The world’s largest contract chipmaker is riding high on the AI boom while adroitly navigating international expansion and competition with China.
PHOTOS: Taiwan Semiconductor Manufacturing Co., Ltd.
Business has never been better for Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker and paramount Taiwanese company. In the second quarter, TSMC posted record earnings. Revenue jumped 36% year-over-year to NT$1.27 trillion (US$39.6 billion), while profit surged 77% to NT$706.56 billion on the back of voracious demand for artificial intelligence chips.
“AI-related demand continues to be extremely robust,” TSMC Chairman and CEO C.C. Wei said during a July 16 earnings call.
Wei noted that the emergence of agentic AI — systems that work autonomously to conduct tasks and pursue goals — is “leading to a resurgence in the role of CPUs” — central processing units, considered the “brain” of a device in AI data centers. “We believe this is positive for TSMC, as no matter what CPU approach is taken, whether it’s a x86, Arm-based, or RISC-V architecture, they are almost all TSMC’s customers,” he said.
Long the world’s preeminent pure-play foundry, TSMC has taken an even more commanding lead in that market over the past few years. Counterpoint Research estimates that the company currently has a 73% market share. That’s up from 70% in 2025, 64% in 2024, and 61% in 2023, according to market intelligence firm TrendForce.
During that same three-year period, TSMC has significantly boosted its manufacturing footprint outside of Taiwan. Its first Japan fab began mass production in February 2024, followed by its first Arizona production facility later that year. The company’s first European fab, located in Dresden, Germany, will enter mass production in late 2027.
“To alleviate resource constraints in Taiwan and mitigate geopolitical risks, Taiwanese firms are evolving the ‘Made in Taiwan’ model into ‘Made with Taiwan,’” says Hsuan Chih-wang, a manager at the semigovernmental Industrial Technology Research Institute (ITRI), which served as the incubator for TSMC and spun the company off in 1987. “They are establishing facilities in the U.S., Japan, and Europe to supply customers locally and support their success.”
TSMC’s largest customers are American technology giants Nvidia, Apple, Qualcomm, AMD, and Broadcom. Nvidia and Apple contribute the largest share of TSMC’s revenue, at 22% and 18%, respectively. Other key commercial customers include Japan’s Sony, Toyota, and Denso, as well as Germany’s Bosch and Infineon, and the Netherlands’ NXP.
TSMC is also a key supplier of military semiconductors to U.S. defense contractors, but this business accounts for just a fraction of its overall revenue.
Hsuan says that Taiwan’s enduring dominance in semiconductor manufacturing derives from three main attributes. First, it has built the world’s most comprehensive semiconductor ecosystem over the past four decades. Second, its distinct business model has helped it earn the trust of some of the world’s largest and most systematically important technology companies. Crucially, as a pure-play foundry, TSMC does not compete with its customers, unlike its competitors Samsung and Intel. Third, Taiwan has a unique semiconductor “supply chain culture” that includes hundreds of agile, highly specialized small and medium-sized enterprises that are complementary to large manufacturers like TSMC.
“This industrial culture stands in stark contrast to the structures in some competing nations, where industries are dominated by a few large conglomerates,” Hsuan says. However, he emphasizes that “maintaining a lead is not a static state.” TSMC and other large Taiwanese chipmakers “are well aware that their dominance is being challenged.” For that reason, they are shifting their position in the value chain toward system integration and design services.
AI pivot
For many years, consumer electronics provided the growth momentum for TSMC and the broader foundry sector. That changed beginning in 2023 with the ascendancy of AI. Driven by investor excitement about the technology’s potential to boost productivity, tech companies have plowed hundreds of billions of dollars into AI infrastructure.
One of the greatest beneficiaries of the AI boom so far is Nvidia, which surpassed Apple to become the world’s most valuable public company in June 2024. With a market capitalization of more than US$5 trillion, Nvidia remains slightly ahead of Apple, valued at US$4.6 trillion.
Nvidia relies entirely on TSMC for its most advanced chips. The Taiwanese firm produces Nvidia’s state-of-the-art architectures, such as Blackwell and Rubin, using its most advanced processes.
