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TSMC: the world’s largest company

Welcome to Capital Note, a newsletter on business, finance and economics. On the menu today: the chip shortage has raised the stakes for Taiwan, US GDP is soaring and Verizon is throwing in the towel on digital media. To subscribe to Capital Note, follow this link. Taiwan Semiconductor Shortage Could Save Taiwan Founded in 1987 by the Chinese Morris Chang, the Taiwan Semiconductor Manufacturing Company (TSMC) was the first “pure play” foundry, a manufacturer of integrated circuits designed by other companies. Previously, chip designers manufactured their products in-house, but the creation of TSMC reshaped the semiconductor industry, dividing the market between “factory-less” design companies without in-house manufacturing capabilities, and foundries that manufacture only and manufacturers of integrated devices that do both. Three decades later, TSMC is by far the world’s largest producer of semiconductors. Today, in the midst of a global chip shortage, TSMC is arguably the world’s largest company. Late last year, automakers began warning that insufficient supply of chips was limiting auto production. The shortage quickly hit producers of everything from industrial machinery to cell phones. Yesterday, the severity of the shortage was highlighted when Apple, which accounts for one-fifth of TSMC’s revenue, told investors that sales of Macs and iPads would fall by around $ 3 billion due to restraints. supply. If the world’s most valuable smartphone company can’t get its orders fulfilled, no one will come out unscathed. Wait times for semiconductor orders, typically four to eight weeks, have lasted up to 52 weeks, and neither CEOs nor policymakers can overcome the constraints with brute force as the new sites production systems take years to come online. Intel recently announced plans to build two new factories in Arizona, but these won’t be operational until 2024. And the $ 50 billion allocated to semiconductor manufacturing in Biden’s infrastructure bill probably won’t make a difference, given that the United States has only a 10% market share in chip production. While the supply shortage will eventually abate and – if past semiconductor cycles are any indication – is likely to lead to a supply glut, the episode underscores the strategic importance of the manufacturing capabilities of fleas. TSMC and Samsung alone control nearly 75% of the foundry market, providing inputs for a wide range of both high and low tech products. This means that much of the global economy depends on just two suppliers that are not easily replaced. Companies may wish to diversify their suppliers, but the amount of knowledge and capital required to compete with dominant chipmakers is staggering. The Chinese government has invested hundreds of billions of dollars in its domestic foundries to no avail, and integrated device makers in the United States have seen their market share steadily erode over the past three decades. Meanwhile, Beijing and Washington have fought over the fate of Taiwan, which China claims as its territory. Over the past year, Beijing has flexed its muscles in the Taiwan Strait and reportedly began circling fighter jets around the island in January, just days after Biden’s inauguration. The Trump administration has deepened its ties to the island, but the United States still maintains a policy of “strategic ambiguity” towards the island, offering support but not outright acknowledging its independence. If US alliances in the Middle East tell us anything, it’s that Washington will go to great lengths to protect economic assets abroad. While the struggle for Taiwan has been largely ideological, the chip shortage has added a new dimension. If Beijing attempted an invasion, it could tip the scales towards US intervention. Around the web, US GDP grows 6.4% in first quarter US economic growth was boosted in the first three months of 2021 thanks to a massive fiscal stimulus that fueled consumer spending, as well as a loosening of lockdown restrictions, which brought production closer to pre-pandemic levels. Gross domestic product rose 6.4 percent on an annualized basis in the first quarter, the commerce department said Thursday. That exceeded economists’ expectations for 6.1% growth, according to a Refinitiv survey, and marked the fastest growth in the first quarter since 1984. The chip shortage worsens In a dizzying 12-hour period, Honda Motor Co. said it would halt production at three factories in Japan; BMW AG reduced shifts at factories in Germany and England; and Ford Motor Co. cut its full-year profit forecast due to the chip scarcity it sees extending into the next year. Caterpillar Inc. later reported that it may be unable to meet demand for machinery used by the construction and mining industries. Now, the very companies that benefited from the growing demand for phones, laptops and electronics during the pandemic that caused the chip shortage are feeling the pinch. After a successful second quarter, Apple CFO Luca Maestri warned that supply constraints were limiting sales of iPads and Macs, two products that performed particularly well during the lockdowns. Maestri said it would reduce revenue by $ 3-4 billion in the third fiscal quarter. After massive acquisitions of Yahoo! and AOL, Verizon throws in the towel on digital media Verizon Communications Inc. is exploring a sale of assets, including Yahoo and AOL, as the telecommunications giant seeks to get out of a costly and unsuccessful bet on digital media. The sale process, which includes private equity firm Apollo Global Management Inc., could lead to a deal worth $ 4 billion to $ 5 billion, according to people familiar with the matter – assuming there is have one. Further details could not be learned. Verizon has spent billions of dollars to assemble a portfolio of once dominant websites, including AOL in 2015 and Yahoo in 2017, paying more than $ 9 billion in total to acquire the pair. Random Walk The Financial Times published a good overview of TSMC last month, explaining how it combined its knowledge of scale and process to build a huge competitive divide: [TSMC] becomes more and more dominant with each new process technology node: while it only accounts for 40-65% of revenue in the 28-65nm category, the nodes used to produce most of the automotive chips it holds nearly 90% of the market for the most advanced nodes currently in production. “Yes, the industry is incredibly dependent on TSMC, especially since you’re on the cutting edge of technology, and it’s pretty risky,” says Peter Hanbury, partner at Bain & Company in San Francisco. “Twenty years ago there were 20 foundries, and now the most advanced products are on a single campus in Taiwan.” As each new process technology node requires more difficult development and a larger investment in new production capacity, other chip makers over the years have started to focus on design and leave production behind. to dedicated foundries such as TSMC. The higher the cost of new manufacturing units, the more other chipmakers began to outsource, and the more TSMC’s competitors in the pure-play foundry market dropped out. One solution would be to diversify the supply chain by distributing TSMC fabs globally. This was the reason the Trump administration was successful in opening TSMC factories in Arizona, but it is not a perfect solution: According to analysts, one of the main reasons the company is so efficient and profitable is its manufacturing concentration in Taiwan. “TSMC’s main sites in Taiwan are close enough that TSMC can flexibly mobilize our engineers to support each other when needed,” said TSMC spokesperson Nina Kao. A person close to the company estimates that production costs in the United States are 8 to 10 percent higher than in Taiwan. TSMC is therefore not prepared to disperse its manufacturing activities around the world. “In the United States, we made a commitment to build a factory after the authorities made it clear that they would subsidize the cost differential. In Japan, our investment is focused on a technology area that is critical to our future, ”said a senior TSMC executive. “But in Europe, the case is not so strong, and [the Europeans] should really understand what exactly they want and if they can maybe achieve it with their own chipmakers. – DT To subscribe to Capital Note, follow this link.

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