Why TSMC is No. 1 in chips

Kim Chang-gyu

The author is the economic news editor of the JoongAng Ilbo.

Just a year after Samsung Electronics won back the title as the No. 1 semiconductor company globally, TSMC is expected to take the crown. TSMC, or Taiwan Semiconductor Manufacturing Company, reported the sales of $19.2 billion in the third quarter, up a whopping 48 percent on year. The chip sales of Samsung Electronics are forecast at $17.5 billion in the same period and Intel $15.5 billion. If the numbers hold, TSMC will emerge as top chipmaker. As of October 7, TSMC’s market cap at $360.4 billion is the largest among all chipmakers, far higher than Samsung Electronics ($235.2 billion) and Intel ($105 billion).

Semiconductors are divided into two categories: memory chips for information storing and non-memory chips for information processing. Memory chips, where Samsung Electronics is No. 1, are very sensitive to business cycles. Non-memory chip makers can be split into three categories: integrated device manufacturers (IDM) that design, manufacture and sell integrated circuits, like Samsung Electronics and Intel; fabless companies that only design chips without producing them; and foundries that manufacture chips designed by fabless companies.

Despite decreased demand as a result of the recession, the foundry market is still strong because foundries are more stable and less vulnerable to market fluctuations due to their customized production. Chips for cars are still in short supply, and an increasing number of high-tech companies — such as Apple, Google and Tesla — have started to enter the fabless sector. The global foundry market is expected to grow to $145.6 billion by 2025 from $98.6 billion this year.

TSMC, the first foundry company, was founded in 1987 by former chairman Morris Chang, who had worked at Texas Instruments after studying mechanical engineering at MIT and getting a doctorate degree in electric engineering at Stanford University, with funding from the Taiwanese government. At the time, Taiwan was excellent in manufacturing chips, but lagged behind in chip design. So, the government turned to the foundry field devoted to producing chips as designed by their customers.

Despite the criticism that TSMC was just a contractor, it dug only one well deeply. The company did not pay any attention to chip design with the slogan “We don’t compete with our customers.” As time went by, TSMC accumulated technology and built trust with customers. With this symbiotic growth, the company at the periphery became the top chipmaker. There was another advantage for TSMC. Fabless companies, its customers, preferred TSMC over IDMs for fear of technology leaks. That helps explain a widening gap between TSMC and Samsung Electronics in their market share (53 percent and 16 percent).

As the name of the company suggests, Taipei strongly supports TSMC, which was government corporation in the beginning. The government helps the company comprehensively, from core technology to recruitment, R&D and tax benefits, if necessary, when TSMC needs a massive investment for the future.

Taiwan’s corporate income tax rate for the semiconductor industry was merely 10.9 percent on average between 2019 and 2021, about half of Korea’s. In terms of individual companies, the rate for TSMC was 10.9 percent compared to 27 percent for Samsung Electronics. To help recruit foreign employees, the government levies income tax on only half the excess personal income above 3 million Taiwan dollars. With the tax benefit, Taiwan has 28 semiconductor companies with more than $1 billion in sales while Korea has only 12.

Unceasing efforts, advantageous market situation, and full-fledged government support helped TSMC emerge as top chipmaker around the world. In 2019, Samsung Electronics declared it would surpass the Taiwanese company. Vice Chairman Lee Jae-yong pledged to take the first place in the system chips too, including in the foundry business. But the circumstances are not friendly. Prices of memory chips, in which Samsung Electronics has strength, are plunging as economies weaken globally, while TSMC became top chipmaker with its unrivaled foundry alone.

A special bill government support for Korea’s semiconductor industry is still pending in the legislature. When the Taiwanese government and chip industry are fully united, Korean companies have to fight an uphill battle on their own. The semiconductor industry is in crisis.