Their local companies, such as Taiwan Semiconductor Manufacturing Company

TSMC, have established the island as a crucial player in the global tech supply chain.

As of 2022, Taiwan is responsible for more than 60% of the global foundry market, with TSMC alone accounting for nearly 54% of the world's total chip production.

This success has led the entire island to become one of the world's most successful and richest economies. In the same year, the semiconductor industry contributed over $184 billion to the total exports of Taiwan, which is the size of some nations' GDP.

Even its largest company, TSMC, has a market valuation of a massive $892 billion, making it the ninth most valuable company globally.

The success of Taiwan within the semiconductor chain is often repeated as semiconductors gain prominence in global politics, yet many don't actually know how TSMC and the entire Taiwan semiconductor industry started. How did it even become successful to begin with?

Well, let's take a look at the historical lens and see just how Taiwan became the world's semiconductor manufacturing hub. Before Taiwan became a powerhouse in high technology, its economy was largely based on agriculture and low-cost manufacturing.

The island's industrial strategy began to shift in the late 1960s and early 1970s when the Taiwanese government, led by the Ministry of Economic Affairs, recognized the need to diversify the economy and develop more technologically advanced industries.

One of the first steps the government took was establishing the Industrial Technology

Research Institute, ITRI, in 1973. ITRI was set up as a government-backed research institute to support industrial innovation in Taiwan, particularly in technology-intensive fields such as semiconductors. This was a pivotal moment for Taiwan as it marked the beginning of state-driven support for high-tech industries. ITRI played a key role in researching new technologies and facilitating technology transfer from abroad to local firms. For instance,

ITRI negotiated licensing deals and partnerships with foreign companies that allowed Taiwanese firms to access critical semiconductor manufacturing technologies. At this time, the Taiwanese government also encouraged foreign direct investment, FDI, by creating science parks, offering tax incentives, and subsidizing the training of engineers.

The most notable science park, Hsinchu Science Park, was established in 1980. Modeled after

California's Silicon Valley, it provided the infrastructure and ecosystem that allowed local and foreign tech companies to thrive. The turning point for Taiwan's semiconductor industry came with the establishment of Taiwan Semiconductor Manufacturing Company,

TSMC, in 1987. The creation of TSMC was initiated by the Taiwanese government and led by Morris

Chang, a seasoned semiconductor executive who had previously worked at Texas Instruments in the United States. Morris Chang was invited by the Taiwanese government to lead the country's efforts in building a semiconductor industry. Chang brought with him not only technical expertise, but also a vision for a new business model in the semiconductor industry – the pure-play-foundry model. Unlike traditional semiconductor companies that designed and manufactured their own chips,

TSMC would focus solely on the manufacturing aspect, producing chips for companies that specialized in design but lacked their own manufacturing capabilities. This foundry model proved to be a groundbreaking innovation as it allowed fabless companies – those that focused purely on chip design – to thrive without the heavy capital burden of building and maintaining expensive semiconductor fabrication plants. TSMC's pure-play model allowed it to attract a large number of clients, and it quickly became a global leader in semiconductor manufacturing.

While TSMC became the most well-known name in Taiwan's semiconductor landscape, it was not the only player. Several other companies played a vital role in building the industry. One of them was United Microelectronics Corporation, UMC. The company was founded years before TSMC, in 1980. It was Taiwan's first semiconductor company.

It was originally a spinoff from ITRI, reflecting the government's strategy of fostering industry by building institutions that could nurture local talent. UMC initially focused on designing and manufacturing chips, but eventually followed a path similar to TSMC's by adopting the foundry model in the 1990s. Although UMC did not grow as large as TSMC, it remains one of the world's largest semiconductor foundries. Another important player in Taiwan's semiconductor landscape is Mediatek, founded in 1997. Mediatek is a fabless semiconductor company, meaning that it designs chips but outsources the manufacturing to companies like TSMC.

Mediatek has become a major player in the mobile communications and consumer electronics industries, producing chips used in smartphones, tablets, and television. While it does not manufacture its chips, Mediatek's design expertise has made it one of the top fabless companies in the world, rivaling global players like Qualcomm. Lastly, another company is ASE Technology.

Established in 1984, ASE Technology focuses on semiconductor packaging and testing services.

This company is a crucial part of Taiwan's semiconductor supply chain, handling the back-end processing of semiconductor manufacturing.

As semiconductors became more complex, the importance of packaging and testing grew, and ASE's specialization allowed it to become a global leader in this segment.

Prior to these companies' establishment, however, there were already a couple of American investors who had factories in Taiwan. This was also the basis of foreign investments in the country.

In the 1960s and 1970s, US companies such as RCA, Texas Instruments, and General Instruments set up factories in Taiwan, primarily to take advantage of the island's cheap labor.

These early investments helped establish Taiwan's electronics manufacturing capabilities.

