Most tech investors likely know that Taiwan Semiconductor Manufacturing (TSM -0.24%), also known as TSMC, is the world's first, largest, and most advanced contract chipmaker. They also probably know that it manufactures chips for top fabless chipmakers like Advanced Micro Devices, Qualcomm, and Apple, which makes it a linchpin of the semiconductor industry.
Those strengths have enabled TSMC to generate big gains for patient investors. Over the past 10 years, TSMC's stock has rallied more than 350% as the Nasdaq Composite advanced 250%. Despite that decade of consistently strong growth, TSMC is still a solid long-term play on the semiconductor sector.
That's a lot to know about this semiconductor giant. But here are three lesser-known facts about this chipmaker that many investors may have overlooked. Knowing these could make you smarter than the average buyer.
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1. TSMC's founder once worked at Texas Instruments
TSMC was founded by Morris Chang in 1987. But prior to his return to Taiwan, Chang worked for three decades in America. He spent 25 of those years at Texas Instruments, where he eventually became the chipmaker's global VP of semiconductors. But instead of being promoted to the C suite, Chang was abruptly transferred to lead TI's struggling consumer division before being "put out to pasture" (in his own words) at a staff job.
Chang, who was 52 years old when he left TI, subsequently became the president and chief operating officer of General Instrument for a year. He then returned to Taiwan to lead the Industrial Technology Research Institute (ITRI), a non-profit open lab and incubator that eventually fostered the creation of TSMC and its largest domestic competitor, United Microelectronics.
So if TI had promoted Chang back in the 1980s, there's a strong chance that TSMC wouldn't even exist today. TI might have also evolved into a more technologically advanced integrated device manufacturer (IDM) like Intel under Chang's leadership, as opposed to its current reputation as a producer of simpler analog and embedded chips.
2. Its technological lead depends on a single company
TSMC's two closest competitors in the chip foundry market are Intel and Samsung. But over the past decade, TSMC pulled ahead of both tech giants in the "process race" to create smaller and denser chips. By establishing that lead, TSMC became the only contract chipmaker that could produce top-tier chips for companies like Apple and AMD.
TSMC's success can be entirely attributed to its early adoption of ASML's (ASML 2.31%) extreme ultraviolet (EUV) lithography systems. ASML is the only manufacturer of EUV systems, which are used to etch circuit patterns on silicon wafers for the smallest and densest chips in the world. ASML doesn't face any competition in the EUV market for two reasons: It took decades to perfect its technology, and a single EUV system costs about $200 million to manufacture and requires multiple planes to ship.
TSMC, Intel, and Samsung were all initially skeptical of the new technology. But Apple stepped in, told TSMC it needed EUV systems to produce its next-gen chips, and even offered to finance its initial purchases. That partnership, which started in 2014 after Apple shifted its chip orders from Samsung to TSMC, enabled TSMC to install EUV systems before its rivals.
Intel and Samsung are now finally trying to buy more EUV systems to catch up to TSMC, but it will likely take tens of billions of dollars and several years -- along with big government subsidies -- to narrow that gap.
3. It actually manufactures some chips in China
One of the most frequently cited risks regarding TSMC is its geographic location. Its most advanced fabrication plants are all located in Taiwan, which leaves it exposed to a potential military conflict with mainland China. That's why TSMC, with the support of U.S. subsidies, has been building a plant for manufacturing its top-tier 5nm chips in Arizona.
But TSMC also operates two plants in China. These two plants, which are located in Nanjing and Shanghai, don't produce any chips that are smaller than the 28nm node because TSMC doesn't want its more advanced designs to be leaked to rival Chinese chipmakers like SMIC. However, 28nm chips are still used in plenty of lower-end devices across the consumer electronics, automotive, and Internet of Things (IoT) markets. In the second quarter of 2022, TSMC still generated 10% of its revenue from 28nm chips while another 25% came from its even larger nodes.
Therefore, TSMC and China have a more symbiotic relationship instead of an adversarial one. TSMC needs to keep operating its plants in China to maintain a stable supply of lower-end chips (especially for the automotive and IoT markets) while Chinese tech companies still need a steady supply of higher-end chips from TSMC's Taiwanese foundries.
It's still one of the best semiconductor stocks
These facts might not tip the scales in favor of the bulls or the bears, but they offer valuable insights into a company that has become the bellwether of the global semiconductor market. TSMC's stock might remain volatile in the near term amid the recent macro headwinds, but I believe it still has plenty of room to grow over the long term as chips become faster, more advanced, and more essential to a wide range of industries.
