In an era defined by global supply chain challenges and the AI revolution, whoever controls over semiconductors means control over the future—and at the heart of this transformation stands TSMC.
As leading chipmakers race to develop high-performance chips for AI, their mass production inevitably relies on TSMC’s advanced processes and foundry expertise. This makes TSMC a central beneficiary of the AI boom and a driving force in the global semiconductor industry. However, what does TSMC do and how did it achieve its current stature?
Below we will introduce the development of TSMC in detail.
Company Overview
TSMC (Taiwan Semiconductor Manufacturing Company; TWSE: 2330, NYSE: TSM) was established in 1987 as the world’s first and largest dedicated semiconductor foundry. With a market capitalization of TWD 27.88 trillion, it is a cornerstone of Taiwan’s economy.
TSMC: Taiwan’s “Guardian Mountain” As of December 2024, TSMC’s market value is approximately 10x that of Taiwan’s second-largest company, Foxconn (TWSE: 2317), highlighting its unparalleled importance to Taiwan and its stock market.
Industry Position
TSMC is positioned in the midstream foundry segment of the semiconductor supply chain.
Semiconductor supply chain:
- Upstream: IC/IP design
- Midstream: Wafer fabrication (TSMC holds a 62.3% market share in the global foundry industry).
- Downstream: Wafer packaging and testing
TSMC’s products serve a diverse range of applications, from high-performance computing (HPC) and smartphones to automotive and consumer electronics. Historically, smartphones and HPC have dominated revenue, with HPC now surpassing 50% of the total due to surging AI demand.
TSMC's Development Landscape
TSMC's rise to its current position can be attributed to its pioneering and steadfast implementation of the pure-play foundry model in the semiconductor industry.
Going back to the 1970s, semiconductor companies primarily operated as Integrated Device Manufacturers (IDMs), with firms such as Texas Instruments, Intel, and Motorola controlling the entire process from chip design to manufacturing.
During this period, transistors were gradually replacing vacuum tubes in electronic devices. Against the backdrop of the Cold War between the U.S. and the Soviet Union, the demand for semiconductors in defense applications steadily increased, replacing the previous reliance on vacuum tubes. Although the IDM model required significant technological expertise and capital investment, stable orders from the defense sector and major corporations provided the necessary financial and technological resources for vertically integrated semiconductor manufacturers.
Founded in 1987 with support from the Taiwanese government, TSMC was established under the leadership of its founder, Morris Chang, who introduced the wafer foundry business model. This model complemented the rise of fabless semiconductor companies at the time, such as Nvidia, Qualcomm, and a transformed AMD. By providing wafer manufacturing services, TSMC focused on advancing semiconductor fabrication technology while leaving chip design to clients and other specialized firms.
Technological Leadership
In its latest earnings report, TSMC revealed that its 3nm process accounted for 20% of Q3 2024 revenue, reflecting its growing maturity. The company is also preparing for the 2nm (N2) process rollout in 2025, supported by early client orders.
TSMC is also advancing packaging technologies to address exploding AI demand. Below are key innovations drawing investor attention:
1. CoWoS (Chip-on-Wafer-on-Substrate)
CoWoS-L, a new iteration of TSMC’s CoWoS packaging, replaces silicon interposers with LSI active chips, reducing costs and enhancing photomask compatibility.
Despite its potential, CoWoS-L has struggled to meet TSMC’s 95% yield target, delaying shipments of NVIDIA’s GB200 chips. Improving CoWoS-L yields will be critical to sustaining growth.
To read more about CoWoS, you can read our Taiwan Industry 101: Introduction to CoWoS Technology
2. SoIC (System on Integrated Chips)
SoIC technology stacks HBM (High Bandwidth Memory), SoCs, and other chips to minimize transmission distances and power consumption. It also enables heterogeneous chip integration, providing a solution to the post-transistor scaling era, where system-level innovation is critical for meeting computational demands.
3. Silicon Photonics & CPO (Co-Packaged Optics)
Silicon photonics and CPO enhance data transmission speed and reduce signal loss, improving overall computing performance. These technologies also bolster heterogeneous chip integration, reinforcing TSMC’s leadership in advanced packaging.
To read more about Silicon Photonics & CPO, you can read our Taiwan Industry 101: The Silicon Photonic
Current Developments and Global Strategy
AI Hardware Dominance
AI server providers, particularly NVIDIA, rely heavily on TSMC’s advanced packaging technologies such as CoWoS. Since CoWoS capacity limits chip output, analysts often use TSMC’s CoWoS capacity as a proxy for estimating NVIDIA’s B-series and GB200 shipments.
TSMC’s critical role extends to nearly all AI-related chips (ASICs being an exception), making it a linchpin in AI computational power. Quarterly reports on TSMC’s capital expenditures, revenue, and guidance are thus closely monitored as barometers for AI industry trends.
Current Developments
With the rapid advancement of AI technology and increasing demand, TSMC's packaging technology continues to break new ground. From the early 28nm and 16nm processes, the company has steadily progressed to industry-leading 5nm and 3nm nodes, introducing exclusive packaging technologies such as CoWoS (Chip-on-Wafer-on-Substrate), FOPLP (Fan-Out Panel Level Packaging), and SoIC (System on Integrated Chips). These innovations have solidified TSMC’s dominant position in the GPU foundry market, with its market share continuing to rise.
Conclusion
From its pioneering foundry model to cutting-edge process technologies, TSMC has redefined the semiconductor industry. Its pivotal role in the AI era and sustained technological advancements ensure its continued dominance.
Recently, Trump threatened to impose tariffs and sanctions on Taiwan’s semiconductor industry, causing market uncertainty and concerns. However, beyond its unrivaled technological advantage in the short term, TSMC has long been proactively expanding overseas. The company has established fabrication plants in Arizona, USA, and Kumamoto, Japan, with plans to produce N5, N4, N28, and N16 process nodes. This strategic expansion demonstrates TSMC’s agility in managing geopolitical risks and its commitment to global positioning.
