Elite Supply Chains - TSMC Part 1

Welcome back to the SupplyQ blog and our next deep dive into the world’s best supply chains. If you remember from our first series on Zara, my goal is to highlight the most positive aspects of an organization’s operations, and then share best practices that you can apply in your own company.

In this next round, we’re exploring the world of semiconductors. Silicon and technology are tied to the hip, and our reliance on silicon and semiconductors grows seemingly exponentially in each passing year. Everything has a chip in it now, even the most innocuous items like your car door, refrigerator, and toothbrush.

You’re probably familiar with many of the world’s largest chip designers like AMD, Qualcomm, and Nvidia, but would you be surprised to find out that none of these world class companies manufactured their own chips? Instead, they all rely on the Taiwanese giant that has perfected the semiconductor manufacturing process: TSMC.

Founded in 1987 by Dr. Morris Chang, TSMC or Taiwan Semiconductor Manufacturing Company (how original!) pioneered the “pure-play foundry” business model, in which they exclusively manufacture chips for other design companies. Their specialization has paid off spectacularly – today TSMC share of foundry revenue is over 60% globally! They are undoubtedly the industry leader in semiconductor manufacturing and research, pushing to boundaries as to what is possible each year.

What makes TSMC truly remarkable isn’t just their market dominance, but how they have maintained their technological edge despite the exponentially increase challenges of semiconductor manufacturing. Each new generation of chips requires smaller and smaller transistors, yet TSMC consistently stays ahead of the competition, while keeping all of its IP in the process! TSMC’s latest technology, the 3 nanometer chip, is making the world of AI possible, powering Nvidia’s flagship Blackwell GPUs.

So what permits TSMC to consistently maintain its advantage over competitors? Beyond Taiwan having some of the most brilliant minds in the semiconductor and electrical engineering discipline, their supply chain excellence can be broken down into three principal advantages:

1. Relentless technological advancement – the last four years TSMC has invested roughly $30B in capital expenditures, ensuring they maintain their lead in R&D and manufacturing capabilities

2. Strategic concentration of assets – while historically concentrating production in Taiwan to create unprecedented efficiency and knowledge sharing, TSMC’s latest announcement to invest around $162B in US manufacturing demonstrates a willingness to diversify its manufacturing capabilities while ensuring it stays at the root of who they are as a company by keeping their state-of-the-art development in Taiwan

3. Unwavering operational excellence - TSMC has pioneered holistic wafer management practices that optimize both yield and cycle time. Their proprietary defect detection systems capture microscopic issues before they impact entire wafers, while their methodical approach to production flow minimizes bottlenecks at critical steps. By treating each wafer as a multi-million-dollar asset, TSMC extracts significantly more value per wafer than competitors, reducing waste and maximizing output of the most advanced nodes. This combination of high yields and efficient processing creates a compounding economic advantage in an industry where margins are determined by nanoscale precision.

Technological Advancement

TSMC’s capital expenditure truly is unrivaled. To help put its capex into perspective, their $30B in annual expenditure is more than one of its most well-known customers (AMD) generates in revenue annually. Furthermore, in 2025 TSMC expects to spend $40B in capital expenditure, more cash than one of its other most well-known customers, Qualcomm, generated in revenue last year.

While vertical integration makes sense in some industries, TSMC proves that semiconductors is one industry where separation of expertise makes sense. TSMC has perfected foundry operations within the fab, it has permitted nearly every other major chip company to go fabless, relying on TSMC’s operational superiority to handle the manufacturing.

AMD, Nvidia, Qualcomm, Broadcom, and many others (even Intel) are able to continue designing the best chips because they know that TSMC will be able to handle any design spec thrown its way. This specialization allows TSMC to focus its massive capital expenditures purely on manufacturing excellence - investing in cutting-edge lithography equipment, clean room technology, and process development that no single chip designer could justify on their own. The result is a virtuous cycle where TSMC's scale creates efficiency that benefits the entire ecosystem, allowing chip designers to push the boundaries of what's possible knowing TSMC's manufacturing prowess will keep pace.

