How Taiwan's TSMC rose to the top of the chip industry worldwide

No one took Morris Chang seriously when he first came up with the concept for TSMC

Even though the Taiwanese chip company is now essential, is it still worth purchasing?

Taiwan Semiconductor Manufacturing Company (TSMC) (Taipei: 2330 and NYSE: TSM) might be the most significant company that most people are unaware of. You most likely currently own items that it produced. Most consumers are familiar with brands like Nvidia and Apple. However, a Taiwanese manufacturer is in charge of bringing their designs to life behind many of the products they sell.

Every day, TSMC chips power devices used by billions of people. The company's impact extends well beyond smartphones. A large portion of the contemporary digital economy, ranging from consumer electronics to artificial intelligence, ultimately depends on a company with its headquarters located on an island about 100 miles off the coast of China.

It's not just its size that makes TSMC noteworthy, but also how it did it. In contrast to the majority of tech behemoths, it did not establish a monopoly on software or produce the greatest consumer goods to become dominant. Rather, it presented itself as an impartial supplier to a market with intense rivals. TSMC effectively turned into the Switzerland of the semiconductor industry, conducting business covertly with all parties.

How Morris Chang established TSMC.

Morris Chang, a seasoned semiconductor executive who identified a weakness in the industry's business model and built an entire company around fixing it, came up with that tactic. His insight is at the core of the global technology industry, nearly forty years after it was founded.

Building one of the most significant companies in the world was never Chang's goal. He worked at Texas Instruments for 25 years, rising to the position of head of its international semiconductor division. In those years, Chang became aware of an issue. Innovative chips were frequently created by brilliant engineers, but it cost enormous sums of money to turn those designs into finished goods.

During the 1970s and 1980s, semiconductor companies were supposed to handle everything on their own. Chip design was only half the work. Additionally, businesses required costly factories, specialized machinery, and the know-how to operate them. As a result, a small number of large, vertically integrated companies dominated the industry.

Chang's career then took a surprising turn. He left Texas Instruments in 1983 at the age of 52 after being passed over for the company's top position. He briefly held a senior position at another American chip company before getting an odd offer. The Taiwanese government sought someone with Silicon Valley experience to spearhead the development of a domestic electronics industry. Chang agreed.

Morris Chang founded Taiwan Semiconductor Manufacturing Company (TSMC) and serves as its chairman.

Having worked in the semiconductor industry for decades, he came to Taiwan convinced that it would be a mistake to emulate America. Taiwan lacked the international brands, customer connections, and design know-how required to compete. However, Chang had been observing another issue for years. There were many gifted chip designers in the industry, but they were unable to produce their creations. What if someone made the chips for them?

In 1987, TSMC was established in response to that straightforward query. It was a ridiculous idea at the time. Access to a fabrication plant, or "fab," was necessary for bringing a chip to market. Serious businesses should own these factories, according to the industry. In actuality, this meant that chip designers had to depend on a major player in the market.

That led to an additional issue. The business that produced your chip was frequently a rival. It took a leap of faith to give up your most valuable intellectual property. Chang came up with the idea that TSMC would manufacture chips for anyone who could afford them, but it would never create its own products.

That sounded insane in 1987. Chang was turned down by several of the biggest names in the business when he sought investors. His offer was rejected by both Texas Instruments and Intel. A factory that did not produce its own goods appeared to be headed for bankruptcy. Without assured demand, how could a manufacturer survive?

Chang ultimately convinced a number of wealthy Taiwanese families and the Dutch electronics company Philips to support the endeavor. Even so, there wasn't much enthusiasm. Instead of seeing the investment as a strong business opportunity, Philips saw it as a means of advancing the goals of the Taiwanese government. It planned to sell off its investment as soon as possible. The enthusiasm of potential customers was hardly higher. Many designers didn't think it was necessary to outsource production. It seemed pointless to have a business that produced chips exclusively for other consumers.

By now, Chang was a 56-year-old executive pitching an untested business model in an industry convinced it could never work. Fortune then brought an opportunity. In 1988, Intel ran out of production capacity. Reluctantly, it sought assistance from TSMC in order to avoid disappointing customers. When Intel's engineers came to Taiwan, they anticipated a cheap, unskilled subcontractor. Instead, they discovered a top-notch business led by one of the most seasoned executives in the sector. It was difficult to meet Intel's quality standards, but after TSMC got the American behemoth's approval, opinions in the sector rapidly shifted. Others reasoned that if Intel trusted TSMC, maybe they could too.

