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History of TSMC

Taiwan is undoubtedly the unmatched leader of the global semiconductor industry with TSMC (Taiwan Semiconductor Manufacturing Company) alone accounting for over half the foundry business. The nearest competitor, Samsung is only 1/3 of them.

But how exactly did Taiwan get its start in the semiconductor industry in the first place? 

The Origin 🇹🇼

• Taiwan's economic miracle started after the Chinese Civil War - the Chinese Communist Party won and the Republic of China retreated to Taiwan
• Like other East Asian countries, the miracle started with land reform and agriculture. Then they would go into exporting to ride the wave of higher consumption and rising wages in the US and Europe
• Japan and South Korea did it in a state-directed, capital intensive way - large companies got loans to invest in heavy industry exports like steel and later went into cars
• But Taiwan took a different approach - small companies focusing on labour-intensive exports like textile

The Catalyst ⚡

• Wages in Japan started to rise which made the lowest value-adding industry like electronic assembly to be less profitable
• American retailers started using bar codes and computers to manage their inventory
• American retailers had to adhere to fair-pricing laws, which prohibited large companies from selling brand name products at low prices
• All these unrelated trends benefited immensely in Taiwan's exporting game

What Happened Next... 

• Japanese manufacturers started outsourcing the easy assembly work to Taiwan while keeping the proprietary stuff domestic
• Soon after, Taiwan became the place where you outsourced your fragmented production to
• Because of their smaller, more distributed manufacturers, they managed to respond faster to changes in consumers' taste which for larger companies, are too expensive to handle
• For example, Nike contracted its high-volume product lines to Korea and ancillary products to Taiwan

Then, The PC Market Came 💻

• The product cycle for PCs was extraordinarily fast in the 80s and 90s, and the business was scaling rapidly
• By this point, Taiwanese OEMs had expertise in managing complex supply chains and have deep relationships with retailers and distributors. The next step is to expand
• While South Korea expanded into chemicals and cars, the Taiwan government formed TSMC as a joint venture with Philips Electronics (Netherland) to be a dedicated foundry for other chip design houses like Intel and Nvidia. Basically, an OEM for chip-designing companies
• At that time, there was no pure-play foundry, all chips were built in-house. TSMC was the first, the next one would exist 10 years later
• Taiwan's head start in the pure-play foundry model made it extremely difficult for others to catch up and the rest was history

A capital-intensive business like chip fabbing is exactly the appropriate one for a country* like Taiwan, with no comparative advantage in labour-intensive businesses. And chips are, like oil, one of those products that basically every country wants to consume but that many aren’t able to produce.

P.S. To my Malaysian readers, stay safe out there 🙏 If you would like to contribute, here's a list of flood relief emergency funds.

Before you go...

• Check out issue #43 where we talked about how did the Asia boom start and why wasn't Malaysia part of it? 🐯
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