Taiwan’s Chip Leadership

Taiwan’s dominance in advanced chip manufacturing is one of the most strategically important – and most fragile – facts about the 21st-century economy. Almost every smartphone, cloud data center, AI accelerator and modern car depends, directly or indirectly, on wafers that pass through a small cluster of fabs in and around Hsinchu and Tainan.

Below is a deep-dive into why Taiwan became the heart of global semiconductor manufacturing, how that dominance shapes geopolitics and supply-chain risk, and what governments and companies are doing about it.

1. Why Taiwan’s chip leadership matters so much

Semiconductors are to the digital economy what oil was to the industrial age: a foundational input for everything else. But unlike oil, the most advanced chips come from an extremely narrow geographic base.

Recent analyses estimate that:

• Taiwan produces over 60% of the world’s semiconductors and more than 90% of the most advanced chips.

• Two years before mid-2025, Taiwan accounted for 20% of global semiconductor production, 37% of worldwide logic chip manufacturing, and a staggering 92% of advanced logic capacity (typically ≤10 nm).

• Taiwan’s share of global foundry capacity is around 40–45%, with forecasts near 44% in 2024, ahead of China (28%), South Korea (12%), the US (6%) and Japan (2%).

Within this, TSMC (Taiwan Semiconductor Manufacturing Company) is the gravitational center:

• By end-2024, TSMC controlled about 68% of global pure-play foundry revenue, far ahead of Samsung’s roughly 8%.

• In Q2 2025, TSMC hit a record 70.2% foundry market share, generating about $30.24 billion in quarterly revenue as global foundry revenue reached $41.7 billion.

Because advanced logic chips (CPUs, GPUs, smartphone SoCs, AI accelerators) underpin cloud platforms, 5G networks, military systems and critical infrastructure, Taiwan’s chip leadership translates directly into economic leverage and systemic vulnerability. Any disruption in Taiwanese production would ripple through almost every modern industry.

2. How Taiwan became the world’s foundry

Taiwan’s rise in semiconductors isn’t an accident. It’s the product of deliberate industrial policy, institutional innovation, and decades of compounding know-how.

2.1 The invention of the dedicated foundry model

Before the 1980s, most chip firms were IDMs (integrated device manufacturers) that both designed and fabricated chips. Taiwan’s break came when Morris Chang, a US-trained semiconductor veteran, founded TSMC in 1987 with backing from the Taiwanese government and Philips.

TSMC pioneered the pure-play foundry model: manufacturing chips designed by other companies. This solved two problems at once:

• Fab economics for designers – Smaller or fabless firms could access world-class manufacturing without investing billions in fabs.

• Focus and scale for TSMC – The company could specialize in process technology and yield, spreading colossal capital costs over many customers.

This model aligned perfectly with the rise of fabless design houses like Qualcomm, Nvidia, Broadcom, and MediaTek. As these firms grew, so did TSMC’s scale and experience, creating a self-reinforcing loop.

2.2 Cluster effects and industrial policy

Taiwan’s government actively cultivated a semiconductor cluster:

• Hsinchu Science Park, founded in 1980, served as a hub for chipmakers, tool vendors, and research institutes, effectively Taiwan’s “Silicon Valley” for hardware.

• Institutions like ITRI (Industrial Technology Research Institute) helped translate R&D into commercial ventures, and provided early technical know-how and talent for companies like TSMC and UMC.

• Consistent industrial policy and infrastructure investment (power, water, transport) made it easier to run power-hungry, water-intensive fabs at scale.

Over time, this created dense supply-chain co-location: from specialty gas suppliers and wafer producers to packaging and testing firms, many sit within a few hours’ drive of major Taiwanese fabs. That proximity enhances resilience and speed, but also increases geographic concentration risk.

2.3 Step-by-step mastery of advanced nodes

TSMC didn’t leap to leading-edge dominance overnight. It gradually:

1. Built credibility on mature nodes.

2. Invested heavily in process R&D, including early adoption of copper interconnects and low-k dielectrics.

3. Moved aggressively down the node ladder (28 nm → 16/14 nm → 10/7 nm → 5/4 nm → 3 nm).

By the late 2010s and early 2020s, TSMC was consistently first (or effectively tied for first) in volume production at the most advanced logic nodes – and crucially, it often had better yields and reliability than rivals.

3. How dominant is Taiwan, numerically?

To ground the story, here’s a snapshot of Taiwan’s role in global chip manufacturing using recent estimates.

Table: Approximate Global Foundry & Advanced Logic Shares

Different sources use slightly different definitions (by revenue vs. capacity, “foundry” vs. “all semiconductors”, what exactly counts as “advanced”), so the exact numbers vary. But across datasets, the pattern is unambiguous: Taiwan dominates foundry manufacturing, especially for the most advanced technologies.

