To understand geopolitics, follow one company

Most businesses are affected by geopolitics, but few can claim the reverse – that they can shape geopolitical dynamics. TSMC, Taiwan’s leading semiconductor manufacturer, is one of them. Against the backdrop of growing US-China tensions, with navy ships and combat aircraft from both sides getting increasingly close to one another in the narrow Taiwan Strait, I recently asked a group of senior executives what would happen if TSMC’s factories on the contested island went offline, say as the result of a naval blockade or military confrontation. “Our businesses would come to halt within weeks,” was the consensus, and not just from leaders of electronics or manufacturing companies.  

TSMC controls over 60% of the world’s foundry market, manufacturing chips for leading designers such as NVIDIA, Qualcomm, Broadcom, and even Apple, which started designing its own chips in 2010. For the most advanced chips, the company’s market share is even higher, an astonishing 90%. Most computers, smartphones, and tablets contain chips made by the Taiwanese industry leader – you are probably reading this article on a device powered by them!  

On the one hand, TSMC’s success epitomizes the power of globalization in enabling firms to focus on their core competency, leverage global supply chains, and thereby maximize value for customers and investors. Founded in 1987, the company became so good at manufacturing chips that most leading semiconductor firms in the US and Europe decided to focus on chip design, leaving manufacturing to TSMC and a handful of other contract manufacturers. This in turn helped “fabless” chip design firms get even better at what they do – America’s Nvidia controls over 80% of the market for the most advanced gaming chips.

Similarly, just three firms – Taiwan’s Mediatek and Qualcomm, and Apple in the US – account for 86% of the smartphone chip market, with TSMC doing most of the manufacturing. We find a similar concentration upstream from TSMC: ASML in the Netherlands is the undisputed leader in making the machines required for chip manufacturing; a British firm, Arm, owns the software most chip designers use; two Japanese firms – JSR and Shin-Etsu – control 75% of the market for photoresists, light-sensitive chemicals used to etch patterns onto silicon wafers; and just a handful of companies supply most of these wafers.