TSMC Deep Dive

Welcome to the forty-second Pari Passu newsletter.

Today, we are going to learn more about the world’s largest chip contract manufacturer, Taiwan Semiconductor Manufacturing Company (TSMC).

Introduction

In this edition of Pari Passu, we will be diving into Taiwan Semiconductor Manufacturing Company (TSMC) and assessing what made the company the technological, economic, and industrial powerhouse it is today. Founded in 1987 by Morris Chang, TSMC is the world's largest independent manufacturer of semiconductor chips, a leader in advanced process technologies, and a key player in the global technology supply chain. In this summary, we will cover TSMC's current performance as well as the company’s history and its possible headwinds and tailwinds for the coming years. This summary is dense, but each section can stand alone if you would like to divide up the reading. 

Overview –  What is a Semiconductor?

Let's start by reviewing the underpinnings of the semiconductor industry's value and importance. The key concepts we will be covering here include what semiconductors are, how they are produced, who produces them, and why they are so important.

Semiconductors are materials with electrical conductivity between that of conductors and insulators, making them ideal for controlling the flow of electrical current in electronic devices. Their ability to act as a conductor and an insulator is due to the band gap in the energy levels of the electrons in the material. The most common semiconductor material is silicon, although other materials like gallium arsenide are also used.

The process is semiconductor manufacturing is extremely complex, so here is a relatively simplified version.

• The production of semiconductors begins with the purification of silicon through the Czochralski process, which involves growing a single crystal of silicon from molten silicon to create high-purity silicon

• The purified silicon is then melted, slowly cooled to form a single crystal ingot, and sliced into thin wafers using a diamond saw

• The wafers are polished, cleaned to remove surface impurities or defects, and prepared for fabrication

• Photolithography (light) is then used to etch patterns onto the wafer surface by coating the wafer with a light-sensitive photoresist (special material), exposing it to ultraviolet light through a patterned mask, and developing and removing the exposed areas of the photoresist

• The wafer then undergoes etching and deposition processes to create electronic components by removing unwanted material and adding new materials

• Doping involves adding impurities, such as boron or phosphorus, to the semiconductor material to change its electrical properties

• After fabrication, the wafer is tested to ensure the electronic components function correctly

• Finally, the individual chips are cut from the wafer and packaged into their final form

The manufacturing process is extremely capital-intensive and consists of very high start-up costs, posing grave challenges for new entrants. To put it into context, only 50 chip manufacturing machines are made per year by the leading producer, Advanced Semiconductor Materials Lithography (ASML).

• The cost of one machine is between $200 and $300 million

• It takes seven Boeing 747s to ship the parts for one machine, which is the size of a school bus when assembled and operates at a temperature 40x hotter than the surface of the sun

• Each machine must be operated by a highly skilled ASML employee

There are three primary semiconductor manufacturing businesses that are known for their ability to manufacture semiconductor chips with high yields: TSMC, Samsung, and Intel. These three companies accounted for 84% of ASML’s business in 2021.

Yields define the proportion of manufactured chips that are operational and can be installed in another device. Yields for semiconductor manufacturing are remarkably low. Even for the most established technology, yields sit at around 90%. For the latest, cutting-edge technology, yields are only 70%.

• TSMC is a “pure play” foundry company, which means that they strictly manufacture semiconductor chips that are designed by chip design companies such as Nvidia, Intel, and Qualcomm.

• Samsung has both a foundry side and a design side, so they primarily manufacture their own semiconductor chips.

• TSMC and Samsung are currently the two powerhouses leading the semiconductor industry.

• Intel is similar to Samsung with regards to their business model of having a foundry side and a design side. Intel used to strictly manufacture their own semiconductor chips but now their foundry business is open to manufacturing third-party designs.

Although these chips are extremely capital intensive and the machines used to produce them are expensive, they are a crucial part of our everyday life. They are the reason our smartphones, computers, and cars function and the barrier to unlocking functionality and speed in these machines.

Without these chips, the modern technological innovation boom that we have experienced would not exist. The constant back-and-forth game between software and semiconductor chips is what keeps driving innovation. As software gets better, chip designers and manufacturers improve their processes and vice versa.

Overview – Performance

Subscribe to Pari Passu Premium to read the rest.