4. Why advanced nodes and packaging make Taiwan uniquely critical

Not all chips are equally strategic. What makes Taiwan irreplaceable is its dominance in cutting-edge logic and advanced packaging, which are the bottleneck for AI, 5G and high-performance computing.

4.1 Advanced logic: 7 nm, 5 nm, 3 nm and beyond

Logic chips at ≤7 nm deliver the transistor densities, power efficiency and performance needed for:

• Data center CPUs and GPUs (e.g., AMD, Nvidia, AWS custom chips)

• Smartphone and tablet SoCs (e.g., Apple’s A-series and M-series)

• Networking ASICs and 5G baseband chips

• Strategic defense and aerospace electronics

By the early 2020s:

• A US Congressional Research Service report noted that Taiwan and South Korea together housed about 70% of global logic manufacturing capacity, with Taiwan alone at about 35% in 2020.

• Subsequent analyses show Taiwan’s share of advanced logic capacity rising to over 90%.

TSMC’s leadership at nodes like 3 nm and upcoming 2 nm is now central to AI acceleration. In Q2 2025, about a quarter of TSMC’s wafer revenue came from its 3 nm node, powering chips such as Nvidia’s Blackwell GPUs, AMD’s Zen 5 CPUs and Apple M-series processors.

4.2 Advanced packaging: CoWoS and chiplets

As Moore’s Law slows, performance gains increasingly come from advanced packaging – combining multiple chiplets, memory stacks and I/O dies in a single package.

TSMC has led the way with technologies such as:

• CoWoS (Chip-on-Wafer-on-Substrate) for high-bandwidth memory (HBM) pairing with AI accelerators.

• InFO and SoIC packaging for mobile and high-performance applications.

Analysts attribute much of TSMC’s recent revenue surge to demand for these AI-centric packaging technologies – especially CoWoS capacity, which remains a supply bottleneck for top-end GPUs.

Because these packaging lines are also heavily concentrated in Taiwan, even relocating some wafer fabrication offshore doesn’t fully diversify risk.

5. Economic leverage and the “silicon shield”

Taiwan’s chip prowess gives it a kind of “silicon shield” – a belief that the island’s indispensability to the global economy discourages military aggression and incentivizes international support.

From an economic standpoint:

• Chips are essential inputs for trillions of dollars in downstream GDP – in automotive, telecom, cloud, consumer electronics, industrial automation, and more.

• The global semiconductor manufacturing market alone is projected to reach hundreds of billions of dollars annually by the 2030s, with fabrication and foundry services a large portion of the total.

• Many of the highest-margin, highest-value chips (AI accelerators, premium smartphone SoCs) are exactly those made in Taiwan.

This gives Taiwan:

1. Bargaining power – Foreign governments and firms have direct, material interests in avoiding instability in the Taiwan Strait.

2. Investment magnetism – Global tech leaders queue for capacity allocation at TSMC and other Taiwanese fabs, creating long-term commercial ties.

3. Innovation leadership – Talent, suppliers, and capital accumulate where the most advanced nodes and tools are in production.

At the same time, this concentration exposes everyone – Taiwan, customers, and rival powers – to systemic risk. That’s what makes Taiwan’s chip dominance not just an economic fact, but a geopolitical flashpoint.

6. Geopolitical risk: chokepoint and vulnerability

Multiple governments, think tanks and insurers now treat Taiwan’s chip concentration as one of the world’s most significant supply-chain vulnerabilities.

• One analysis calls the heavy concentration of chip manufacturing in Taiwan “the biggest geopolitical risk facing supply chains today,” citing heightened US-China tensions and uncertainty over Beijing’s intentions toward Taiwan.

• A RAND study argues that Taiwan’s domination of chip production creates severe vulnerabilities for the US and its allies, as disruption could cripple advanced manufacturing, communications, and defense systems.

• Recent academic work categorizes potential Chinese actions into quarantine, blockade, or invasion scenarios, each with major implications for semiconductor supply.

Even short-duration disruptions from natural disasters or local shocks (earthquakes, droughts, blackouts) could have global impact. Fabs depend on:

• Extremely stable electricity supply

• Huge volumes of ultra-pure water

• Continuous deliveries of specialty gases and chemicals

Taiwan has already faced water shortages that forced temporary adjustments in operations – previews of how climate and infrastructure constraints can intersect with chip supply.

The result: policymakers see Taiwan’s chip industry both as a strategic asset to be protected and a single point of failure to be mitigated.

7. Global responses: CHIPS Acts, friend-shoring and “de-Taiwanization”

Recognizing this risk, governments are throwing enormous subsidies at on-shoring or “friend-shoring” chip manufacturing. But because of cost, talent and ecosystem constraints, these efforts will modify, not immediately overturn, Taiwan’s central role.

