Why is Taiwan so important to the US?

The production of high-performance chips has long been dominated by Taiwan, specifically by one company that supplies the vast majority of the world's most advanced semiconductors. Any disruption to the supply chain of this critical commodity would have huge negative impacts on global economies, including that of the US.

Taiwan's importance to the US

Taiwan's strength in semiconductors and U.S. dependence on Taiwan for chips have become synonymous with four letters: TSMC $TSM-+0.3%the Taiwan Semiconductor Manufacturing Company. TSMC is a semiconductor company that helped Taiwan produce a staggering 63 percent of the world's semiconductor supply in 2020. According to a recent report, TSMC supplied 92 percent of the most advanced chips in 2019.Samsung accounts for the rest.

TSMC is a true leader in the semiconductor foundry market, known for making chips for iPhones, but it also makes semiconductors for Intel. Apple was responsible for about 25 percent of TSMC's total revenue of about $57 billion in 2021. Overall, the five foundries with the highest revenue have a market share of about 90 percent.

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TSMC makes its products in giant factories on the west coast of Taiwan - on the shores where China would land if it invaded the island. Some giants say China's own dependence on Taiwan for these chips would deter it from attacking. But the risk cannot be ruled out, and the repercussions would ripple around the world.

Since the start of the pandemic, chip shortages have had a major impact on the automotive, information technology and consumer electronics industries, in part because of disruptions to manufacturing processes and supply chains as demand increases. The ongoing war in Ukraine and global inflation are also contributing to relatively weak quarterly results for chipmakers such as AMD $AMD-1.2%, Qualcomm $QCOM-0.8% and Intel $INTC-1.3%. The latter set a new negative record: with a net loss of $454 million, Intel fell into the red in Q2 2022 for the first time since late 2017.

This development was the result of a "sudden and rapid decline in economic activity," according to CEO Pat Gelsinger's official statement, but also reflected Intel's own "execution issues."

In contrast, it was companies such as TSMC, Samsung Electronics and UMC that benefited from the increased demand and simultaneous supply shortages in the two pandemic years and managed to increase their sales thanks to, among other things, favourable pricing and high capacity utilisation.

Taiwan dominates global chip production

Globalfoundries $GFS-4.4% of the US is the only manufacturer not based in the East Asia region in the top eight; its market share was around six per cent in the first quarter of 2022.

TSMC history and milestones

One cannot tell the story of TSMC without mentioning its founder: Dr. Morris Chang, known as the "father of semiconductors." Chang was born in China and completed his PhD in electrical engineering at MIT and Stanford in the US. He spent 25 years at Texas Instruments $TXN-3.7% working with advanced semiconductor design and manufacturing processes. He founded TSMC in 1987 when he was 56 years old. It began as a collaboration between the Taiwan government, technology giant Philips, as well as private investors interested in semiconductor technology.

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As the demand for their semiconductor technology continued to grow, TSMC eventually established their own 8-inch wafer fabrication plant in 1993, soon after which the company's stock began trading on the Taiwan Stock Exchange. In the following years, TSMC continued to invest in innovation and expand its technology portfolio. In parallel, TSMC managed to increase its production capacity to keep up with the high demand for their silicon wafers. This success eventually led to becoming the first Taiwanese company listed on the New York Stock Exchange in 1997.

The company continues to outperform its competitors in the market in terms of the number of clients it serves and the profits it generates. Currently, TSMC employs over 52,000 employees and serves over 500 customers with over 11,000 different products known to design and manufacture.

Pelosi in Taiwan

Although Speaker of the House of Representatives Nancy Pelosi left Taiwan, her visit has once again shone a spotlight on the island's key role in the global chip supply chain and in particular on the world's largest chipmaker, TSMC.

The controversial visit, which angered Beijing, included a meeting between Pelosi and TSMC chairman Mark Liu, in a sign of how critically important semiconductors are to US national security and the integral role the company plays in producing the most advanced chips.

Pelosi's visit to Taiwan and meeting with TSMC show that the U.S. can't do it alone and will require cooperation with the Asian companies that dominate cutting-edge chips.

Supporting domestic chipmakers

The risk of US dependence on Taiwan-made chips was very much in mind when Congress passed a sweeping bill to reduce US dependence on foreign chips. The legislation aims to build more semiconductor factories with the help of $52 billion in subsidies.

In his speech, Senate Majority Leader Chuck Schumer called the Chip and Science Act "one of the most important things we've done for America in years, if not decades."

DISCLAIMER: All information contained herein is for informational purposes only and is in no way an investment recommendation. Always do your own analysis.

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