A large amount of the most sophisticated microchips in the world are produced at a factory in Hsinchu, Taiwan, a mid-sized city on the northwest coast with nothing particularly noteworthy about it from the outside. Workers in cleanroom suits move silently and cautiously. The machines inside are more precise than most engineers outside the industry have ever worked with. And their fingernail-sized products wind up in the brake sensor in the car you drove this morning, the laptop on your desk, and the iPhone in your pocket.
Taiwan Semiconductor Manufacturing Company is unfamiliar to most people. This is one of the reasons this situation is so subtly unsettling.
According to TrendForce data, TSMC makes up about 54% of all foundry revenue worldwide, and that percentage only includes the outsourced manufacturing sector. The picture gets even more focused when you consider its dominance over the production of advanced chips in particular. Together, Taiwan’s contract manufacturers account for over 60% of foundry revenue worldwide. Just one island. a single ecosystem. The rest of the world is observing from a distance and is totally reliant on its outcome.
Most people saw this fragility for the first time during the 2021 chip shortage. Production lines were stopped by automakers. Shipments of electronics were delayed. Suddenly, nations that had never given semiconductor policy much thought were contacting Taipei and politely requesting assistance. Germany made contact. The United States did the same. That picture of powerful industrial nations with trillion-dollar economies reaching out diplomatically to a democratically run island of 23 million people because they needed chips is almost surreal.
It’s important to consider how this came about because it wasn’t an accident. Morris Chang, who had the somewhat radical notion that semiconductor manufacturing and chip design could be completely separated, founded TSMC in 1987.
While TSMC handled the extremely complicated physical production, companies like Apple, Qualcomm, and Nvidia could concentrate on engineering the designs—the intellectual work. That division of labor was incredibly effective. As the chip design industry expanded around its capabilities, TSMC made unrelenting investments in manufacturing precision over several decades. TSMC was practically indispensable by the time anyone in Washington or Brussels gave supply chain concentration any serious thought.
Economists and defense analysts now refer to this irreplaceability as a single point of failure. Although the term seems dry, its implications are not.
Whether caused by a natural disaster, a conflict, a cyberattack, or something as commonplace as a protracted power outage, a significant disruption at TSMC would simultaneously affect almost every technology-dependent industry on the planet. manufacturing of consumer electronics, automobiles, military hardware, medical equipment, and financial infrastructure.
There isn’t a clear list of items that wouldn’t be impacted because modern manufactured goods rely heavily on chips in ways that have quietly accumulated over the past 20 years.
It’s more difficult to have a calm conversation about the geopolitical aspect. Taiwan is located about 100 miles from the Chinese mainland, separated by a strait that has been the source of political and military conflict for many years. Taiwan is regarded by Beijing as a part of its territory. In terms of how it would react to any military action, Washington has consistently maintained a policy of purposeful strategic ambiguity. There has been little change in either position. As TSMC’s significance has only increased, so too have the possible repercussions of Taiwan Strait instability.
There are initiatives in place to lessen this concentration, and they merit recognition. In Arizona, TSMC is constructing fabrication facilities. Intel is making a significant effort to return to advanced manufacturing. Samsung of South Korea is a competitor at the forefront. However, building semiconductor fabrication facilities requires years and billions of dollars, and funding alone is insufficient to transfer the expertise ingrained in Taiwan’s manufacturing ecosystem, including the engineers, suppliers, and institutional knowledge. Over the next ten years, it’s possible that new plants will significantly alter the balance.
In Taiwan’s semiconductor industry, the world created something remarkable. It’s difficult to look at it now without experiencing a complex mixture of admiration and worry because the same concentration that made it so effective also made it vulnerable in a way that the world economy hasn’t yet fully considered.