7.1 US, EU and allied industrial policies

Major initiatives include:

• US CHIPS and Science Act – Allocates tens of billions of dollars in subsidies and tax credits to incentivize US-based fabs, including facilities by TSMC (Arizona), Samsung (Texas) and Intel.

• EU Chips Act – Targets 20% global share of chip production in Europe by 2030, supporting new fabs in Germany, France and elsewhere.

• Programs in Japan, South Korea and India aimed at attracting advanced fabs and developing domestic champions.

These initiatives reflect a desire to reduce reliance on Taiwan for national security-critical chips, especially for defense and infrastructure systems.

Yet, as insurers and analysts note, diversification will be slow: building a leading-edge fab takes years and tens of billions of dollars, and replicating Taiwan’s full ecosystem (suppliers, skilled workforce, packaging) is even harder.

7.2 TSMC’s global footprint vs. home-base dominance

TSMC is itself part of this diversification story. The company is:

• Building fabs in Arizona (USA), with planned 4 nm and 3 nm production, and discussions about future 2 nm lines.

• Investing in facilities in Japan (with a focus on 12/16 nm and specialty processes) and exploring European options, particularly for automotive chips.

However:

• Overseas fabs face higher labor and construction costs, unfamiliar regulatory environments, and sometimes slower permitting. Analysts see them as strategically important but relatively small compared to TSMC’s massive Taiwanese base.

• Taiwan will likely remain TSMC’s main location for bleeding-edge nodes, at least in the near to medium term, due to its deep talent pool and existing cluster advantages.

So diversification is real but partial. For the most advanced chips, the world will continue to depend heavily on Taiwan for years.

8. The strategic calculus for major powers

Taiwan’s chip dominance reshapes strategic thinking in Washington, Beijing, Brussels, Tokyo and beyond.

8.1 United States: protect and diversify

For the US, Taiwan’s role intersects with:

• Tech competition with China – Advanced chips are central to AI, cyber, and military capabilities. Export controls on AI and supercomputing chips to China often hinge on wafers made in Taiwan.

• Economic security – Automotive, industrial and consumer electronics supply chains all depend on reliable access to TSMC and other Taiwanese fabs.

• Defense planning – In a serious Taiwan crisis, US planners would have to account for the impact on domestic chip supply, both for commercial and defense systems.

US policy is therefore dual-track:

1. Support Taiwan diplomatically and militarily, partly to keep the semiconductor lifeline intact.

2. Build redundant capacity at home and in allied countries (Japan, South Korea, Europe).

But even under optimistic assumptions, US and allied capacity will not fully substitute for Taiwan’s advanced nodes in the near term.

8.2 China: dependence and ambition

China is in a more delicate position:

• It sees Taiwan as a core sovereignty issue, yet also depends on Taiwanese chips.

• Chinese firms like Huawei, Alibaba and domestic automakers rely heavily on advanced nodes that are currently inaccessible or restricted due to US export controls and sanctions, particularly for EUV tools and leading-edge foundry services.

China is pouring resources into its own foundry champion, SMIC, and a broader domestic ecosystem. But export controls on advanced lithography equipment, especially EUV tools from ASML, materially constrain its ability to match TSMC at the cutting edge in the short term.

This creates a paradox:

• On one hand, absorbing Taiwan could theoretically give Beijing control over TSMC’s assets.

• On the other, any major conflict or severe coercion would likely cripple those fabs, either directly or via sanctions and lost access to essential foreign equipment and materials, destroying the very capabilities Beijing might seek to acquire.

In practice, that makes the chip industry more of a mutual hostage than a simple prize.

8.3 Europe, Japan, South Korea and others

Other advanced economies are pursuing a mix of:

• Partnerships with TSMC (e.g., Japan’s joint venture in Kumamoto)

• Support for domestic players (e.g., STMicroelectronics, Infineon, Samsung, SK Hynix)

• Resilience-oriented regulation targeting critical supply chains.

They want some indigenous capacity for security and economic reasons, yet also want to maintain access to Taiwan’s cutting-edge nodes. So their policies focus on mitigation, not decoupling.

9. Corporate strategy: managing “Taiwan risk”

For global companies that rely on chips, Taiwan’s dominance is both a blessing and a board-level risk.

9.1 Capacity allocation and long-term contracts

Cloud providers, AI firms and device makers now:

• Negotiate multi-year capacity reservations with TSMC and other Taiwanese foundries.

• Co-invest in custom process nodes and packaging (e.g., custom 3 nm variants, tailored CoWoS configurations).

• Diversify some volume to secondary foundries (Samsung, GlobalFoundries, UMC) at slightly older nodes where possible.

TSMC’s outsize market share gives it strong pricing power and the ability to prioritize strategic customers, which can affect smaller firms’ access during demand spikes.

