TSMC: The Tech Paradox

Taiwan Semiconductor (TSMC) is one of the most important companies in the modern economy. It manufactures the tiny silicon chips that act as the “brains” inside smartphones, data centres, electric vehicles and the fast-growing world of artificial intelligence. These

chips are built on ultra-thin silicon wafers and contain microscopic circuits that allow devices to process information and make calculations. TSMC’s ability to produce these chips reliably and at scale has supported strong earnings growth across a range of market conditions. It has also created an unusual concentration risk because large parts of the global economy now depend on TSMC’s uninterrupted operations.

A systemically important company is one whose failure can disrupt many other parts of the market, with knock-on effects that are

hard to predict. Modern supply chains and financial markets are highly connected, which means that when a supplier as essential as TSMC falters, few industries, countries or consumers remain insulated from the impact.

This article explains why TSMC matters, where the risks lie, how those risks are mitigated and how investors can think sensibly about a company that now plays a central role in the modern economy.

Why One Chipmaker Matters

TSMC is a dedicated foundry that manufactures the chips that power many of today’s devices. Chipmakers etch tiny pathways into silicon so information can move at high speed. These structures are built at an atomic scale, fitting a vast network onto a surface no

larger than a fingernail. The work is extremely sensitive. Even the vibration from a truck driving kilometres away can disturb equipment and ruin a batch of chips.

TSMC now manufactures about 60% of the world’s microchips and close to 90% of the most advanced 2-nanometre and 3-nanometre generations1 used in AI systems and high-end smartphones. This concentration gives it a pivotal role in the global technology supply

chain. Over several decades, the company has built this leadership through sustained investment, deep technical expertise and early backing from the Taiwanese government. Today, it remains one of only two companies able to produce leading-edge chips at scale.

The other, Samsung, accounts for roughly 10% of output and would be unable to meet global demand if TSMC were offline.

Chips as the “New Oil”

A useful way to understand TSMC’s importance is to compare advanced chips today with oil in the last century. Oil-powered transport, manufacturing and global trade. When supply was disrupted, the effects flowed through economies and into everyday life.

Chips now play a similar role in the digital economy. Every phone, payment, appliance, vehicle and AI tool relies on them. When advanced chip supply tightens, the disruption does not stay within technology. It moves outward into products and services people

use every day. In that sense, advanced chips have become a modern equivalent of oil: a concentrated, critical input where interruptions create ripple effects far beyond the source.

A Deeper View of This Dependency

We have effectively moved from “just in time” manufacturing to “just at TSMC” manufacturing. When a company like Nvidia grows its market capitalisation by a trillion dollars, much of that value is physically sitting on TSMC’s conveyor belts in Hsinchu, Taiwan. Large technology companies rely on TSMC for components and have, in practical terms, partially outsourced their ability to innovate to one company’s engineering schedule. That level of reliance is unusual in global markets and helps explain why TSMC has become such a critical point of focus.

Why TSMC’s Position Is So Hard to Replicate

Several factors reinforce its leadership today and explain why it is so difficult to replace:

• Financial barriers: a competitor would need to spend roughly US$56 billion a year on research and development to maintain the level of expertise of TSMC.

• Production efficiency: its manufacturing lines achieve about 80 to 90% yield output on leading-edge chips, compared with roughly 50% at competitors such as Samsung. This has a direct impact on profitability.

• Deep expertise: more than 50,000 specialised engineers and over three decades of accumulated intellectual property.

• Ecosystem dependence: major technology companies design their most advanced products specifically around TSMC’s manufacturing processes, which strengthens TSMC’s strategic position.

Together, these factors create a “monopoly of excellence” rather than a legal monopoly. TSMC is not the only chipmaker, but it is the only one able to produce the most advanced chips at the scale the world currently needs.

If TSMC Stumbles: A Simple Cascade

A disruption could arise from a production issue, a natural disaster, a shortage of inputs or geopolitical tension. The practical way to think about this risk is as a sequence of connected steps.

Nvidia’s Blackwell B200 is a clear example2. It uses a specialised packaging process known as CoWoS L, which combines multiple chips into one high-performance module. At present, there is no near-term like-for-like alternative at scale to TSMC. A delay in Blackwell

production would likely postpone AI infrastructure rather than eliminate demand. Even so, it could still affect near-term revenues and confidence among the large US technology companies relying on AI to deliver earnings growth or drive a competitive advantage.

What Could Go Wrong at TSMC

There are many scenarios, but we highlight several risk factors that face the company today and the mitigants to each to either reduce the likelihood, where controllable, or the impact, where the risk is uncontrollable.

These risks sit alongside a business that remains central to global technology, which is why many managers continue to own TSMC for very different reasons.

Why Different Investment Styles Own TSMC

TSMC appears across a range of investment strategies:

• Value managers, such as Dodge & Cox, may see it as a relatively cheaper way to gain exposure to AI-driven earnings growth than owning the largest US technology companies.

• Quality managers, including Walter Scott, emphasise high returns on capital, resilient cash flow generation and durable competitive moats, while recognising the risk of future disruption.

• Growth managers, such as Baillie Gifford, focus on rising demand for AI-related chips and high-performance computing.

• Emerging market managers, for example, Lazard and Fidelity, view it as a standout global business headquartered in the developing world.

TSMC Holds the World’s “Digital Oil”

TSMC’s influence spans value, quality, growth and emerging market strategies for different reasons, yet the conclusion is broadly shared. Its risks are clear, but they sit alongside meaningful earnings power, deep industry relevance and a global dependency that is

unlikely to unwind soon. There are scenarios where adverse geopolitical events or operational missteps can lead to serious repercussions, but the counter is that TSMC has become so central to the world’s technology engine that it can make money in a

range of scenarios. The fact that it often trades at a lower multiple than US mega caps, despite supporting a similar AI-driven demand theme, helps explain why so many portfolio managers continue to hold it and why we believe it could be an influential company

driving global equity portfolio performance.