Pushed by booming demand from chip designers, TSMC—which has a near-monopoly on world semiconductor manufacturing—is using the AI wave that’s pushed the inventory market to report highs.

The worldwide semiconductor business’s ecosystem is widespread and fragile, largely counting on teamwork between a handful of design and manufacturing companies throughout continents to supply the chips behind all the pieces from lawnmowers to giant language fashions (LLMs). However TSMC has constructed up a dominant place in fabrication, the a part of the method the place semiconductors are literally constructed. 

The explanation why TSMC makes some 92% of the world’s superior chips is as a result of it’s one of many solely companies that may. In contrast to different firms that deal with chip manufacturing from design to sale, TSMC capabilities solely as a producer (also referred to as a foundry, or fab). Firms designing cutting-edge AI chips, equivalent to Nvidia and Intel, depend on foundries with extraordinarily specialised instruments to construct their designs—and for them, TSMC is the one recreation on the town.

As demand for AI chips continues to increase, TSMC is going through extra competitors from friends equivalent to Intel, who’s additionally opening new fabs in Arizona, and New York-based GlobalFoundries. However semiconductor demand is anticipated to extend by double digits this 12 months, and TSMC’s huge head begin means it’s poised to remain on high of the marketplace for years.

TSMC was based by Morris Chang in 1987. Born in China in 1931, Chang left the nation throughout the Chinese language Civil Struggle and studied engineering at Harvard and MIT earlier than taking a job at Texas Devices, a number one firm within the then-nascent semiconductor business. Chang rose via the ranks at Texas Devices, incomes a PhD at Stanford alongside the best way and finally coming to run their whole semiconductor division, however give up in 1983.

Chang was 55 when he moved to Taiwan and based TSMC, and already had many years of expertise within the semiconductor business. His imaginative and prescient for TSMC was for a brand new strategy to chip manufacturing: whereas different semiconductor firms managed each step of the manufacturing course of in-house—from design to cargo—TSMC was arrange solely as a foundry, taking orders from chip designers and solely specializing in the extremely technical means of assembling chips. 

The thought wasn’t universally standard from the beginning.

“There have been two obstacles to entry. One was the capital value. However the different was the idea, which was not broadly accepted,” Georgetown world innovation coverage professor Charles Wessner informed Fortune. “Most individuals, together with these in Taiwan, didn’t consider this could work—the concept of organising fabs that simply produce chips for different individuals. That’s a really novel strategy.

TSMC grew slowly, touchdown contracts with Dutch agency Philips and benefiting from Taiwanese authorities assist. Over time, as its operations grew and chip expertise designers started to ask for newer, progressive manufacturing capabilities, TSMC’s fabrication capabilities—unencumbered by time spent designing or advertising chips—far outpaced its rivals.

“The fundamental thought is you get a number of prospects who’re offering you with the assets to supply their chips, and all it’s important to do is focus on the fabrication—you don’t need to do design, and also you don’t need to promote,” Wessner mentioned. “You give attention to that central node. And the extra quantity you get, the extra expert you get within the manufacturing.”

Semiconductor fabrication is among the most technically demanding manufacturing processes on the market. Probably the most superior transistors, the digital parts that make up semiconductors, are extremely small—simply 50 nanometers, over a thousand occasions smaller than the width of a human hair. 

To construct essentially the most superior chips, TSMC matches billions of those transistors onto silicon wafers. That course of requires costly instruments, equivalent to lithography machines, ultra-pure water filtration. TSMC is among the few firms on the planet that has them, and in addition has many years of expertise in provide chain administration and navigating provider relationships required to do enterprise within the semiconductor business.

“One of many fascinating issues about this business is how a lot of it depends on tacit information: that’s, know-how,” Wessner mentioned. “It’s far more artisanal than most individuals understand.”

One in every of TSMC’s greatest worries is environmental: its Taiwan headquarters is situated proper alongside a fault line. Final week, it suffered a 7.4-magnitude earthquake, the biggest in 25 years. The earthquake didn’t considerably disrupt enterprise or have an effect on TSMC’s operations, however left business watchers cautious of the potential results of a extra critical disaster. 

Greater than 80% of the world’s earthquakes happen on the rim of the Pacific Ocean, together with Taiwan. Taiwanese authorities detect round 20,000 earthquakes a 12 months, though most of them are barely perceptible.

“It sits on high of an earthquake fault —the Pacific Rim of fireplace,” Wessner mentioned of TSMC. “I’m fairly unaware of any settlement with the earthquake gods.”