CASE STUDY 6.3

TSMC: The Foundry Model That Changed Semiconductors

⏱️23 min read

🏭Case Study

Taiwan Semiconductor Manufacturing Company (TSMC) revolutionized the semiconductor industry by pioneering the pure-play foundry model— manufacturing chips designed by others rather than competing with customers. Founded in 1987 by Morris Chang, TSMC has grown to command 71% of the global foundry market and manufacture 92% of the world's most advanced chips, making it the most strategically important company in the digital economy.

The Foundry Model Innovation

Morris Chang's Vision

In 1987, Morris Chang, a veteran of Texas Instruments, founded TSMC with backing from the Taiwanese government. His insight was radical: separate chip design from manufacturing. Traditional Integrated Device Manufacturers (IDMs) like Intel designed and manufactured their own chips, requiring billions in capital and limiting innovation to companies that could afford fabs.

Chang's foundry model enabled "fabless" chip companies to focus on design while TSMC handled manufacturing. This democratized chip innovation— startups could compete with giants without building fabs. Companies like NVIDIA, AMD, Qualcomm, and Apple owe their existence to TSMC's model.

The Trust Factor

TSMC's pure-play model meant never competing with customers. Unlike Samsung (which designs competing chips) or Intel (historically focused on its own products), TSMC had no conflicts of interest. This trust enabled deep partnerships where customers shared roadmaps and collaborated on process development.

🏆 TSMC Top Customers by Revenue (2024)

Apple

25% (~$18B)

NVIDIA

11% (~$8B)

AMD

8% (~$6B)

Broadcom

Qualcomm

Others

43%

Total Revenue: ~$72B (2024) | Market Cap: $1.5T

Process Leadership Journey

The Race to Smaller Nodes

TSMC's dominance stems from relentless process innovation. The company invests $30-40 billion annually in R&D and capital expenditures, outspending all competitors:

28nm (2011): First to high-volume production, capturing smartphone market
16nm/20nm (2013-2014): FinFET technology for Apple A-series chips
7nm (2018): 18-month lead over Samsung, powered iPhone XS and AMD Ryzen
5nm (2020): Apple M1 and A14, NVIDIA Ampere GPUs
3nm (2022): Full production in 2024, Apple A17 Pro and M3 chips
2nm (2025): Mass production starting, 10-15% performance gain, 25-30% power reduction
1.4nm (2027-2028): In development with ASML High-NA EUV

Manufacturing Excellence

TSMC's competitive advantage isn't just technology— it's execution. The company achieves:

Yield Rates: 90%+ on mature nodes, 70-80% on leading edge (vs Samsung's 60-70%)
Reliability: Defect rates 30-40% lower than competitors
Time-to-Market: 6-12 month advantage in ramping new processes
Capacity: 14 million 12-inch wafers annually across 4 fabs

📅 TSMC Process Node Timeline

28nm

2011

7nm

2018

5nm

2020

3nm

2022

2nm

2025

Leadership: 12-18 month advantage over Samsung

92% of advanced chips (≤7nm) manufactured by TSMC

Strategic Partnerships

Apple: The Anchor Customer

Apple accounts for 25% of TSMC revenue (~$18B annually), providing stable demand and co-investing in process development. TSMC reserves leading-edge capacity for Apple, ensuring iPhone and Mac chips use the most advanced nodes. This partnership has lasted 15+ years, with Apple transitioning from Samsung to TSMC in 2014.

NVIDIA: The AI Boom

NVIDIA's AI chip demand has made it TSMC's second-largest customer at 11% of revenue. All NVIDIA GPUs (A100, H100, H200, B200) are manufactured exclusively by TSMC. The AI boom has created unprecedented demand, with TSMC allocating entire fabs to NVIDIA production.

AMD's Comeback

AMD's resurgence was enabled by TSMC's 7nm process, which gave AMD a node advantage over Intel's struggling 10nm. TSMC manufactures all AMD CPUs and GPUs, accounting for 8% of revenue.

Geopolitical Implications

The Taiwan Concentration Risk

Over 90% of advanced chips are manufactured in Taiwan, creating unprecedented geopolitical risk. A Chinese invasion, natural disaster, or other disruption would immediately halt production of:

All NVIDIA AI accelerators
All Apple iPhones, iPads, Macs
All AMD processors and GPUs
Most Qualcomm smartphone chips
Cloud provider custom AI chips

The "Silicon Shield"

Taiwan's semiconductor dominance provides a "silicon shield"— the theory that China won't invade because it depends on TSMC chips. However, this logic has limitations as China invests $150+ billion in domestic chip capacity.

Global Expansion Under Pressure

Under U.S. pressure, TSMC is building fabs outside Taiwan:

Arizona (USA): $40B investment, two fabs for 4nm/3nm production by 2025-2026
Japan: Joint venture with Sony for 28nm/22nm chips, operational 2024
Germany: Planned fab for automotive chips

However, these facilities will represent less than 10% of TSMC's capacity by 2030, with most advanced production remaining in Taiwan.

Competitive Dynamics

Samsung's Struggles

Samsung has fallen behind TSMC despite massive investments. Issues include lower yields, customer trust concerns (Samsung designs competing chips), and strategic inconsistency. Samsung's foundry market share has declined from 18% (2020) to 10% (2024).

Intel's Foundry Ambitions

Intel is attempting to become a major foundry through Intel Foundry Services, backed by $19.5B in CHIPS Act funding. However, Intel faces significant challenges: limited foundry experience, yield concerns, and conflicts of interest. Most analysts are skeptical Intel can catch TSMC by 2030.

The Future: Sustaining Leadership

TSMC's strategy for maintaining dominance:

Technology Leadership: First to 2nm (2025), 1.4nm (2027-2028), and beyond
Advanced Packaging: CoWoS capacity doubling to 660,000 wafers in 2025
Vertical Integration: Controlling more of the value chain from wafer to package
Customer Lock-In: Deep co-development partnerships make switching prohibitively expensive
Capital Intensity: $30-40B annual capex creates insurmountable barriers to entry

TSMC's foundry model revolutionized semiconductors, enabling the fabless ecosystem that powers the digital economy. The company's 71% market share and 92% of advanced chip production make it the most strategically important company in technology— and Taiwan's greatest geopolitical asset.

🎯 Key Takeaways

Morris Chang's 1987 pure-play foundry model separated design from manufacturing, enabling fabless companies (NVIDIA, AMD, Qualcomm, Apple) to innovate without building $20B+ fabs
Commands 71% foundry market share with $72B revenue (2024), manufacturing 92% of advanced chips (≤7nm) with 12-18 month process lead over Samsung through $30-40B annual capex
Top customers: Apple 25% ($18B), NVIDIA 11% ($8B), AMD 8% ($6B)— deep partnerships with co-development and reserved capacity create switching costs exceeding $10B
Taiwan concentration creates systemic risk: 90%+ advanced chips in Taiwan, overseas expansion (Arizona $40B, Japan, Germany) will be <10% capacity by 2030, "silicon shield" weakening as China invests $150B+ in self-sufficiency

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