography) cameras. They are the only ones in the world that allow you to print chips at 5 nm, which is currently the most powerful chips in circulation. We are talking about machines that weigh 7 tons, have a cost of 100 million dollars and only 150 are produced per year. And guess who's most of these 25 machines go to? Right at TSMC.

Taiwan and ASML, a winning marriage

In addition to the history that unites Taiwan, the Netherlands and their respective companies, we discover why there is such a strong link between TSMC and ASML by going back in time. But first, let me briefly explain what the litografia: in short, the design of the chip is projected by a laser through a lens, which projects and photo-engraves many of its small miniatures on the silicon wafer coated with photosensitive material. To this factor we add the often mentioned Moore's Law, according to which the number of transistors in chips doubles on average every 18 months, and we see this from how much phones and computers have shrunk over the years. But miniaturizing a chip is something extremely complex, because the lenses used for lithographic printing have a physical limit and can miniaturize up to a certain point.

As I told you poco ago, it is ASML that makes those very expensive machines to make very small chips, but if these machines exist it is also thanks to TSMC. Indeed, it would be more correct to say that it is thanks to Burn Jeng Lin, Taiwanese engineer who theorized the immersion lithography. You know when you water a plant and you are told not to wet the leaves, otherwise the drops that remain on the leaves act as a magnifying glass and burn them? Here, the concept is the same. In short, liquid is placed between the lens and the silicon wafer to exploit the greater refractive capacity of water and thus increase the capacity of miniaturization. It is thanks to this technique that today we have such small chips and guess what? That Taiwanese engineer started working for TSMC in 2000 bringing with him this knowledge that was then shared with ASML starting from 2004. This agreement thus allowed ASML to become the queen of the sector on the one hand and from more to TSMC to have a friendly company that would provide him with the machinery necessary to advance technologically.

In short, these are all the reasons why TSMC is the company that dictates the law in the chipset market today. And to say it is not me, but the numbers: to tackle the chip crisis, the US government has allocated investments for 52 billion dollars. An important figure, of course, but at the same time TSMC has it ready 100 billion, and this makes us understand how much TSMC is ahead of the rest of the world, being able to afford to invest twice as much as a world power like the USA. Understanding how the semiconductor crisis will evolve is still too early to say, also by virtue of the winds of war blowing between China and Taiwan. If in ancient times wars were fought for resources such as gold and oil, today chipsets are in effect the new gold. And in all this, as usual Europe is watching.

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