That endorsement changed the company's course. It was no longer necessary for designers to invest billions in building factories before releasing a new product. Alternatively, they could concentrate on their area of expertise, chip design, and let TSMC take care of the rest. It's doubtful that Nvidia or many other chip companies would have survived without TSMC.

Freed from one of the largest obstacles to entry in the industry, a new generation of semiconductor companies arose. TSMC concentrated on becoming the world's greatest manufacturer while competitors fought to create better chips. The business transformed neutrality into a competitive advantage by opting not to compete with its clients. The impact of that choice would be far greater than anyone could have predicted. However, TSMC's model's success raised the obvious question, "If it was such a good idea, why didn't somebody copy it".

Nearly all of the attempts were unsuccessful. Samsung appeared to be the most reliable rival for many years. The massive South Korean company had decades of manufacturing experience and substantial financial resources. The issue was that Samsung was a rival as well. In contrast to TSMC, Samsung sold consumer electronics and smartphones under its own brand. Customers faced a dilemma as a result. No customer asked the question more than Apple: Why give your most valuable chip designs to a company that could eventually compete with you?

Many of Apple's processors during the early years of the iPhone were manufactured by Samsung. The arrangement was successful, but as the two businesses became fierce competitors in the smartphone market, it grew more awkward. They were engaged in a number of patent disputes by the early 2010s. Apple was put in the peculiar situation of having to rely on one of its largest rivals to produce some of its most crucial parts.

TSMC provided a path out. When the A8 processor was introduced in 2014, Apple moved its manufacturing to Taiwan. Despite the risks involved, Apple decided that the advantages outweighed the disadvantages. One of TSMC's greatest assets in the tech sector is its neutrality. Nowadays, TSMC produces chips for many of Silicon Valley's largest competitors. Despite fierce competition in their respective markets, Apple, Nvidia, AMD, and Qualcomm all depend on the same business.

A phone screen with the Nvidia logo.

Intel's issue was success, whereas Samsung's was a conflict of interest. Intel was the industry leader in semiconductors for many years. Among the most sophisticated in the world were its factories. But the business started concentrating more and more on its own goods. Intel turned down Apple's request in the middle of the 2000s to supply chips for the first iPhone.

The management felt that the investment was not justified because of the small opportunity. It was among the most costly mistakes in the history of the technology sector. Apple had moved on by the time Intel realized its error, and a new generation of chip designers were choosing TSMC as their manufacturing partner. Intel's manufacturing systems were built around its products, not the requirements of outside designers, when the company later tried to open its factories to outside clients.

The investment requirements were too high for other rivals to meet. An American competitor, GlobalFoundries, essentially gave up on cutting-edge manufacturing in 2018 after years of trying to keep up. The business came to the conclusion that the returns on investment for each new generation of chip technology were no longer worth the risk.

A different obstacle confronts SMIC, the national champion of China. It is challenging to compete at the cutting edge of the industry due to Western export restrictions that limit access to advanced manufacturing equipment.

TSMC's biggest benefit.

Technology isn't TSMC's biggest advantage because it can be replicated. The business model Morris Chang developed almost forty years ago is its true advantage. Serving clients who frequently compete with one another, the company is situated in the heart of the semiconductor industry. Large scale is produced by that position, which finances the next generation of machinery and factories.

The most sophisticated chips require ultraviolet lithography equipment manufactured by ASML, a Dutch company. Every one of them cost over 275 million. A state-of-the-art fab may contain dozens of these machines, helping to push the cost of a new facility beyond 15 billion before production even begins. For potential competitors, that poses a challenge.

Customers won't entrust their most important products to an unproven manufacturer, particularly if they lack sophisticated factories. However, it takes billions of pounds to construct a cutting-edge factory before those clients show up. TSMC now mostly avoids this trap since it has already attained enormous scale. The company controls roughly 92 percent of advanced chip manufacturing and generates the cash needed to fund the next generation of technology.

In 2026 alone, TSMC expects to spend nearly 45 billion on new factories and equipment. Few businesses worldwide could afford to spend that much money. Nobody can do it with the same assurance of making a profit. The outcome is an effective feedback loop. Scale attracts customers. Clients produce money.

Every year that cycle turns, TSMC becomes harder to catch as the price of entry rises ever higher. That scale gives TSMC another advantage: it allows customers to help fund its expansion. Most manufacturers have to build factories first and hope demand follows. Today, TSMC often works the other way around. Some of its largest customers commit billions of pounds years before new facilities begin production, effectively helping to finance the next generation of capacity.