Furthermore, many Taiwanese semiconductor companies were started or influenced by

Taiwanese engineers and executives who had worked in the United States. These individuals brought back not only technical expertise, but also business models and management practices that helped shape the growth of Taiwan's high-tech industries. The timing was perfect for Taiwan.

They had an early start to witness semiconductor companies and had American-trained Taiwanese engineers. So, by the late 1980s and early 1990s, Taiwan's semiconductor industry began to gain global recognition. TSMC quickly became the go-to foundry for fabless companies around the world, including prominent tech firms in the US and Europe. The company's willingness to invest in cutting-edge manufacturing technology, such as advanced lithography and process nodes, allowed it to stay ahead of competitors. By the early 2000s, Taiwan had firmly established itself as a global leader in semiconductors. The industry became a critical part of Taiwan's economy, contributing significantly to its GDP and providing thousands of high-paying jobs.

Taiwan's semiconductor companies also began expanding their operations globally, building manufacturing plants in other countries to meet rising demand. At the dawn of the 21st century, Taiwan was already a significant player in the global semiconductor market.

However, it was during this period that Taiwan's semiconductor industry truly began to dominate on a global scale. One of the most critical milestones in the 21st century was the development and mass production of advanced process nodes – semiconductors with increasingly smaller and more efficient transistors. TSMC, the leader of Taiwan's semiconductor industry, began producing 65nm chips in 2006, and by 2011 it had progressed to 28nm chips.

TSMC has continuously been at the forefront of process technology innovation. They went on to pioneer the mass production of 7nm and 5nm chips, used in cutting-edge devices such as Apple's iPhones, NVIDIA's GPUs, and AMD's processors. One of the most complex processes in semiconductor manufacturing is the use of extreme ultraviolet, EUV, lithography to produce chips at 5nm and below. EUV lithography is a technology that allows manufacturers to etch incredibly small circuits onto silicon wafers, enabling the creation of the world's most advanced semiconductors.

TSMC was one of the first companies to invest heavily in EUV technology, giving it a significant edge over competitors like Samsung and Intel. Today, and as we noted at the beginning of the video, Taiwan accounts for more than 60% of the global semiconductor foundry market, making it the world's largest supplier of chips that power everything from smartphones to high performance computing systems. TSMC alone is the world's largest contract chipmaker.

TSMC controls more than 54% of the global foundry market, with its nearest competitor,

Samsung, holding less than 18%. Taiwan's dominance is even more pronounced in the production of advanced semiconductors. Taiwan produces more than 90% of the world's most advanced chips, specifically those smaller than 10nm in size. These cutting-edge chips are critical for the latest technologies, including 5G networks, artificial intelligence, autonomous vehicles, and high-performance computing.

TSMC is the only company in the world with the capability to mass-produce 5nm and 3nm chips, which are used in devices such as Apple's iPhones and Nvidia's GPUs.

How does TSMC stay at the top, and how do they advance so quickly against their competitors?

Well, one of the primary reasons TSMC has maintained its leadership position is its relentless focus on research and development, R&D. TSMC consistently invests billions of dollars each year into R&D to stay ahead in the fiercely competitive semiconductor industry. Moreover, TSMC is already planning its 2nm chip production for 2025, ensuring it remains at the forefront of semiconductor innovation.

By consistently leading in the development of new manufacturing processes,

TSMC has set a technological barrier that few other companies can match.

Due to TSMC's advancement in the semiconductor industry, the US and the rest of the world is now reliant on Taiwan. The US, in particular, is highly dependent on Taiwan for the semiconductors that drive its technology and defense sectors. Beyond the US, countries across Europe, Japan,

South Korea, and China are also heavily reliant on Taiwan for their semiconductor needs.

The global economy is deeply intertwined with Taiwan's semiconductor output, as chips produced in Taiwan are used in everything from consumer electronics to healthcare devices and industrial machinery. This is why, if there were a conflict between China and Taiwan, then the most immediate impact would be a massive disruption to the global semiconductor supply chain. A military conflict would likely cause semiconductor production in Taiwan to halt or slow down, leading to severe shortages in chips. The ripple effects of such a disruption would be felt worldwide. The automotive industry could face production shutdowns due to a lack of chips for critical systems like autonomous driving and electric vehicle components. The consumer electronics industry could see significant delays in the production of smartphones, laptops, and gaming consoles.

Moreover, cloud computing, data centers, and artificial intelligence services could experience slowdowns due to limited access to high-performance computing chips.

This led to TSMC and many Taiwanese companies to relocate elsewhere. One of which is the US, where TSMC is building a $12 billion fab in Arizona, marking its first major expansion into the United States. TSMC is also investing in a new fab in Japan in collaboration with Sony, which will produce mature technology nodes for automotive and industrial applications.

So, as you can see, this is how Taiwan became the world's semiconductor hub.

But anyway, do let us know what you think. Thanks for watching.