A man walks past TSMC headquarters at the company’s headquarters in Hsinchu, Taiwan. TSMC is the world’s largest semiconductor foundry.

Sam Yeh | AFP | Getty Images

Taiwan’s oversized role in chip manufacturing has come into the spotlight when a global semiconductor shortage forced several automakers to stop manufacturing.

Countries like the US and Germany have turned to Taiwan to help remove chip manufacturing bottlenecks. The shortage was due to increased demand for electronics during the Covid-19 pandemic. and was exacerbated by former President Donald Trump’s trade war with China.

Taiwan dominates the foundry market or semiconductor manufacturing outsourcing. According to Taipei-based research firm TrendForce, contract manufacturers combined accounted for more than 60% of total global foundry sales last year.

Much of Taiwan’s dominance can be traced back to Taiwan Semiconductor Manufacturing Co, or TSMC, the world’s largest foundry, whose customers include large tech companies like Apple, Qualcomm, and Nvidia. According to TrendForce data, TSMC accounted for 54% of total foundry sales worldwide last year.

Semiconductors are important components that drive electronics from computers and smartphones to brake sensors in cars. The manufacture of chips encompasses a complex network of companies that design or manufacture them, as well as companies that provide the technology, materials, and machinery for them.

TSMC is manufacturing-only and was the first to make many state-of-the-art semiconductors, said Dan Wang, technology analyst at research firm Gavekal, in a podcast from DBS Bank in Singapore.

“TSMC, if you just look at the market share, I believe that around 50% of all semiconductors in the world are made. And I think that still understands how important it is because these are some of the most advanced chips out there . “said Wang.

Semiconductor designers and manufacturers strive to make chips smaller and better. Currently, TSMC and its South Korean rival Samsung are the only foundries that can make the most advanced 5-nanometer chips.

TSMC is already preparing for the next-generation 3-nanometer chips, which are reported to start production in 2022.

China is catching up

Some countries are planning to increase their own semiconductor production – and one of them is China, which aims to be more independent.

However, China’s technological struggle with the previous US administration is holding back the largest chip maker, Semiconductor Manufacturing International Corporation (SMIC), said Paul Triolo, head of geotechnology practice at Eurasia Group’s risk advisory group.

TSMC is just so dominant. It doesn’t really have a lot of competition in the upper range anymore.

Dan Wang |

Technology analyst Gavekal Dragonomics

Last year the Trump administration blacklisted SMIC known as the Entity List, which has limited limits the company’s access to the technology and machines it needs.

In 2020, SMIC was the fifth largest semiconductor foundry in the world by sales – after Taiwan’s TSMC and UMC, South Korea’s Samsung and GlobalFoundries in the US, TrendForce data showed.

“The current goal is to be up to date with companies like TSMC, Samsung and Intel,” Triolo told CNBC’s “Squawk Box Asia”.

“The problem that SMIC is in now, the dilemma, is that the US government put it on the entity list,” he said. “But the big picture is that, at least for now, SMIC has been cut off from purchasing the really cutting-edge equipment it needs from ASML, a Dutch company.”

ASML makes the so-called extreme ultraviolet lithography devices that are used to make the most advanced chips such as those made by TSMC and Samsung. Reuters reported last year that the Trump administration had pressured the Dutch government to stop selling the machine to SMIC.

Even if SMIC had access to ASML devices, it would take the company years to mass-produce high-end chips, Triolo said.

Until then, TSMC appears to maintain its leading position.

“TSMC is just so dominant. It doesn’t really have a lot of high-end competition anymore. So it has taken a while for this model to really work. But at this point it can actually be a very profitable company,” said Wang of Gavekal .

– CNBC’s Eustance Huang and Arjun Kharpal contributed to this report.