High-performance AI chips require more than just a basic processor. TSMC has developed proprietary Chip-on-Wafer-on-Substrate (CoWoS) packaging, which stacks the GPU die directly alongside High Bandwidth Memory (HBM). The chip giant is the only foundry with the capacity to produce this critical packaging at the volume Nvidia requires.
“TSMC is the world’s leading producer of the chips that make AI possible,” says Chris Miller, an economics professor at Tufts University and author of Chip War: The Fight for the World’s Most Critical Technology, a book about the semiconductor industry. “No company has been so critical to AI as TSMC,” he adds.
TSMC’s diversification into proprietary 3D packaging is crucial to meet customer needs for advanced AI chips used in high-performance computing, analysts say. “In recent years, the bottleneck for AI chips has shifted from wafer fabrication to packaging,” ITRI’s Hsuan says. He notes that TSMC’s monthly CoWoS capacity is set to grow from approximately 72,000 wafers in 2025 to about 113,000 in 2026.
In addition to manufacturing AI chips, TSMC is integrating AI into its production lines to increase yields and lower costs. In May, TSMC and Nvidia announced their joint use of AI for semiconductor design and manufacturing. “TSMC is bringing Nvidia AI and accelerated computing into the fab itself, tackling some of the world’s most complex design and manufacturing challenges,” Nvidia founder and CEO Jensen Huang said in a news release.
Bigger and better
In tandem with its pivot to AI chips, TSMC is rapidly developing significant production capacity outside of Taiwan. This diversification has prompted China’s ruling Communist Party (CCP) to propagate the narrative that Taiwan’s semiconductor sector is moving its “crown jewels” offshore. After TSMC announced a large new investment in the United States last March, China’s Taiwan Affairs Office said the company had become “a fat piece of meat on the chopping block, at the mercy of others,” adding that “what Taiwan’s industrial sector and people stand to lose is not just immediate jobs, but also future development opportunities.”
Those predictions miss the mark, analysts say. Tufts’ Miller notes that Taiwan’s economy has never been larger than it is today, while TSMC has never been more valuable. Taiwan’s economy grew at a brisk 8.63% in 2025, the best rate of any developed country, and a remarkable 14.55% in the first quarter of 2026, among the highest of any nation in the world. TSMC’s market capitalization, meanwhile, has reached nearly US$2 trillion.
“The people predicting a hollowing out have been proven completely wrong,” Miller says.
The largest of TSMC’s overseas investments is in Phoenix, Arizona, where it is building a gigafab cluster. That project is the biggest single foreign direct investment in U.S. history and includes six fabrication plants, two advanced packaging facilities, and a major research and development center.
Commercial mass production of 4-nanometer chips began at the first fab in early 2024. A second facility is targeted to begin volume production of 3-nanometer chips in the second half of 2027, ahead of the originally planned 2028.
What’s more, after weathering some initial difficulties, the Arizona site saw a profit of nearly US$500 million in 2025, its first full year of mass production, according to Taiwan’s National Development Council (NDC). “TSMC told me it was surprised by the smooth trial run of the first fab, which has left the company optimistic about the project’s outlook,” NDC Minister Yeh Chun-hsien said in May at the SelectUSA Investment Summit in Maryland.
Reflecting these positive developments, TSMC Chairman Wei said during the second-quarter earnings call that the company will invest another US$100 billion in Arizona to meet strong customer demand. That will bring its total investment in the state to US$265 billion.
The additional money will be used to build more semiconductor fabs for 2-nanometer mass production as well as advanced packaging fabs “to support the strong multi-year demand from our leading U.S. customers,” Wei added.
A key factor in the project’s success has been help from the Arizona government, which “rolled out the red carpet over a decade ago when TSMC was first dipping its toes into possible U.S. investment,” says J. Travis Mosier, a non-resident fellow at the Center for a New American Security (CNAS) in Washington and a former senior Commerce Department official.
TSMC’s Arizona project does still face challenges securing water, power, and visas for overseas hires. To sustain operations during regional droughts, the state and TSMC are wagering that aggressive closed-loop recycling systems will prevent the facility from straining the local municipal water system.
