Taiwan accounts for two-thirds of the world’s third-party semiconductor production, thanks largely to TSMC and UMC, but it is also now climbing many ranks in advanced chip design, rivaling large US firms that design but don’t. They make chips. MediaTek is the best-known Taiwanese company in this field, with its smartphone chip designs made for it by TSMC, but its compatriots Novatek, Realtek and Himax are also among the top ten chip design companies, according to Trendforce.
The global market for built-to-order semiconductors, for companies that sell the chips they design under their brand but do not manufacture them, is expected to grow 20% this year to $128.7 billion, according to Taiwanese consultancy Trendforce, which knows this market well because in Taiwan no less than 66% of all chips are manufactured by third parties, according to the calculation forecast for this year, and which is two points higher than in 2021.
Taiwanese company TSMC is the undisputed world leader in the custom chip market, forecast to account for 56% of global manufacturing this year, up three points from 2021. Its compatriot United Microelectronics Corporation (UMC) will continue to control another 7% global share of this market, always according to Trendforce, and the rest of Taiwanese companies another 3%. In total, Taiwan is estimated to manufacture 66% of the chips designed by others.
Taiwan has TSMC as one of the big chip manufacturers and MediaTek as a big chip designer, but it also has manufacturers like UMC or designers like Novatek, Realtek or Himax, which it wants to promote
South Korean companies, basically Samsung Electronics, will have a 17% share of this market this year, one point less than last year. Chinese companies, especially SMIC, will increase their share to 8% of the world total, gaining one point compared to 2021. This means that the rest of the companies (American, European and Japanese) share only 10% of the chip market per charge.
That TSMC is the absolute king of the manufacture of chips for third parties, and also the most sophisticated ones, is quite well known, because among its main clients are Apple, Qualcomm, Nvidia, MediaTek, Broadcom and AMD (the latter with GlobalFoundries, another big of the sector), which entrust it with a large part of the manufacture of their chip designs, especially the most sophisticated ones.
TSMC also manufactured Huawei’s chips designed by its subsidiary HiSilicon until the US embargo. The loss of this important client (it manufactured its processors for smartphones, the Kirin, and other chips for telecommunications equipment) has not meant a loss of billing for TSMC; on the contrary, it has gained share in a growing market, as indicated.
TSMC, a very peculiar case
TSMC’s situation in the world semiconductor market is very peculiar, because it does not appear in the list of the main manufacturers, as it is typically made with the brands of the final products and not with its own, as is the case with IC Insights, a of the most respected consultants in this market. The 2021 list, as seen in the table below, is led by Samsung, which has overtaken Intel, followed later by memory makers SK Hynix and Micron.
Next in the table are Qualcomm, Nvidia, Broadcom and MediaTek as fabless, that is, without a chip factory, since they are mostly made by TSMC, and then there are Texas Instruments (TI) and AMD, another fabless. Apple does not appear on this list because the main product that it orders with its brand (the M1 processor of its computers and iPhone) is made by TSMC and does not involve much turnover, despite its great strategic importance and that it is causing a strong setback for Intel, which until a few years ago manufactured all the processors for its Macs.
As seen in the table, these ten “semiconductor sales leaders” (because IC Insights explicitly does not include third-party pure-play chipmakers, nor does Gartner) account for no less than 57.1% of the market. world total, valued at $614.6 billion. This percentage is 42% if only the top five companies are counted, and 79% if the top 25 on the consultant’s list are counted.
In 2010, the total semiconductor market was $321 billion, about half that of 2021. The top five brands then accounted for 34% of the total and the top ten for 48%. The concentration in the last ten years has increased but, above all, the companies that commission the manufacture of their chips to third parties (mainly TSMC) have grown. In 2008, as can be seen in the table, there was only Qualcomm (which has never had a chip factory) and in a discreet position.
Chips on demand, a crucial market
The on-demand chip market, estimated to be $128.7 billion this year, as noted, represents just 20% of the world total, but it’s crucial. First, because it refers to very sophisticated chips, manufactured with design rules of the environment of five nanometers or less, especially those manufactured by TSMC, and, second, because the companies that order them can integrate them into a very competitive team and do not have to worry about its manufacture or control the entire subsequent chain of encapsulation and verification, only the design of the chip and its associated patents.
