\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/04\/GettyImages-1746591662-e1712773924314.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
Taiwanese semiconductor manufacturer TSMC is riding high. A day after winning an $11.6 billion grant and loan package<\/a> from the Biden administration\u2019s CHIPS Act, its stock price surged on reports of a 16.5% increase in quarterly revenue.\u00a0<\/p>\n Driven by booming demand from chip designers, TSMC\u2014which has a near-monopoly on global semiconductor manufacturing\u2014is riding the AI wave that\u2019s pushed the stock market to record highs.<\/p>\n The global semiconductor industry\u2019s ecosystem is widespread and fragile, largely relying on teamwork between a handful of design and manufacturing firms across continents to produce the chips behind everything from lawnmowers to large language models (LLMs). But TSMC has built up a dominant position in fabrication, the part of the process where semiconductors are actually constructed.\u00a0<\/p>\n The reason why TSMC makes some 92% of the world\u2019s advanced chips<\/a> is because it\u2019s one of the only firms that can. Unlike other companies that handle chip production from design to sale, TSMC functions only as a manufacturer (also known as a foundry, or fab). Companies designing cutting-edge AI chips, such as Nvidia<\/a> and Intel<\/a>, rely on foundries with extremely specialized tools to build their designs\u2014and for them, TSMC is the only game in town.<\/p>\n As demand for AI chips continues to boom, TSMC is facing more competition from peers such as Intel, who\u2019s also opening new fabs in Arizona<\/a>, and New York-based GlobalFoundries<\/a>. But semiconductor demand is expected to increase by double digits this year<\/a>, and TSMC\u2019s massive head start means it\u2019s poised to stay on top of the market for years.<\/p>\n TSMC was founded by Morris Chang in 1987<\/a>. Born in China in 1931, Chang left the country during the Chinese Civil War<\/a> and studied engineering at Harvard and MIT before taking a job at Texas Instruments<\/a>, a leading company in the then-nascent semiconductor industry. Chang rose through the ranks at Texas Instruments, earning a PhD at Stanford along the way and eventually coming to run their entire semiconductor division, but quit in 1983.<\/p>\n Chang was 55 when he moved to Taiwan and founded TSMC, and already had decades of experience in the semiconductor industry. His vision for TSMC was for a new approach to chip manufacturing: whereas other semiconductor companies controlled every step of the production process in-house\u2014from design to shipment\u2014TSMC was set up solely as a foundry, taking orders from chip designers and only focusing on the highly technical process of assembling chips.\u00a0<\/p>\n The idea wasn\u2019t universally popular from the start.<\/p>\n \u201cThere were two barriers to entry. One was the capital cost. But the other was the concept, which was not widely accepted,\u201d Georgetown global innovation policy professor Charles Wessner told Fortune<\/em>. \u201cMost people, including those in Taiwan, did not believe this would work\u2014the idea of setting up fabs that just produce chips for other people. That\u2019s a very novel approach.<\/p>\n TSMC grew slowly, landing contracts with Dutch firm Philips and benefiting from Taiwanese government support. Over time, as its operations grew and chip technology designers began to ask for newer, innovative manufacturing functions, TSMC\u2019s fabrication capabilities\u2014unencumbered by time spent designing or marketing chips\u2014far outpaced its competitors.<\/p>\n \u201cThe basic idea is you get multiple customers who are providing you with the resources to produce their chips, and all you have to do is concentrate on the fabrication\u2014you don\u2019t have to do design, and you don\u2019t have to sell,\u201d Wessner said. \u201cYou focus on that central node. And the more volume you get, the more skilled you get in the production.\u201d<\/p>\n Semiconductor fabrication is one of the most technically demanding manufacturing processes out there. The most advanced transistors, the electronic components that make up semiconductors, are incredibly small\u2014just 50 nanometers, over a thousand times smaller than the width of a human hair.<\/a>\u00a0<\/p>\n To build the most advanced chips, TSMC fits billions of these transistors onto silicon wafers. That process requires expensive tools, such as lithography machines, ultra-pure water filtration. TSMC is one of the few companies in the world that has them, and also has decades of experience in supply chain management and navigating supplier relationships required to do business in the semiconductor industry.<\/p>\n \u201cOne of the interesting things about this industry is how much of it relies on tacit knowledge: that is, know-how,\u201d Wessner said. \u201cIt\u2019s much more artisanal than most people realize.\u201d<\/p>\n One of TSMC\u2019s biggest worries is environmental: its Taiwan headquarters is located right along a fault line. Last week, it suffered a 7.4-magnitude earthquake, the largest in 25 years<\/a>. The earthquake didn\u2019t significantly disrupt business or affect TSMC\u2019s operations, but left industry watchers wary of the possible effects of a more serious catastrophe<\/a>.\u00a0<\/p>\n More than 80% of the world\u2019s earthquakes occur on the rim of the Pacific Ocean, including Taiwan. Taiwanese authorities detect around 20,000 earthquakes a year, although most of them are barely perceptible.<\/p>\n \u201cIt sits on top of an earthquake fault \u2014the Pacific Rim of fire,\u201d Wessner said of TSMC. \u201cI am quite unaware of any agreement with the earthquake gods.\u201d<\/p>\n<\/div>\n\nSubscribe to the Eye on AI newsletter to stay abreast of how AI is shaping the future of business. Sign up<\/a> for free.<\/div>\n