The company behind Apple & Nvidia's success ( CHIP) , INDIA ?

On Oct 14, Chinese ships circled Taiwan.

It effectively blocked Taiwanese ports.

For long, Taiwan has claimed to be an independent nation.

And China has said that the island is a part of Chinese territory.

The history is long and complicated.

On Oct 14, China conducted a military exercise – surrounding the seas around Taiwan with its war-ships.

This obviously rattled Taiwan.

Such drills have happened many times. Taiwan-China confrontations have been happening for decades.

Some residents of Taiwan even seem to have gotten used to it.

Only about 2 weeks before this, the USA had announced over $500 million in military aid to Taiwan.

CHIPS Act

In Aug 2022, the US government announced the CHIPS Act.

Its aim was multi-fold.

But the biggest takeaway was this: the US would give about $50 billion in subsidies to companies involved in making chips in the US.

The US heavily depended on Asian companies to get chips for electronics.

We are in an era where too much runs on chips.

Chips are in our computers, smartphones, TVs, etc. – everybody knows this.

A little less obvious: practically everything else that runs on electricity – fridge, washing machine, car parts, etc.

Very serious devices too: critical communication like walkie-talkies, satellites, surveillance cameras, security apparatus, etc.

The USA wants to ensure that it has a steady supply of chips. Hence the CHIPS Act.

There’s one common link between what happened in the seas outside Taiwan and US annoucing the CHIPS Act.

The link is actually a company.

TSMC – Taiwan Semiconductor Manufacturing Company.

What Does TSMC Do?

This company is based in Taiwan.

What does it do?

It makes chips.

Spoken like that, the above line sounds like not-a-big-deal.

But TSMC is a big deal. It is a giant deal.

TSMC is like a printing shop. It makes the chips others design.

Nvidia’s stock has skyrocketed. It is one of the biggest companies in the world. Its chips power the most advanced AI programs.

Nvidia designs its chips. But doesn’t actually make it.

TSMC makes the chips based on designs supplied by Nvidia.

Apple sued Samsung in 2011 for smartphone-related patends. But Samsung was also a chip supplier to Apple.

Apple wanted to reduce their dependence on Samsung.

What did they do?

They designed their own chips for the iPhone and iPad, in 2013. Later, they designed their own M-series computer chips too.

TSMC made all of those chips.

Many flagship Android phones run on a processor series called Snapdragon. A company called Qualcomm designs those chips.

And TSMC makes them.

Many other Android phones use processors made by Mediatek. TSMC makes those too.

You would have heard of Google, Amazon, and Microsoft announcing chips of their own.

TSMC would be involved.

TSMC has a market share of 56% of all chips.

If that doesn’t seem like a lot to you, you should know that all chips are not the same.

Simple low-processing chips – like the one inside a washing machine for example – are still made by many other companies.

Advanced chips – the kind of chips that are found in high-performance computers, smartphones, communication devices, AI servers, etc. – those chips are far more difficult to make.

Very few companies can make advanced chips.

TSMC makes over 90% of those advanced chips.

Some of the biggest companies in the world are located in the USA. Most of them are tech companies.

Which means, their business relies heavily on computers, servers, smartphones, network routers, etc.

In short, their business relies heavily on chips – TSMC’s advanced chips.

Modern life as we know it – e-commerce, online banking, payments, social media, searching the web, online videos, etc – none of it would be possible without advanced chips.

No wonder Taiwan’s security is so important to the US and the world.

Taiwan knows this very well.

In a speech, Taiwan’s president had emphasised how chips made in Taiwan are crucial to democracies around the world.

She even used the words ‘democracy chips’.

It is considered one of the primary reasons why US supports Taiwan in its defense.

Facts and Figures

When you are the darling of the entire tech industry, surely your revenues would look great?

Yes.

TSMC’s revenues and profits look great.

Everyone knows TSMC is supplying to all giants out there.

Despite that, their last quarterly revenues and net income beat expectations.

It sent is shares soaring up – TSMC is now a company worth over $1 trillion.

The internet, AI, and 5G boom are going on making TSMC richer.

In 2023, its revenue was around $70 billion. Around $27 billion net income.

5 years earlier in 2018, its revenue was around $33 billion.

10 years ago in 2013, its revenue was around $20 billion.

This consistent growth has proven hard to copy for its competitors.

Over 50% of all chips. Over 90% of advanced chips.

Modern civilisation as we know it seems impossible without TSMC.

Way Forward

Now, if the chips are so crucial, why does the world rely so heavily on a Taiwan-based company?

Because – it is hard. Very very hard.

Manufacturing chips involves deep technical expertise that has proven to be a challenge to scale.

TSMC is the biggest in this business. Samsung comes next. And then there’s Intel at third place.

Relying on a Taiwan-based company for nearly all advanced chips of the world was risky.

So the US made a big move in 2022.

The US announced the CHIPS Act.

This act gives subsidies to companies setting up chip-making plants inside the US.

It seems to be working for now.

Intel, TSMC, Samsung, and several others have announced that they will be setting up chip-making plants in the US.

This issue is so sensitive, that some time ago, the US asked TSMC to cut ties with some Chinese companies due to national security concerns. China and USA are not good friends right now.

Besides USA, many other countries are trying to attract chip-making companies. The idea is the same: everyone wants such a crucial part to be manufactured in their own country.

Besides the US, TSMC is opening plants in Japan and Germany.

Scaling Problems

TSMC has been making chips for so long, it has developed a deep expertise. Chip-making requires an extremely skilled workforce.

Over the years, TSMC’s workforce has only grown bigger and more skilled in Taiwan.

TSMC’s USA plant is delayed because of skilled labour shortage.

Besides skill, another challenge is the high initial cost.

The cost alone prevents many small companies from getting into this game.

To give some idea, the machines that make advanced chips can cost around $150 million to $350 million.

According to some reports, TSMC owns 50% of all of these machines in the world (roughly 30-35 machines).

Making these machines is a huge endeavor. It is time-consuming, expensive, and requires skilled workers.

So, even though TSMC wants to expand faster, it cannot.

This is enough to explain how difficult it is for other companies to enter the space.

India

According to some reports, TSMC is in talks with the Indian government too. But nothing is confirmed yet.

India’s first chip-making plant is coming up in Gujarat. It is a collaboration between the Tata Group and another Taiwan company, Power Chip.

It is important to highlight here that chip-designing and chip-making are entirely different activities.

There are many companies that design chips.

Chip makers (also called fabs or fabricators) are in short supply.

As for chip designers, there are enough of those – Apple, Nvidia, Qualcomm, Sony, you name it.

In this department, India is not new.

Many of the above mentioned companies have their chip design offices in India. According to some estimates, 20% of all chip designers are in India.

Tata is building a chip assembly and testing plant (different from chip making) in Assam.

Vedanta has been trying to get into the chip making business in India.

Foxconn – the maker of iPhones and many other smartphones – wants to make chips in India too.

But still, all of these are miniscule in front of the behemoth that is TSMC.

And it looks like it will stay that way for a long time.