In the mid-1980s, when Morris Chang was commissioned by Taiwan’s president to found and develop a government-funded semiconductor manufacturing and design center, IRTI, and later created TSMC, no one in the United States believed that making chips custom made was a good idea. At that time, chip manufacturers, such as the American Intel, AMD, Texas Instruments, Motorola or Analog Devices, the European Philips and Siemens (later NXP and Infineon), ST and telecommunications equipment manufacturers, as well as the Japanese NEC, Fujitsu, Toshiba, Matsuhita and others designed, manufactured and packaged their chips. Thirty years later, however, they discovered the benefits of outsourcing the manufacture of their chips (only Intel remains in its thirteenth, although with its own factories in mainland China, Ireland, Israel and soon in Germany). It is now, with the scarcity of chips, when they begin to see the problems and the electronics entrepreneurs must queue and beg the subcontractors to attend to them.
This heavy dependence of the big US semiconductor brands on an island as tiny as Taiwan has stunned US politicians, who had no idea of the structure of this market. It has been with the shortage of chip supply, which has paralyzed multiple car factories, among others, when it has become clear how strategic the chip market is. It has also allowed, however, the United States to put Huawei on the ropes, by prohibiting TSMC from selling chips to the Chinese company, with the legal alibi that the software used to manufacture the semiconductors and used by TSMC is Patented by US companies.
The lack of qualified personnel threatens the future of the semiconductor industry: Taiwan employed more than 290,000 people at the end of 2021, compared to 225,000 in 2019; TSMC will hire 8,000 people and MediaTek another 2,000 this year
From an economic and financial point of view, outsourcing the manufacture of sophisticated chips to a company like TSMC (or Samsung, as Qualcomm is now doing) is very profitable, because customers do not have to worry about the huge investments required to build a chip manufacturing plant or fluctuations in supply and demand.
The global market for semiconductors has been very volatile until a couple of years ago, with wild swings in supply and demand, causing headaches for investors in chip factories, who had to plan several years ahead. In the lower graph of the SIA, the world semiconductor industry association, the monthly historical oscillations are seen in red, from +60% to -40%, although the trend has been for market growth, from 10,000 million dollars per month at the end of the last decade to 40,000 million per month a couple of years ago and 60,000 million per month today.
Source: World Semiconductor Trade Statistics, 29 abril 2022 (WSTS).
In March 2022, chip turnover has grown 23% compared to March 2021, from 41.11 billion to 50.58 billion dollars, on average. By region, the oscillation has been much greater, from a 40% increase in America to 25.7% in Europe or 17.3% in China. In the last quarter, the average sales compared to the previous quarter hardly changed, although in Europe it grew by 7.7% and in America it fell by 5.3%, as can be seen in the table above. The fall in demand for computers and smartphones in the first quarter worldwide, and the foreseeable slowdown in the economy, partly explains these figures, although it is a very complex phenomenon. Semiconductor market swings have always been a constant, but their growing importance compounds their repercussions.
Making more chips in the US is wasteful, says Chang
At a meeting organized on April 19 by the influential Brookings Institution and the International Center for Strategic Studies (CSIS), both in Washington, on whether semiconductor manufacturing can return to the United States, Morris Chang, the founder of TSMC, assured that It would be a waste for the United States to increase its chip production within its country, because it would not be globally competitive or capable of rivaling TSMC, in a remote interview.
Chang is now 90 years old. He was born in China into a middle-class family and at the age of 18 he moved to the United States, where he graduated from MIT in mechanical engineering and later received a doctorate from Stanford University in electrical engineering. He lived in his childhood and adolescence the Sino-Japanese War, then the Second World War and later the Chinese Civil War. In the United States, he worked at Texas Instruments and General Instrument in positions of very high responsibility and has several chip manufacturing patents, but he saw that, as a Chinese of origin, even if he had American nationality, his career would always have a ceiling, so he accepted the order from Taiwan.
According to Chang, the same products that TSMC makes in its Oregon factory, which it has had for 25 years, cost 50% more than those made in Taiwan, and he believes that it would be delusional to think that these cost differences can be reduced over time. . “The United States is in a very good position in semiconductor technology and has the best chip design teams and chip production lines in the world, while TSMC has none.” There are some chip design centers in Taiwan, but they are not as advanced as those in the United States, he added.
As for Taiwan not being a safe country, Chang said it was a debatable issue. “If there is a war in the Taiwan Strait, I think the United States would have more cause for concern than chips,” although, he added, “if there is no war, I consider increasing semiconductor production capacity in the United States an exercise expensive and a waste [of resources].”
Chang may be right, but continuing to let much of the most sophisticated chips be made on an island almost swimmable from mainland China is also pretty foolhardy. And not only because China claims that Taiwan is part of its territory (and the United States does not officially deny it) but because the island is geologically very unstable. Recently, there were several earthquakes that paralyzed chip factories, apart from power and water supply cuts.