9.2 Designing for resilience

Leading firms increasingly design products with supply-chain resilience in mind:

• Using multi-sourcing strategies where the same chip, or at least a functionally compatible variant, can be made at multiple fabs/nodes.

• Adopting chiplet architectures so that the most advanced logic die is bottlenecked to TSMC, but other dies (I/O, RF, analog, older logic) can be made elsewhere.

• Building larger inventory buffers for critical chips, especially in automotive and industrial sectors where redesign cycles are slow.

Yet for cutting-edge AI accelerators and flagship smartphones, performance requirements tend to force designers back to TSMC’s best nodes in Taiwan.

9.3 Insurance, risk modeling and regulation

Insurers and risk analytics firms now model China-Taiwan crisis scenarios explicitly, estimating potential supply-chain losses and recommending mitigation strategies like:

• Geographic diversification of assembly and test locations

• Contingency plans for rapid design down-porting to older, more widely available nodes

• Stronger vetting of suppliers at all tiers for geopolitical, cyber and climate risks.

Regulators are likewise requiring more explicit supply-chain risk disclosures and resilience planning from critical industries.

10. The road ahead: Will Taiwan stay on top?

Looking forward to the 2030s, several structural forces will shape whether Taiwan can maintain – or is forced to share – its semiconductor leadership.

10.1 Technological trajectory

TSMC is pushing aggressively toward:

• 2 nm and 1.4 nm nodes, with pilot lines and early risk production planned over the next few years.

• Further improvements in gate-all-around (GAA) transistors, backside power delivery, and 3D packaging (e.g., stacked logic and memory).

As long as TSMC sustains its lead in process technology and yield, Taiwan will remain the epicenter of high-end silicon. But the cost and complexity of each new node are rising sharply, potentially narrowing the number of players that can keep up – a dynamic that actually reinforces TSMC’s position relative to most competitors.

10.2 Economic and demographic headwinds

Taiwan faces domestic constraints:

• A shrinking, aging population, which can strain the pool of engineers and fab technicians.

• Pressure on electricity and water infrastructure, particularly as fabs consume more of both.

• Political debates over land use, environmental impact, and labor conditions in giant fab projects.

These constraints might nudge more capacity offshore over time. But given the depth of Taiwan’s existing ecosystem, most analysts expect the core of TSMC’s most advanced production to stay on the island for at least the next decade.

10.3 Geopolitics and the risk of disruption

The biggest wildcard is geopolitical:

• A full-scale conflict in the Taiwan Strait would almost certainly devastate local fabrication and trigger sweeping sanctions, export controls, and global economic disruption.

• Blockade or quarantine scenarios – even short of war – could still pressure logistics and access to critical materials and tools.

Paradoxically, the more the world invests in alternative fabs in the US, Europe and Japan, the less absolute leverage Taiwan’s “silicon shield” may provide – but also the less catastrophic a disruption might be. In the long run, this could slightly reduce the geopolitical stakes around Taiwan’s chip industry, while still leaving it as a premier manufacturing hub.

11. Strategic takeaways

Putting it together, Taiwan’s semiconductor dominance is strategically important in at least five ways:

1. Systemic chokepoint
   Taiwan is the single most important bottleneck in the electronics value chain, especially for advanced logic and AI chips. Any serious disruption would echo across global GDP, security and technological innovation.

2. Leverage and vulnerability bundled together
   Taiwan’s chip leadership gives it economic and diplomatic leverage – but also paints a giant target on the island, turning it into a focal point for great-power competition.

3. Central node of a wider ecosystem
   Taiwan’s leadership is anchored not just in one firm (TSMC) but in an integrated ecosystem of suppliers, talent and infrastructure that is extremely hard to replicate.

4. Driver of industrial policy worldwide
   From the US CHIPS Act to the EU Chips Act and Japanese subsidies, much of today’s industrial policy in advanced economies is, implicitly or explicitly, about managing dependence on Taiwan.

5. Catalyst for new architectures and supply-chain design
   The risks of over-reliance on one geography are pushing firms toward chiplets, multi-sourcing strategies, and more explicit supply-chain resilience planning – even as performance pressures keep them tied to TSMC’s leading nodes.

12. Conclusion: A small island at the center of a big contest

Taiwan’s semiconductor industry is a remarkable success story: an example of how visionary industrial policy, technological focus and cluster effects can propel a small economy to global strategic centrality.

But success has a shadow:

• The more indispensable Taiwan’s fabs become, the more the world worries about their security.

• The more other countries try to build their own fabs, the more complex and politically fraught the chip ecosystem becomes.

For at least the next decade, we’re likely to live in a world where Taiwan remains the beating heart of advanced chip manufacturing, even as new capacity rises elsewhere. Understanding that reality – and planning for both its opportunities and its risks – is now a core task for governments, companies, and investors alike.