At the end of 2024, TSMC held more than 7.3 billion of customers' deposits. As production ramped up on newer technologies, some of that money was recognised as revenue, but the balance remained substantial. Technology companies are willing to tie up enormous sums because access to TSMC's manufacturing has become critical to their own growth plans. This arrangement shifts much of the risk away from TSMC.

When companies such as Nvidia sign long-term agreements worth billions of pounds, they provide "visibility" confidence in management forecasts that few industrial businesses can match. New factories can be built with a high degree of confidence that demand will be waiting when they open. That helps explain why TSMC can continue investing through industry cycles.

AI is a game-changer for the semiconductor industry.

For years, Apple was the company's most important customer. The iPhone generated the predictable demand that allowed TSMC to refine successive generations of manufacturing technology and steadily expand its lead. Now a new force is reshaping the industry. AI has become the biggest driver of demand for advanced semiconductors. Training and running large AI models requires vast quantities of computing power, creating an arms race among technology companies desperate to secure enough chips.

AI computer system.

The biggest beneficiary has been Nvidia. In 2025, Nvidia overtook Apple as TSMC's largest customer, generating more than 18 billion of revenue for TSMC and accounting for roughly a fifth of total sales. The shift says a great deal about how quickly AI has altered the economics of the technology industry, but the opportunity extends beyond chip design.

Producing cutting-edge AI processors is one of the most demanding manufacturing tasks in the world. The chips themselves are larger, more complex and more difficult to assemble than those used in smartphones. As demand has exploded, bottlenecks have emerged throughout the supply chain. For TSMC, that has translated into even greater pricing power.

The world's largest technology firms are competing for a limited supply of advanced manufacturing capacity. Many have little choice but to accept TSMC's terms because there are few credible alternatives. AI has reinforced the advantages of specialisation. Developing a leading-edge AI chip already costs hundreds of millions of pounds. Building the factory to make it would require billions more. As AI pushes the technological frontier forward, the advantages of specialisation are becoming even more pronounced.

But TSMC's dominance creates a problem. Most of the world's most advanced semiconductor manufacturing remains concentrated in Taiwan. That has become a concern for governments, particularly as tensions between China and Taiwan have intensified. A disruption to TSMC's operations would ripple through the global economy.

Smartphones, data centres, AI systems and countless other technologies depend on its chips. Under pressure from the US and other governments, it's begun expanding overseas. The largest investment is a vast complex in Phoenix, Arizona. Similar projects are underway in Japan and Europe.

Building advanced factories in the US is estimated to be roughly 50 percent more expensive than doing so in Taiwan. Labour costs are higher, experienced engineers are harder to find and supply chains are less developed. TSMC has reportedly had to transfer experienced staff from Taiwan and create thousands of new operating procedures to support its US operations. Yet even these higher costs have not weakened the company's position.

Customers are willing to pay a premium for chips manufactured on US soil. For many, securing a politically safer supply chain is worth the extra expense. In an ironic twist, efforts to reduce dependence on TSMC have largely demonstrated how dependent the world has become on its expertise.

The future looks bright for TSMC.

Whether the company can maintain its current position forever is another question. The semiconductor industry has a long history of dominant firms losing their edge, while geopolitical tensions surrounding Taiwan remain an ever-present risk. Governments are spending heavily to build alternative sources of supply and rivals continue searching for ways to close the gap.

However, history suggests writing off TSMC would be unwise. For nearly 40 years, the company has repeatedly adapted to changes in technology, customers' demands and the structure of the industry. It has survived downturns, outlasted competitors and continued strengthening its position at the heart of the digital economy. The story of TSMC is ultimately the story of how a company became indispensable. In an industry defined by relentless change, that may be its most remarkable achievement.

None of this means TSMC is a bargain. Investors are well aware of the company's strengths and the shares have performed exceptionally well over the past decade. As a result, the stock trades on a valuation that reflects high expectations for future growth. Still, TSMC has qualities that are difficult to find elsewhere. It occupies a dominant position in one of the world's most important industries, enjoys deep relationships with many of the largest technology companies on the planet and continues to invest heavily to maintain its lead.

Most importantly, investors do not need to predict which company will ultimately win the AI race. Whether the future belongs to Nvidia, AMD or some future challenger, there is a good chance that their chips will still be manufactured by TSMC. That does not guarantee attractive returns from today's share price. But betting against the company has rarely been a profitable strategy. For investors seeking exposure to long-term growth in technology and AI, TSMC remains one of the highest-quality businesses in the market.

Cash funds new factories. New factories attract even more customers.