Deep Dive: How Taiwan Became the Epicenter of AI

**Zaid** (0:00)
Welcome back to The Rundown for another weekend deep dive. Today, we are talking about Taiwan and the role that it plays in the AI economy. Today, almost every chip in the world is made in Taiwan. That includes the chip on your iPhone, likely the chip in your car, and of course, all the state-of-the-art chips sitting inside AI data centers. But how did Taiwan become the epicenter of semiconductor manufacturing? Well, in today's episode, we're gonna break down how Taiwan became the AI chip factory of the world, and why companies like Nvidia are doubling down on the island. We also take a look at the risk this creates for the global markets, and why some tech companies and the US government, for that matter, are looking at alternatives. We got a great one for you today.
Let's dive in.
Taiwan's dominance in chip making didn't happen by accident. The Taiwanese government actually started building up the industry back in the 1970s. See, back in the early 70s, Taiwan was still mostly known as a low-cost manufacturing economy. They were making mostly cheap goods for Western companies. But Taiwan's government was worried that eventually an even cheaper country would come along and undercut them. And, you know, they were right about that. Luckily for Taiwan, though, they started focusing on specialized manufacturing like semiconductors. Back in 1973, Taiwan created a government-backed tech lab called the Industrial Technology Research Institute, or ITRI, and the lab's job was to incubate strategic industries. And, you know, they made some early moves. Like in 1976, ITRI signed the deal with the American company RCA to license their chip manufacturing technology. There's a throwback name that I haven't heard in a while. RCA, man, I had a couple RCA VCRs back in the day. Now, as part of this deal with RCA, ITRI sent over 19 engineers to the US to learn chip design, manufacturing, equipment handling, and everything else involved with chip manufacturing. And when these engineers returned to Taiwan, they helped jumpstart Taiwan's chip manufacturing capabilities using the knowledge they learned from RCA. And then the real game changer moment came in 1985, when the Taiwanese government convinced Morris Chang to become the president of ITRI. See, Morris Chang spent 25 years working at Texas Instruments in the US, and he understood the chip business better than almost anyone alive back then. Shortly after taking over as president of ITRI, Morris Chang founded a company called Taiwan Semiconductor Manufacturing Company, or TSMC. You might have heard of them. Morris Chang started TSMC in 1987 to be a pure-play chip foundry, which was not the norm at the time. See, back then, chip companies like Intel and Texas Instruments were vertically integrated, meaning they both designed and manufactured their own chips. But Morris Chang's brilliant idea was to make TSMC only manufacture chips and not to design them. And Taiwan was the best place for him to start this company because they had just started building up their experience and capabilities in chip manufacturing. Now, the reason that just being a chip manufacturer was genius was that for one, TSMC wasn't a threat to its customers. Chip makers were happy to hand over their valuable chip designs to TSMC because they knew that TSMC wasn't gonna steal their design like Intel might potentially do. Because remember, Intel also designed chips. So some chip makers were reluctant to work with Intel. So TSMC pretty much positioned themselves to be the Switzerland of semiconductors, and it was a brilliant move. And the existence of TSMC allowed for companies like Nvidia to get started without needing billions of dollars to build their own manufacturing plant. And here's where things really started snowballing for the company. The thing with chip manufacturing is that it has steep learning curves and high upfront costs. But the more chips you make, the better your quality gets and the lower your costs go over time. And because TSMC was only manufacturing chips, they had hundreds of customers and they got a ton of volume. And more volume meant more revenue, and more revenue meant more R&D, which led to better tech, which led to more customers, and more customers meant even more volume. It was a very powerful economic flywheel. And by the year 2000, TSMC was manufacturing 50% of chips in the world. But that was just to start because then we got the smartphone era. After the iPhone came out in 2007, the world suddenly needed billions of small, powerful, energy efficient chips. And TSMC was right there with the factories and capabilities to mass produce these chips. And again, since they weren't designing their own chips, they had a edge over their competition. Like for example, Apple was initially using Samsung to manufacture their iPhone chips. But you gotta remember, Samsung was also a smartphone rival for Apple. So Apple didn't wanna just hand over their valuable chip design to them. So around 2006, Apple switched to TSMC exclusively to manufacture their chips for the iPhone. So TSMC continued to build up their market share, and then we have the AI era that really cemented TSMC's dominance in chip manufacturing and Taiwan as one of the most important players in the global economy. TSMC was already the most important chip maker in the world before the AI boom. They were already making chips for the iPhone, laptops, gaming consoles, basically everything that makes the modern economy work. I mean, just to paint a picture of how dominant TSMC is, today, they control about 70% of the global chip manufacturing market. In second place is Samsung, with just 7%. But it's the AI boom that took TSMC from being a dominant player to borderline irreplaceable. See these AI chips like the GPUs that Nvidia makes are incredibly sophisticated and very hard to manufacture. We're talking about chips with billions of transistors packed onto a piece of silicon smaller than your fingernail. There was a really good video by MKBHD a few months ago that really highlighted the scale of how small these chips are. And TSMC is really the only company in the world that can make these chips at scale, and they do it at their factories in Taiwan. And the thing about these modern AI chips, and it's not just one piece of silicon, it's actually a processor stitched together with stacks of memory using a process called advanced packaging. And TSMC dominates that process as well. In fact, right now, their ability to manufacture and package these AI chips has become the bottleneck on the entire AI ecosystem. Pretty much every major tech company in the world, from Nvidia to Apple to AMD to Amazon to Google, they're all fighting for space on TSMC's production line. There's literally a wait list. So TSMC can't make these advanced AI chips fast enough to meet the demand. And the demand has been absolutely insane. And you can see that shift in their financials. I mean, they did $122 billion in revenue in 2025, which was up 36% from 2024 And according to their most recent quarter in 2026, revenues came in at $36 billion with gross margins above 66%. For a company that manufactures something, those are just insane numbers. High performance computing, which is the category that includes AI chips, now makes up 61% of TSMC's revenue. Smartphone chips has now fallen to about 26%.