The company also faces a significant labor shortage in Arizona, part of a wider shortfall that is threatening to delay or stall chip fab construction across the country, according to a July Bloomberg article. A new report published by the Arizona Board of Regents and the Rounds Consulting Group assesses that TSMC’s Arizona project will face a labor shortfall of 10,000 workers per year.
Expansion in Japan and Germany
While TSMC’s largest foreign expansion is in the United States, the company is also ramping up capacity in Japan and Germany. The former aims to combine Japan’s strengths in materials, equipment, automotive electronics, and electronic systems with Taiwan’s advanced manufacturing capabilities, says Jerry Peng, a consultant at the semigovernmental Taiwan Market Intelligence & Consulting Institute (MIC).
Peng notes that Japan has made semiconductors a priority for economic security and industrial competitiveness. It also has a strong base from which to build. In the 1980s, Japan was the world’s top semiconductor manufacturer with a 50% global market share by 1989. However, South Korean and Taiwanese firms surpassed their Japanese counterparts in the 1990s. Today, Japan has about a 10% market share, similar to the United States.
In a similar vein to its U.S. project, TSMC’s Japan investment has turned profitable relatively fast. TSMC’s subsidiary in Kumamoto swung to a profit in the first quarter of this year, about 15 months after the start of mass production at its first Japanese fab.
In February, Wei said that the company would begin mass producing advanced 3-nanometer wafers at its second Japanese fab in 2028. TSMC’s previous plans for Japan focused on the less-advanced technologies. “The significance of Japan’s 3-nanometer capacity is not limited to serving Japanese customers,” says Peng. “It may also integrate Japan more deeply into the global AI and advanced computing manufacturing network.”
In Germany, meanwhile, TSMC plans to launch mass production at its Dresden fab in late 2027. The US$11 billion facility — jointly invested by TSMC, Bosch, Infineon, and NXP — officially broke ground in August 2024 and will mainly supply the European automotive and industrial sectors.
“TSMC’s main challenge in Germany is to turn Europe’s automotive and industrial demand into stable long-term orders and a sustainable local supply chain model,” Peng says. He adds that Germany faces issues such as energy costs, environmental and administrative procedures, and labor market constraints.
Geopolitical risk management
Looking ahead, perhaps the greatest overall challenge for TSMC will be adroitly managing geopolitical risk — particularly the long-running U.S.-China techno-industrial competition. While the company’s leadership prefers to avoid talking about this issue, when pressed by the first Donald Trump administration to enact export controls on advanced semiconductor technology to China, TSMC complied. With that decision — which took into consideration the broader importance of Taiwan’s security relationship with Washington — TSMC effectively sided with the United States in its intensifying trade war with China.
This geopolitical tension has had a noticeable effect on TSMC’s China sales. China accounted for 20% of TSMC’s business in 2019, but today just 11-12%.
“U.S.-China technology competition, export controls, and customer product strategy adjustments have increased uncertainty around China’s access to advanced chips,” notes MIC’s Peng. “This does not mean China is no longer important.” However, Chinese customers face higher regulatory hurdles and compliance constraints in accessing advanced process nodes, electronic design automation tools, high-end computing chips, and related supply chain services. At the same time, Chinese IC design firms are adjusting product portfolios, seeking alternative suppliers, and boosting localization, he says.
Driven by both financial considerations and the CCP’s ambitions to dominate chipmaking, Chinese semiconductor firms have long sought to catch up to TSMC. But they are not much closer to achieving that goal than when Beijing announced its first massive state semiconductor fund in 2014.
U.S.-led export controls play a role in reducing Chinese chipmakers’ competitiveness, given that they are blocked from buying the most advanced chipmaking tools and lack access to global R&D networks.
At the same time, Chinese semiconductor makers face overcapacity-induced travails. A race-to-the-bottom pricing environment squeezes margins and depresses fab utilization rates.
For these reasons, “China continues to struggle with the hardware side of the semiconductor equation,” says CNAS’s Mosier. “The global supply chains supporting the semiconductor manufacturing industry continue to leverage first-mover advantage to keep China at bay, and no firm utilizes that supply chain more efficiently than TSMC.”
At TSMC’s annual general meeting in June, Wei expressed confidence about the company’s prospects to ward off competitors. TSMC “is not afraid of competition” from anyone in the semiconductor fabrication business, he said.
