TAIWAN LEADS THE WORLD in semiconductor manufacturing, with a single company – Taiwan Semiconductor Manufacturing Company (TSMC) – accounting for an astonishing 55% of the world’s sales by revenue. That number alone confirms TSMC as the central player in the manufacture of the integrated circuit chips at the heart of the world’s modern computer processors and everyday electronic devices.
But when TSMC’s market share is combined with United Microelectronics Corp’s (UMC) 7% and Powerchip Semiconductor Manufacturing Corp’s (PSMC) 1%, plus smaller players, the numbers reveal that Taiwan has 65% of the world’s market for pure-play semiconductor fabrication – a remarkable dominance in an intensely competitive and eye-wateringly lucrative field. (“Pure-play” semiconductor makers don’t produce their own designs or compete with their customers).
TSMC in particular has honed its advantage on relentless research and development and capacity investments that have put it far out in front of its competitors.
“TSMC caters to the leading edge,” says Mario Morales, program vice president for enabling technologies and semiconductors at tech market intelligence firm IDC. “The advanced side of [the industry] is less than 18% of the total market share, but this gives you access to the newest phones, the newest computer gaming chips, the animation chips. That’s where the money is.”
And that’s where the money is going. In a letter leaked to the press on 1 April, TSMC’s CEO Dr C C Wei said the company has plans to invest US$100 billion (AUD133 billion) over the next three years to increase capacity and support the manufacturing and R&D of advanced semiconductor technologies.
“TSMC will be building greenfield fabs [fabrication plants] and expanding existing fabs for both leading edge and specialty technologies,” Wei was reported to have said.
There’s little doubt about the need for a more diversified supply matrix of semiconductors. A worldwide shortage – nicknamed ‘chipageddon’ – has resulted in supply delays for a range of electronic goods; the problem is said to have a variety of causes, including the pandemic.
So, where will TSMC be building its new fabrication plants? The company is already at work on a new US$19.6 billion (AUD26 billion) 3 nanometre (nm) manufacturing plant in the Southern Taiwan Science and Technology Park in Tainan, about 300 km southwest of Taipei, with an anticipated completion date of 2023. (Semiconductor nm measures – 3nm, 5nm etc – refer to the refinement of the lithography machine and its ability to etch onto the silicon wafer; the smaller the number, the greater the performance.)
But analysts expect much of the new capacity investment that Wei’s spruiking to be outside of Taiwan.
“TSMC plays a complicated game of chess with its strategic investments,” says Morales, who notes that the company is already investing in a 5nm plant in the US state of Arizona, and is reportedly contemplating further investments in Japan, Europe and Singapore. According to Morales, factors in the company’s strategic decision-making include avoiding dependency on China amid the ongoing US-China trade war, as well as tax incentives and subsidies on offer, and an ecosystem of suppliers and talent.
But two other crucial factors, both logged and widely discussed as chipageddon factors, have the company looking at distant shores: water and power.
Semiconductor foundries consume huge amounts of both resources, and Taiwan’s recent struggle with a severe drought, combined with a power crunch, has highlighted the vulnerability of its infrastructure.
What’s more, TSMC’s customers, particularly Apple Inc, prioritise renewable energy in their supply chains. Taiwan has an ambitious energy transition goal of raising renewable energy to 20% of its power generation by 2025, but renewables accounted for only 5.8% of the island’s power in 2020. Given the ongoing pandemic, little progress has been made in solar photovoltaic and offshore wind capacity installations this year.
“If Taiwan doesn’t make sure that TSMC has access to adequate amounts of renewable energy, it will force TSMC to look elsewhere,” predicts Morales. “All of TSMC’s customers are well aware of their carbon footprint [and] are looking closely at TSMC.”
Prior to rain finally falling in June, Taiwan’s west coast had experienced its driest year in over a century. The Bashan Reservoir, which provides water to the Hsinchu Science Park in central Taiwan – where both TSMC and UMC are headquartered and have most of their production facilities – dried to only 2.6% of its capacity by the end of May. This forced semiconductor makers to truck in water supplies to maintain production (although both TSMC and UMC denied that production was affected by the shortage). The emergency was curtailed by the June rainfall. All water-supply warnings were suspended by 30 June, and the reservoir was declared full on 5 July – for the first time since 22 June last year.
Taiwan receives an annual average of 2500 mm of rainfall, but complex geography and poor land management have resulted in the siltation of many of its 18 major reservoirs, which limits storage capacity. The island depends on frequent rains, and if rains fail shortages might be experienced in as little as a month and a half.
Climate change is affecting weather patterns, resulting in Taiwan seeing less frequent but more torrential rains that cause erosion and landslides, only exacerbating the storage situation. Low water prices offer little incentive to conserve the resource, and the low returns don’t provide funds to invest in improving infrastructure.
