The Business Strategy of TSMC

The Business Strategy of TSMC

Morris Chang founded Taiwan Semiconductor Manufacturing Company or TSMC in 1987 with the vision of making it a manufacturer focusing on producing independent circuits for semiconductor and consumer electronics companies that do not own and operate foundries. It essentially became the first dedicated semiconductor foundry in the world.

Nevertheless, with a global presence and a large customer base composed of other multinational tech companies, in addition to its established dominance in semiconductor and integrated circuit manufacturing, this report explores and discusses the elements of the business strategy of TSMC to understand the factors that have been instrumental to its success.

Key Elements in the Business Strategy of TSMC

TSMC is an industry incumbent and a market frontrunner. It has been considered one of the largest companies in Taiwan and one of the most important companies in the tech sector. It is also the most valuable semiconductor company in terms of market capitalization and the largest dedicated semiconductor foundry in the world in terms of production output.

It might not be a household brand unlike other tech companies oriented toward the end-consumer market but it is behind the critical hardware components that power most of the modern devices of the digital information age. The company is at the forefront of semiconductor manufacturing and has been advancing further technologies relevant to chipmaking.

1. Focus on Expanding and Improving its Manufacturing Capabilities

Part of the success of TSMC rests on its multifaceted manufacturing capabilities that collectively represent one of the main sources of its competitive advantages. Remember that it offers outsourced manufacturing services for a wide range of electronic devices and components. These include computer processors, dedicated graphics processors, systems-on-a-chip, and other application-specific integrated circuits, among others.

It remains a top choice for several tech companies because of its unrivaled capabilities that are both high-quality and cost-effective. TSMC keeps itself unmatched through a strong focus on research and development. It has a large team of engineers and scientists tasked to work on developing new materials, equipment, and techniques. It also allocates a significant portion of its resources to pursuits aimed at advancing its process technologies.

The process technologies of TSMC are another source of its competitive advantage. It is the first semiconductor manufacturer that succeeded in mass-producing the first chip based on the 5nm process node. This was the ARM-based Apple M1 chip that was introduced in 2020. Note that companies such as Intel have struggled to produce transistor-dense chips. TSMC leads in producing transistor-dense and highly complex semiconductors.

About 90 percent of its production capacity comes from facilities in Taiwan. It also has manufacturing facilities in China that operate as subsidiaries. However, because of the geopolitical risks stemming from the longstanding China-Taiwan conflict, the company has invested in building facilities in strategic locations around the world. These include specific plants in the United States, Singapore, and Japan.

2. Straightforward Pure-Foundry Proposition to Business Customers

The business-to-business model of this company means that it does not need to spend too much resources and effort on marketing, unlike companies with business-to-consumer models. However, because marketing is still essential in business-to-business operations, especially in closing and retaining business accounts, it markets itself to its business customers through a value proposition that highlights its product strategy and distribution strategy.

An essential aspect of the business strategy of TSMC is its pure-foundry or pure-play semiconductor foundry proposition. It fundamentally positions itself as a manufacturer that focuses on manufacturing and testing physical products based on the instructions and specifications of its business customers. This allows its customers to focus on hardware design while allowing TSMC to focus on its manufacturing capabilities.

The entire proposition means that its customers can focus their resources and efforts on designing and marketing hardware components, such as the instruction set architecture of a system-on-a-chip, without needing to have in-house manufacturing capabilities. This is a time-saving and cost-effective that demonstrates the advantages of outsourcing. Apple has depended on TSMC while still earning commendation for its impressive chip designs.

Furthermore, aside from this product strategy, part of the proposition of TSMC is its distribution strategy which is represented by the location of its facilities. Remember that its main outputs come from Taiwan but it has built facilities in other countries that specialize in specific process technologies and manufacturing requirements. The facilities in Taiwan remain ideal because of its proximity to manufacturing hubs in other countries.

The straightforward proposition of the company has made it a premier manufacturer of semiconductors and integrated circuits. Take note that it services leading fabless semiconductor companies including AMD, Apple, ARM, Broadcom, Marvell, MediaTek, Qualcomm, and Nvidia while also handling some of the production needs of semiconductor companies with fabrication facilities such as Intel and Texas Instruments.

3. Expanding Reach and Capabilities Through Joint Ventures and Partnerships

Another important aspect of the business strategy of TSMC and one of the reasons behind its global success is its business linkages that translated into joint ventures and strategic partnerships. For example, in 1996, it entered a joint venture with Altera Corporation, Analog Devices, and Integrate Silicon Solution to establish WaferTech in the United States. TSMC later acquired this firm in 2000 and became its fully-owned subsidiary.

It also runs the TSMC Grand Alliance with the goal of advancing innovation in the semiconductor industry. The consortium links together its business customers, electronic design automation partners, intellectual property partners, and key equipment and material suppliers. These members also have access to its comprehensive design technology infrastructure called the Open Innovation Platform which serves as an avenue for collaboration.

The company also runs the Design Center Alliance under the Grand Alliance which aims to lower the design barrier for potential and existing business customers to adopt TSMC technology. It specifically focuses on chip implementation services, which include front-end services and back-end services, and system level design solution enablement. This program helps in attracting more customers and reaching more market participants.

Partnerships with governments are also critical to the strategy of TSMC. It has a close relationship with the Taiwanese government since its presence is critical to the national interest. It is also important to underscore the fact that its success is a product of the dedicated ambition of Taiwan to build a local semiconductor industry. TSMC also maintains a close relationship with the U.S. government to secure its North American operations.

4. Sustainability Management and Risk Management in the Supply Chain

The semiconductor industry and all other industries and markets dependent on its products are vulnerable to supply chain disruptions. This was evident from the global chip shortage that started in 2020, the widescale Global Supply Chain Disruption that began in 2021 and worsened in 2022, and macroeconomic factors that affect procurement activities and logistics such as the Global Inflation Surge that started in late 2021.

Semiconductor companies and other consumer electronics manufacturers are aware of these vulnerabilities. TSMC is not an exemption despite its strong foothold. Hence, as part of its supply chain management, it has created and implemented a specific sustainability management program and a dedicated risk management program. These programs are integrated into its supply chain management and are integral to its overall business strategy.

It has a dedicated internal committee tasked with managing its supply chain. The committee specifically brings together fabrication operations, materials management, risk management, and quality system management. Its defined goals and objectives revolve around mitigating risk and supply chain agility enhancement. It is also responsible for monitoring the effectiveness of continuous improvement projects and regulatory compliance of its suppliers.

TSMC has also developed and implemented a Sustainability Evaluation Score that assesses the risk and sustainability of each of its suppliers. Its overall risk management program also involves or includes geographical risk monitoring, earthquake risk and fire risk management, climate change risk management, environmental and health and safety management system, pandemic response and prevention, and business continuity planning.

Note that the company treats its suppliers as partners. A particular issue or shortcoming involving a specific supplier would compel the company to interface with senior management and extend help through on-site assistance, problem-solving, and experience sharing. It also ensures that its suppliers adhere to novel pro-environment practices such as carbon reduction, energy efficiency, water management, green procurement, and waste management.


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