A couple of days ago, the Japanese newspaper Nikkei published that Japan and the United States are strengthening ties to cooperate more in the manufacture and construction of advanced semiconductor supply chains, an issue that is being addressed during the visit these days by the Minister of Japanese economy, Koichi Hagiuda, to his American counterpart Gina Raimondo.
The United States, apart from being concerned about its dependence on Taiwan for chips, is also concerned about the growing importance of mainland China in chip manufacturing. Purchases of chip manufacturing machinery by China, of 29,620 million dollars in 2021, with an increase of 58%, compared to a mere 7,600 million from the United States, according to the consulting firm Semi, have set off all the alarms in the Capitol.
This week, The Economist states in an article that the United States is thinking of vetoing the sale of chip-making equipment to China. More than 30% of Applied Materials’ sales go to mainland China, as do LAM Research and KLA, three US companies that make essential equipment for chip manufacturing. The Dutch ASML and the Japanese Tokyo Electron too, but not as much (the United States does not allow ASML to sell its lines to the Chinese SMIC, arguing that part of the software is from the United States). The bottom chart from The Economist, based on data from Bloomberg, shows China’s growing equipment purchases.
Source: The Economist (30 abril-6 mayo 2022).
The problem these chipmakers have is that if they stop selling to China, they lose one of their three biggest customers (the others are Taiwan and South Korea) and a huge source of profit. US companies hardly buy anything from them, because they don’t need the equipment because they outsource chip manufacturing to Taiwan, South Korea and China.
Lack of qualified personnel
The outsourcing of chip manufacturing has become so important that it has long affected the entire supply chain of products, apart from its strategic dimension. Taiwan is aware that in the medium term it will not be able to maintain its current position as the world’s largest chip producer. The United States, Japan and Europe are already taking the first steps to reverse the situation.
Although it will take a long time for the West to become more sovereign in chip manufacturing, dependence on Taiwan will likely decrease. That’s why Taiwan is investing heavily in designing more chips, not just making them. The island has significant domestic demand for chips, especially in computer and tablet boards made by local companies (although many of them have assembly plants in mainland China).
Mediatek, as stated at the outset, is Taiwan’s leading chip designer. Its smartphone processors rival Qualcomm’s, along with other very sophisticated chips it has designed (and is made for it by TSMC, which has its factory nearby). MediaTek is the fourth largest chip designer in the world, according to TrendForce, but Novatek Microelectronics is sixth, Realtek Semiconductor is eighth and Himax Technologies is tenth, all with Taiwanese headquarters and shareholders.
Taiwan’s problem in continuing to dominate the manufacture (and now the design) of chips is not an economic one, but a lack of qualified personnel, as is also the case with semiconductor companies in the United States, Japan or Europe. Even South Korea and China have trouble finding and training the highly-skilled workforce needed to run a fab, a semiconductor factory, and all that it stands for. That Intel has decided to invest a chip plant in Germany, where talent still remains but is also needed by other European companies, is not surprising, apart from the generous subsidies it is expected to receive.
Tsai Ming-kai, president of MediaTek, stressed at a recent press conference that Taiwan’s most important challenge for the future development of the semiconductor industry is the lack of talent and highly-skilled personnel, which is increasingly needed in greater amount. Visas to leave the island have been very restricted in Taiwan for some time, for fear that they will go to the competition, even if it is only on weekends. Japan and South Korea also do the same, while China offers generous incentives for experts working in the United States or Europe to return to their home country, even if they were neither born in China nor have Chinese nationality.
Taiwan’s semiconductor industry employed more than 290,000 people at the end of last year, up from 225,000 two years ago, according to the Taiwan Economic Research Institute, an official body. A total of 23.4 million people live on the island, with which more than 1% is dedicated to making chips, which are not exactly French fries in this case.
TSMC plans to hire 8,000 people this year and MediaTek another 2,000 people in its semiconductor manufacturing and development centers. UMC plans to hire 1,500 people, while the Dutch ASML will have 1,000 people working in Taiwan, a quarter of its total workforce. It’s not strange, because TSMC is one of the big three clients of ASML; the other two are Intel and Samsung, with fabs using their production lines in the United States and South Korea, but also in mainland China. TSMC clients such as Qualcomm, NVidia or AMD, as well as Intel or Micron employ around 2,000 people on the island.
The financial investment required to build and, above all, run a large semiconductor manufacturing plant is, after all, a minor issue in this world of chip manufacturing. It is necessary, above all, to have highly qualified personnel, with nearby subcontractors for all the sophisticated supplies that are needed, and also to have a sufficient domestic market to make the complex profitable. Taiwan’s semiconductor industry is not the work of a few years, but has taken more than forty years to make it a reality, since Morris Chang accepted the challenge of directing IRTI.