Philippa Kaur

CHIPMAKERS’ CRAFT can seem magical. They use light to stamp complex patterns on a dinner-plate-sized disc of crystal silicon, forming arrays of electric circuits. Once cut out of the disc, each array is called a chip. The chip’s job is to shuttle electrons in a mathematical shimmer prescribed by computer code. They do the maths which runs the digital world, from Twitter and TikTok to electronics in tanks. Without them, whole industries cannot function properly, as carmakers forced to pause production because of microprocessor shortages are discovering.The most important firm in this critical business is Taiwan Semiconductor Manufacturing Company (TSMC). It controls 84% of the market for chips with the smallest, most efficient circuits on which the products and services of the world’s biggest technology brands, from Apple in America to Alibaba in China, rely. As demand for the most sophisticated chips surges thanks to the expansion of fast communication networks and cloud computing, TSMC is pouring vast additional sums of money into expanding its dominance of the cutting edge.This has proved to be a successful business model. Last year TSMC made an operating profit of $20bn on revenues of $48bn. It is, in the words of Dan Hutcheson of VLSIresearch, a firm of analysts, “the Hope Diamond of the semiconductor industry”—and, with a resplendent market capitalisation of $560bn, the world’s 11th-most-valuable company. It is also an astute geopolitical actor, navigating the rising Sino-American tensions, including over the fate of its home country, which China claims as part of its territory and to which America offers military support. In 2020, 62% of TSMC’s revenue came from customers with headquarters in North America and 17% from those domiciled in China. It has managed the geopolitical divide by making itself indispensable to the technological ambitions of both superpowers.TSMC was founded in 1987, and for the first quarter-century it made mostly unremarkable microprocessors. That began to change in 2012, with its first contract to make powerful chips for the iPhone. Apple wanted TSMC to push its manufacturing technology as far and as fast as it could, to gain an edge over rival gadget-makers. The notoriously secretive American firm liked the way Morris Chang, TSMC’s founder, made trade-secret protection one of his priorities; guests to TSMC premises would have their laptops’ USB ports sealed even if they only visited a conference room.Two years later the Taiwanese firm’s chips were powering the iPhone 6, the best-selling smartphone of all time. Revenue from the 220m units sold kick-started TSMC’s ascent. Some of Apple’s competitors also used TSMC as a supplier, and wanted the same thing. All paid handsomely for the chipmaker’s efforts.This windfall set TSMC steaming ahead. It overtook Intel, the American giant which once enjoyed a monopoly on the leading edge, then left it in the dust (see chart 1). Its remaining rival in top-flight chips, Samsung of South Korea, is barely able to keep up. Such is TSMC’s manufacturing prowess that Peter Hanbury of Bain, a consultancy, reckons it has given Moore’s Law, the industry’s prediction-cum-benchmark of doubling processing power every two years or so, at least another 8-10 years of life.Its lead over rivals is growing. It is pouring cash into cutting-edge chip factories (known as fabs) at an unprecedented rate. In January it said it would raise its capital expenditure to $25bn-28bn in 2021, up from $17bn in 2020. In April TSMC raised the figure again, to $30bn; 80% will go on advanced technologies. It plans to spend $100bn over the next three years.It has also stopped cutting prices—which in chipmaking, where processing power has only got cheaper, is tantamount to raising them. Its chief executive, C.C. Wei, has said it will skip a planned price cut in December 2021 and keep things that way for a year. IC Insights, a research firm, calculates that TSMC can charge between twice and three times as much per silicon wafer made using its most advanced processes, compared with what the next-most-advanced technology will fetch.This creates a positive feedback loop. Developing the latest technology before anyone else allows TSMC to charge higher prices and earn more profit, which is ploughed back into the next generation of technology—and so on. The cycle is spinning ever faster. Four technological generations ago it took TSMC two years for those cutting-edge chips to make up 20% of revenues; the latest generation needed just six months to reach the same level (see chart 2). Operating income, which grew at an average rate of 8% year in the decade to 2012, has since risen by 15% on average. Combined with revenues that