Hardware Island: Taiwan’s Indispensable Role in the Global Supply Chain
Hello, I'm Ylli Bajraktari, CEO of the Special Competitive Studies Project. In this edition of our newsletter, we share a trip report from a visit to Taiwan by our Chair, Dr. Eric Schmidt.
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Hardware Island: Taiwan’s Indispensable Role in the Global Supply Chain
Taiwan is home to the most advanced semiconductor fabrication and materials handling facilities in the world. Inside these facilities, overhead conveyor systems, known as Front Opening Universal Pods or FOUPs, transport silicon wafers over many miles of track between different buildings, equipment bays, and testing areas, forming one of the most complex systems ever built by humans. Much of this infrastructure is owed to Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest “pure play” foundry – a company singularly focused on manufacturing semiconductors – headquartered in Hsinchu Science Park, just southwest of Taipei, but with facilities scattered all over the island. The sheer scale of the global semiconductor manufacturing activity in Taiwan is overwhelming, befitting the designation: hardware island.
“There is air — and TSMC”
It is difficult to overstate the importance of Taiwan in the global semiconductor industry; it is estimated that Taiwanese companies produce more than 68 percent of all chips globally. TSMC produces 92 percent of the world’s most advanced chips. These chips power the latest smartphones, serve as the foundation of all cutting edge AI development activities, and are critical for many military applications. No other company today can match TSMC for producing chips as sophisticated as these at large scales.
A pure-play foundry, TSMC does not design chips or sell chips under its own brand name but instead manufactures for chip designers worldwide. TSMC’s customers range from the world’s largest chip firms – predominantly U.S.-based and well known names such as Apple, Nvidia, and AMD – to startups designing chips for emerging computing applications and paradigms such as artificial intelligence (AI). For example, Apple is TSMC’s largest customer by far, accounting for more than 23 percent of TSMC’s total revenue. In comparison to its well known customers, TSMC’s fabs operate as understated but nevertheless indispensable nodes in the global technology supply chain. Jensen Huang, the CEO of Nvidia, in 2014 famously joked, “Basically, there is air — and TSMC.”
Pushing the Edges of Silicon Technology
Moore’s Law dictates that chips get faster as transistor dimensions get smaller. This ethos of miniaturization has guided semiconductor technology advances for decades: with each successive technology generation, transistor dimensions get smaller, which in turn improves overall chip performance. In recent years, TSMC has led the development of transistors with ever-smaller features. Last year, TSMC was the first in the industry to achieve high-volume production of its 3 nanometer process. Chips in Apple’s newest Macs are based on this technology.
With 65 percent of 2022 sales from U.S.-based customers, TSMC has started diversifying its production outside Taiwan. The company is building two new fabs in Arizona, one at 5/4 nanometers and the other at 3 nanometers with a price tag of $40 billion. These U.S.-based TSMC fabs are expected to sell chips at 20 to 30 percent higher prices than Taiwan-made chips, highlighting the challenge of manufacturing cost-competitive semiconductors at scale in the United States. In addition, TSMC is expanding its presence in China, Germany, and Japan.
Next on TSMC’s roadmap is a 2 nanometer process which is expected to go into full production in 2-3 years, with even smaller chip designs in the pipeline. As transistor dimensions dropped below 10 nanometers, the industry added a vertical ‘fin’ to the traditional planar transistor design to extract greater performance. Moving from 3 to 2 nanometers will require further innovation.
Software Tradeoffs for the Hardware Island
Semiconductor manufacturing is a low-margin, capital intensive industry – only the sharpest, most streamlined business processes can survive in this environment. High-volume production at this level requires extremely tight management, thorough analysis and planning, the infusion and integration of new technology, and the strong work ethic of the Taiwanese talent pool. It’s hard to imagine Taiwan replicating this tightly-run manufacturing machine anywhere else but the island. Chip manufacturing in Taiwan has also spawned a whole downstream supply chain unto itself: it is no accident that Foxconn – one of the world’s largest contract manufacturers of electronics – is also based in Taiwan. Foxconn is one of TSMC’s largest customers and TSMC is a key supplier to Foxconn. Foxconn’s corporate clout has served as a launching pad for its founder, Terry Guo, now running for president in Taiwan’s 2024 elections.
Taiwan’s hardware-centric technology ecosystem has some drawbacks however. Amid the global tech talent shortage, the gravitational pull of Taiwan’s successful hardware companies is resulting in a lagging domestic software ecosystem. As a result of this, there are only a few Taiwanese firms working on large language models (LLMs), and they are small and not well-resourced. Taiwan’s lackluster software industry may also be a byproduct of the East Asian educational systems that incentivize conformity and structure over a looser and more creative approach. This can be addressed, but will take some time.
Taiwan’s Tech Future
Taiwan has mastered a level of complexity in manufacturing processes that is beyond human comprehension. This level of excellence will serve it well in emerging technologies. For example, the extreme complexity of TSMC’s manufacturing processes are well suited for applying AI algorithms to optimize yield, quality, and cost, as ensuring high yield on the production line is absolutely critical in the semiconductor business. Second, natural resources are scarce and the island is critically dependent on imported energy. Taiwan’s susceptibility to droughts and other natural disasters underscores the importance of finding alternative, resilient sources of energy to power not just fabs, but the island writ large. Fully renewable solar and wind are not enough to meet all the needs of Taiwan’s factories, but the island’s hardware-focused industry makes it a perfect candidate for both developing and manufacturing fusion energy at scale as the technology has complexity similar to what they have achieved in semiconductor manufacturing.
Taiwan’s centrality to the semiconductor industry only adds to its status as a geopolitical hotspot, amid growing tensions with China. In this context, Taiwan could lean on its strengths as the hardware island to become a military technology exporter at scale, starting with a variety of commercial drone technology. Amid the rising military threat from China, people I spoke to in Taiwan estimated that as high as 80 percent of the population favored the “strategic ambiguity” of the status quo, with only small minorities favoring unification or full independence. With increasing tension, especially amid a new election, some observers have argued Taiwan should adopt a tech-driven “porcupine strategy” to deter any attempt to take the island by force.
Parting Thoughts
As I departed Taiwan, I marveled at the prowess of the people who inhabit the island. The Taiwanese have flourished in the face of geopolitical tension and intense global tech competition. I was impressed by their commitment to producing the best chips in the world and how Taiwan embraced its indispensable role in the global supply chain. Their innovation touches every corner of the globe, silently powering the devices and systems that we all rely on. I have no doubt that the hardware island will continue to be an understated, formidable force in the world.
The above newsletter combines Dr. Schmidt’s personal account from his recent trip to Taiwan with SCSP staff sourcing facts and other information from publicly available resources and articles.