Industry currently accounts for around 10% of total water demand, but that volume is growing.
“With each new generation of semiconductor technology, the amount of water required for cleaning and processing each wafer becomes larger, while the number of chips from each wafer also becomes larger,” says Stephen Su, vice president and general director of Industry, Science and Technology International Strategy Centre at the Industrial Technology Research Institute (ITRI) in Hsinchu, Taiwan.
TSMC states on its website that it’s increasing its water recycling efforts, and that it supports government-recommended recycled water policy; it says that it can recycle water 3.5 times through different processes. But Azita Yazdani, an environmental engineer and founder of Exergy Systems Inc, a provider of advanced water purification and recycling solutions based in Irvine, California, questions how semiconductor manufacturers define water recycling.
Yazdani observes that semiconductor manufacturers say they reclaim 60% of the water they use, but she says what that means is that they spend a lot of money purifying water, which they then put in their cooling towers. “Which is not really capturing the value, and is not reducing your footprint,” she says. “[They need] to reduce consumption.”
Unseasonally hot weather in May and June saw Taiwan twice exceed the single-day record for power consumption that was set in July 2020, catching the state-owned power monopoly Taiwan Power Company (Taipower) by surprise. The company had scheduled the annual maintenance of its combined cycle gas turbine capacity that month in anticipation of cooler temperatures.
The result was two blackouts and a power-reserve margin well below the 15% threshold established by the government. The recent rains helped to restore Taiwan’s idled hydropower and pumped storage capacity, and much of the sidelined gas capacity has been returned to service, but power supply continues to face challenges following the closure of the 985-megawatt (MW) Kuosheng Nuclear Power Plant’s reactor-1 on 2 July. This reactor, typically operated in excess of 100% capacity, went permanently offline, removing another 3% of generation from the mix.
According to TSMC’s website, TSMC’s fabs, located mostly in Taiwan but including those in China and elsewhere, consumed 14,327 gigawatt hours (GWh) of power in 2019. Most estimates have TSMC’s operations consuming more than 5% of Taiwan’s total power supply.
TSMC reports that it strives to reduce its power consumption. “TSMC has carried out a total of 503 energy-saving measures spanning eight different categories,” it notes in the Climate Change and Energy Management section of its 2019 Corporate Social Responsibility report. “These measures saved 300 GWh, which is equal to eliminating 160 thousand tonnes of carbon dioxide emissions, and saved NT$750 million [AUD35.6 million] in utility fees. By cutting down on carbon dioxide emissions, NT$240 million [AUD11.4 million] was saved in potential external carbon costs.”
However, advanced technologies, such as the Extreme Ultraviolet Lithography (EUV) tools that TSMC bought in 2019, consume 20 times as much power as previous generations of production tech. The 43 EUV added to TSMC’s Fab-18 at the Southern Science Park reportedly contributed to a sudden 25% annual increase in power demand last June, according to Taiwan’s Ministry of Economic Affairs.
“In 2019, increases in advanced process development and process complexity led to increased power consumption in new process equipment, raising the power consumption per unit of 10nm and 7nm production to double that of >16nm process technologies,” the company noted in its 2019 Corporate Social Responsibility report. “Consequently, the overall power consumption per unit of production in 2019 increased by 17.9% compared to the base year and therefore did not achieve the default reduction target of 11.5%.”
In light of its growing energy demand, and pressure from its customers to reduce emissions, TSMC reports that its operations consumed 910GWh of renewable energy in 2019, either as generated power or as Renewable Energy Certificates (REC) or Carbon Credits, achieving 6.7% of TSMC’s power consumption. The company intended to raise that to 7% in 2020 (its 2020 CSR report hasn’t yet been published).
They’ll likely struggle to reach these goals in the face of Taiwan’s lagging energy transition.
TSMC has covered its rooftops with solar panels, but its solar installations only power its administration offices, not its fabs. Through a Corporate Power Purchase Agreement (CPPA), the largest-ever contract of its kind, it has also bought the entire output of offshore wind power developer Orsted’s 920MW Greater Changhua 2b & 4 offshore wind farm. But the Orsted wind farm won’t be built for at least several more years.
With the global competition for foundries intensifying and governments around the world seeking to entice investments by TSMC, the pressure is on for Taiwan to improve its power and water infrastructure to remain competitive.
“There’s a lot of governments who want TSMC,” says IDC’s Morales, noting that the US alone has pledged US$50 billion (AUD67 billion) towards developing the sector, while other countries are likewise rolling out the red carpet with tax incentives and subsidies. “It’s about maximising your effort.”