TSMC: Semiconductors and Borders of Light

Friends,

Sometimes, the stars align.

For the past few weeks, I’ve been researching the Taiwan Semiconductor Manufacturing Company (TSMC). Semiconductors are vital to our modern life, and few organizations are more influential than the $400 billion Taiwanese firm.

On Tuesday, TSMC became even more interesting. At an event in Arizona, the company announced it would be spending $40 billion to develop chip manufacturing facilities in the United States.

This is a big deal, evidenced by the fact that both President Biden and Tim Cook were in attendance. For the past couple of decades, semiconductor fabrication has been concentrated in Taiwan. There will be significant commercial and geopolitical impact if a meaningful percentage of manufacturing shifts to America.

To learn about one of the most important companies in the world, and the absolutely impossible process it takes to make a chip, jump in.

PS – There are a lot of great resources out there about TSMC. If you want to go deeper, I’d highly recommend the episode my good friends at Acquired did on the company. I’d also suggest Chip War, an excellent book on the industry.

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TSMC: Semiconductors and Borders of Light

Actionable insights

If you only have a few minutes to spare, here's what investors, operators, and founders should know about Taiwan Semiconductor Manufacturing Company (TSMC).

• One of the world’s most important companies. TSMC is the largest manufacturer of leading-edge semiconductors. These chips are used in everything from phones to fridges to cars to weapons systems. Currently, no other company truly rivals its capabilities.
• Coming to America. Though based in Taiwan, TSMC is investing in American manufacturing. This week, the foundry announced it was increasing its financing for facilities in Arizona to $40 billion.
• A series of chokepoints. Though TSMC is essential, the semiconductor supply chain is littered with nearly irreplaceable players. That includes companies that develop software used for chip design and makers of manufacturing equipment. The result is an industry full of chokepoints.
• Superpowers face-off. As semiconductors have increased in importance, they have become geopolitically strategic. Chip sanctions are a potent weapon in the U.S. and China’s economic war. In October of this year, President Biden’s administration issued a series of unprecedented restrictions.
• Artificial intelligence’s hunger for computing power. Increases in computing power are critical to AI’s advancement. As the technology becomes increasingly important, demand for chips is only likely to increase. Though this may open the door for shifts in the semiconductor industry, it could also compound TSMC’s advantages.

***

“Globalization is almost dead,” Morris Chang said on Tuesday. “Free trade is almost dead.”

If anyone should know, it's Chang. The founder and two-time CEO of Taiwan Semiconductor Manufacturing Company, better known as TSMC, built one of the world’s largest businesses on geographical arbitrage. Much more went into creating the leading semiconductor foundry, but it could not have reached its $417 billion market cap without access to Taipei’s low-cost labor.

While Chang’s pronouncement sounded downbeat, it arrived in auspicious circumstances – at least from the vantage of the American government and private sector. With Joe Biden and Tim Cook in attendance, Chang announced that TSMC plans to invest $40 billion in Arizona to build two new factories. Not only was this triple the amount TSMC had initially pledged as part of a 2020 initiative, it is one of the largest direct investments in American history, comfortably eclipsing Samsung’s $17 billion plan for a Texan chip facility.

More significant than the scale of TSMC’s investment are its implications. Though less buzzy than many other technologies, semiconductors are fundamental to our security, industry, and quality of life. Tiny chips, with transistors just a few nanometers wide, power the computers we use to work, the phones we need to communicate, the cars and trucks transporting people and goods, and the weapons that countries like Ukraine deploy to repel invasion. They are, without exaggeration, vital to modern existence. Even delays in the semiconductor supply chain can choke industries and rile consumers – if companies like TSMC ever shut down, catastrophe would ensue. “GDP would go down 10% overnight,” NZS investor Jon Bathgate remarked. “We’d put ourselves into a global depression.” These wafers of silicon embroidered with circuits act as a border of light, separating us from darkness.

Because of their importance to all aspects of modern living, semiconductors have become geopolitically strategic, especially for China, the U.S., and Taiwan. China has invested tens of billions of dollars in building a domestic supply chain, the U.S. has issued sanctions to thwart China’s technological progress, and Taiwan relies on the presence of TSMC to provide a “silicon shield,” deterring invasion.

All of which makes Tuesday’s announcement more notable. Not only will this bring cutting-edge manufacturing to the U.S., it will decentralize it away from Taiwan. The development speed, scale, and ultimate success of the Arizona venture will inform just how meaningful this move is. If TSMC’s $40 billion investment represents the totality of its interest in foreign manufacturing, the new factories will create jobs, increase capacity, and provide a much-needed, albeit minor, hedge against turmoil in Taiwan. But if it is the start of a broader trend – if Morris Chang is right about the collapse of globalization – it will have profound effects politically, commercially, and technologically.

In a meme

​​​​​​​​​​​​For the pictorially inclined, here's the whole piece — all 5,200 words of it — in a single meme.

Puzzler

​​​All guesses are welcome and clues are given to anyone that would like one. Just respond to this email for a hint.

A fierce battle was fought over last week’s riddle, with a wave of correct answers arriving quickly. Austin V triumphed by answering first. Other winners included Roshan A, Shashwat N, Vinish G, Nnamdi E, Krishna N, Riley V, Keshav J, Ilya K, Rishabh T, Chris S, Ian B, Mike O, Gabe V, Nate W, Julia P, Christopher L, Yaakov C, Pavan Y, Steve S, David, Joshua K, Felipe R, Nathan M, Yakhin I, Hasan E, Kam C, Blanca S, Lucas S, Toby O, Beverly H, John G, Guthrie C., Florian K, C Berry G, Miguel P, Thomas R, Peter L, and Hari A. This was our last puzzler:

The answer? Fire. Of course!

Wishing you all a lovely day, wherever you are in the world.

Mario