Taiwan’s rise as chip design hub threatens U.S. dominance

Taiwan, long known as a global leader in semiconductor fabrication, is starting to make inroads upstream into design as well, going up against American companies that had seen the island mainly as a manufacturing hub.

Taiwanese research company TrendForce’s ranking of the top 10 chip design companies by revenue in 2021 put Taiwan’s MediaTek at No. 4, with compatriots Novatek Microelectronics coming in sixth and Realtek Semiconductor at No. 8. Himax Technologies joined the list for the first time, in 10th place.

While U.S. companies held on to the other six spots, this marked the largest Taiwanese presence on the list to date.

The trend is starting to raise concerns about the world’s growing reliance on a single market for vital components for a vast array of products, from smartphones to cars to rice cookers.

Advanced design capabilities are a must for developing high-performance chips, and America has enjoyed a reputation as a semiconductor superpower because of its overwhelming advantage on this front, with a roster that includes Qualcomm, Broadcom, Nvidia and Advanced Micro Devices.

The fabless model was pioneered by the American semiconductor industry in the 1980s as a way of dealing with the field’s high barriers to entry. The standard approach of handling everything from design to production required companies to split their resources and invest heavily upfront in expensive fabrication facilities.

American players went a different route, keeping the high-value design process in the U.S. while shunting lower-value production to Asian markets, particularly Japan, South Korea and Taiwan. The growth of Qualcomm, founded in 1985, and Nvidia, founded in 1993, attests to the success of this model.

Now Taiwanese companies are starting to encroach on this turf, posing a threat to American designers that had once essentially considered them subcontractors.

The rapid ascent of Taiwanese chip designers owes partly to their proximity to Taiwan Semiconductor Manufacturing Co. — the world’s largest contract chipmaker — and third-ranked United Microelectronics Corp.

Fabless chip companies need to coordinate closely with manufacturers to ensure that their semiconductor designs can actually be produced. For Taiwanese players, having TSMC and UMC so close by makes it much easier to communicate — an advantage that was magnified during coronavirus-related border closings.

MediaTek CEO Rick Tsai, right, poses with an award from Taiwanese President Tsai Ing-wen, left, in Taipei in November 2020. © Reuters

These strong relationships have paid off during the current chip shortage. With a constant flood of orders coming in from around the world, TSMC and UMC have prioritized the Taiwanese design companies they already had close ties with, giving them an additional boost.

This is particularly clear in smartphone chips, where MediaTek, which has deep connections with TSMC, has surpassed Qualcomm to take the lead in the global market.

MediaTek announced Wednesday that net profit jumped 30% on the year to 33.2 billion New Taiwan dollars ($1.13 billion) in the January-March quarter — an all-time high. Revenue increased 32% to a record NT$142.7 billion, thanks to surging demand for 5G smartphone chips.

The company will not only maintain but expand market share in 2022, CEO Rick Tsai said that day. He predicted market growth in North America and India.

While Qualcomm also sought out TSMC for help amid the chip shortage, the American company’s weaker ties to the chipmaker put it lower on the priority list, costing it market share.

The four Taiwanese fabless players in the top 10 all rely heavily on TSMC and UMC. Support from the local suppliers has been instrumental to their success.

U.S. chip design company Advanced Micro Devices is led by Taiwan-born Lisa Su. (Photo courtesy of AMD)

Taiwan is home to all aspects of the semiconductor industry, and companies are very close geographically, said Chris Hung, deputy director general at the Taipei-based Market Intelligence & Consulting Institute. This makes it easier for fabless companies that specialize in designing chips to run more efficiently, he added.

Taiwan’s growing role in chip design extends to U.S.-based players as well. Nvidia, AMD and Xilinx, which ranked second, fifth and ninth, are headed by Taiwanese-born executives. TSMC is a key supplier to all three.

Overall, seven of the top 10 fabless chip businesses have leaders originally from Taiwan. Their connections to the island are an asset in future mergers and acquisitions in the industry.

Semiconductor companies in mainland China are now setting their sights on Taiwan. The industry only appears to be concentrating further on the island, despite the disruption this could cause should a crisis involving Taiwan break out.

Authors: YU NAKAMURA, HIDEAKI RYUGEN, NIKKEI Asia

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