Taiwan Semiconductor Manufacturing Company (TSMC) is a relatively low-profile competitor in the cutthroat semiconductor industry. These microchips provide the smarts behind all sorts of computerized devices. Intel's Pentium line is, of course, the best-known chip and is used in personal computers. But smart devices are multiplying rapidly, and TSMC is a major provider of custom chips for a number of uses beyond the PC.
TSMC is the world's largest contract manufacturer of semiconductors. Contract manufacturers are commonly referred to as foundries and TSMC holds 40 percent of the worldwide foundry business. In 2000, before the downturn in the tech sector, the firm made $1.9 billion on sales of $5.3 billion. Some estimates suggest that foundries, currently supplying 16 percent of chips globally, will expand to 40 percent of the market by 2010.
As a consequence, even in the midst of the dire outlook for chips in 2001, TSMC's Chairman Morris Chang is investing in new technology and new capacity. The firm sunk $3.8 billion into expansion before the downturn and has a couple of new wrinkles on the drawing board.
One is new fabrication plants that work from 12-inch silicon wafers rather than the standard 8-inch wafers currently used in the industry. The plants cost three billion each but each wafer yields 2.6 times as many chips as the eight-inch version, reducing costs by 40 percent. Hand-in-hand with investment in the new size wafers is expanded R&D spending at TSMC with the goal of reducing the line widths (the connections) on chips. Smaller line widths allow each semiconductor to handle more processes in the same size chip. TSMC approaches Intel in its ability to squeeze more capacity into each generation of chips it manufactures for clients.
Probably the most interesting change from an operation point-of-view is the creation of the "virtual foundry" at TSMC. A company needing a chip can contact TSMC about its requirements. If design services are needed, TSMC can arrange connections with designers to help put together a chip design that meets the customer's needs and fits with TSMC's production systems. TSMC can take the design and program one of its foundries to cut a test chip out of a wafer (the rest of the wafer being used for other chips). The test chip is put through its paces, tested, and improved. The finished chip design is then laid out on a wafer, allowing maximum yield of chips from existing wafer space. The chip is then passed into production at one of TSMC's facilities.
The virtual foundry label comes from the idea that the customer needs absolutely no design or manufacturing capability of its own. If the client knows what it needs the chip to do, TSMC and its collaborators can take it from there. Nvidia, for example, the chip supplier for Microsoft's Xbox game machine, uses TSMC for its manufacturing. Nvidia management can take advantage of the virtual foundry to make changes to the chip up until production actually takes place. Moreover, the client can track progress or even cancel orders through the web connection to the virtual foundry.
Compaq computers recently announced that it would discontinue making the Alpha chips that it inherited when it bought Digital Equipment Corporation. Instead, the company will use standard Intel chips for its PC's, leaving the chip research and development, design, and manufacturing to Intel. Will this type of trend, seen in both TSMC and Intel, move away from vertical integration in the technology/electronics industries continue? What factors would drive it that direction? When would it make sense for a company not to outsource but to make its own inputs?
Einhorn, Bruce; Edwards, Cliff and Pete Engardio. "Betting Big on Chips", BusinessWeek, April 30, 2001, p54-56.
- Scott Erickson