Taiwanese Semiconductor Superiority

No nation is as crucial to the semiconductor industry than Taiwan. TSMC is instrumental to Taiwanese semiconductor dominance, and the gulf between Taiwan and the rest of the world in manufacturing capability continues to grow. Although, TSMC understands its favorable global position, it understands the precarious nature of isolating all its manufacturing solely in one location.

Relations between China and Taiwan are decades old, and while never really friendly, the magnitude of both nation’s ability to coexist has never been larger. This geopolitical reality has driven TSMC's historic $162 billion investment in U.S. manufacturing facilities - the largest foreign direct investment in American history. While TSMC will maintain its most advanced research and cutting-edge manufacturing in Taiwan, these new facilities in Arizona represent a strategic hedge that serves multiple purposes. They appease U.S. national security concerns, provide geographic diversification against natural disasters or regional conflicts, and position TSMC closer to its major North American customers. Similar investments in Japan and Germany further distribute TSMC's manufacturing footprint while maintaining Taiwan as the heart of its technological innovation. This balancing act - preserving Taiwan's semiconductor crown while strategically expanding globally - will define TSMC's next growth in the age of AI.

Wafer Excellence

TSMC treats each of its prized assets, wafers, like gold. In semiconductors, a wafer (think of a 12-inch disk – wafer thin) is sent through the fab and put through a variety of steps with individual chips etched on each wafer. Depending on the size of the chips, anywhere from a few hundred to thousands of chips can be extracted from a single wafer.

With the amount of steps that to process one wafer, extreme precision during each step of the process is paramount. Not only does an error result in a scrapping of material, but it can slow the entire line where precise capacity was planned so machines do not get backed up and overwhelmed.

Just think about one bottleneck slowing cycle-time by one day. TSMC’s largest Fab (Fab 18) produces 100,000 wafers per month. At 300,000 wafers per quarter, a lost day of cycle time results in nearly 3,300 delayed wafers, or a $59M quarterly miss!

TSMC has instilled a no nonsense policy for anything but the best. Quoting Chang about his engineer’s willingness to go the extra mile:

"If it [a machine] breaks down at 1 a.m. in the morning, in the U.S., it will be fixed in the next morning, but in Taiwan, it will be fixed at 2 a.m. If an engineer gets a call when he is asleep, he will wake up and start dressing. If his wife asks: 'What's the matter?' He would say: 'I need to go to the factory.' The wife would go back to sleep without saying another word. This is the work culture."

This obsessive focus on wafer excellence creates a flywheel effect that competitors struggle to match. TSMC's superior yield rates mean more functional chips per wafer, which translates to better economics for both TSMC and its customers. As chips become more complex and transistor sizes shrink to atomic levels, this yield advantage compounds – what might be a 5% yield difference at 28nm becomes a 15-20% difference at 3nm.

The financial implications are staggering. While most manufacturing companies celebrate gross margins of 30-40%, TSMC consistently delivers over 50%. Their 41% operating margin ($31B EBIT on $75B revenue) would be impressive for a software company, let alone a capital-intensive manufacturer dealing with physics at the atomic scale.

This operational excellence is why market leaders like Apple, AMD, and Nvidia entrust their most advanced designs exclusively to TSMC. Each new generation of chips pushes the boundaries of what's physically possible, and only TSMC has demonstrated the consistent ability to solve these manufacturing challenges at scale. In the semiconductor industry, where a single misstep can mean billions in lost revenue or delayed product launches, TSMC's reliability has become as valuable as its technical capability.

In Part 2, we'll dive deeper into TSMC's manufacturing excellence and explore how even slight yield improvements compound dramatically across multi-step semiconductor processes. We'll analyze a hypothetical case demonstrating how just a one percent yield difference at each step of a 15-20 step manufacturing process creates exponentially different outcomes. Similar to our Zara inventory analysis, we'll quantify the financial impact of TSMC's superior yield management, revealing how their operational excellence translates directly to their industry-leading profit margins and creates a competitive moat that rivals struggle to overcome.