chip-designers make from semiconductors ultimately forged by TSMC, the company and its customers account for 39% of the global market for microprocessors, according to VLSIresearch, up from 9% in 2000 and a third more than once-dominant Intel.This is an enviable position to be in. But it is not an unassailable one. The experience of Intel, which has fallen behind in the last two generations of chips because of technological missteps, shows that even the most masterful manufacturers can trip up. Chipmaking is also notoriously cyclical. Booms lead to overcapacity, and to busts. Demand may slacken as the rich world emerges from the pandemic, when purchases of gadgets that made it possible to work and relax at home were brought forward. That would hit TSMC’s bottom line and strain its balance-sheet. The company has $13bn of net cash, a modest rainy-day fund for a big tech firm. To help finance its most advanced fabs, it has issued $6.5bn-worth of bonds in the past six months.The most serious danger to TSMC comes from the Sino-American ructions. The company’s position at the cutting edge offers a buffer against geopolitical turmoil. Chip-industry insiders say that the Taiwanese government encourages all its chipmakers, including TSMC, to keep their cutting-edge production on the island as a form of protection against foreign meddling. Taiwanese contract manufacturers account for two-thirds of global chip sales.Reflecting this, 97% of TSMC’s $57bn-worth of long-term assets reside in Taiwan (see chart 3). That includes every one of its most advanced fabs. Some 90% of its 56,800 staff, of whom half have doctorates or masters degrees, are based in Taiwan.The firm has made soothing noises to America and China, offering to invest more in production lines based in both countries. But it is hard not to see this as diplomatic theatre. Its Chinese factory in Nanjing, opened in 2018, produces chips that are two or three generations behind the cutting edge. By the time its first American fab, designed to be more advanced that the one in Nanjing, is up and running in 2024, TSMC will be churning out even fancier circuits at home. By our estimates, based on disclosed investment plans, the net value of TSMC’s fabs and associated equipment will roughly double by 2025, but 86% will still be in Taiwan.In the past three years the American government has begun to disrupt the delicate balance. It has tightened export controls that prohibit any foreign company from using American tools to make chips for Huawei, a Chinese technology giant. That applies to TSMC, which in 2019 sold more chips to Huawei than to any other customer bar Apple. Most of these were destined for smartphones, and other Chinese handset-makers such as Oppo happily snapped up what Huawei (which on April 28th reported its second year-on-year decline in quarterly revenues in a row) could not.Further American attempts to prevent TSMC from doing business with China could invite meddling by the regime in Beijing, which refuses to rule out taking back Taiwan by force. President Joe Biden’s administration has also announced a $50bn government plan to revive chipmaking at home: it is doubtful whether subsidies will restore Intel’s supremacy, but the initiative could involve putting more pressure on TSMC to put cutting-edge production in America, a strategic trap the firm has been keen to resist.The rival powers have so far refrained from interfering with TSMC directly, perhaps concluding that this is the most reliable way of achieving their technological objectives. If the chipmaker’s importance keeps growing, one of them may decide that it is too valuable to be left alone. ■This article appeared in the Business section of the print edition under the headline “Living on the edge” More

THE ANNOUNCEMENT was timed to spoil the party. On April 20th, at its “Spring Loaded” event, Apple unveiled a clutch of new iGizmos, from purple smartphones and a new set-top TV box to “AirTags”, small connected trackers designed to help people find whatever objects they attach them to.On the same day a group of hackers going by the name of REvil declared that they had broken into Quanta Computer, a Taiwanese company that assembles several Apple gadgets, and made off with what they claimed was sensitive data. The group claimed that Quanta had declined to pay a ransom for the stolen information, and addressed Apple directly instead. The hackers posted several sets of schematic diagrams of Apple laptops to their blog, and suggested that, if the mighty tech company did not want more secrets revealed, it should “buy back” the stolen data by May 1st.Apple is a prominent victim of the booming business of “ransomware” . In its original incarnation, at the start of the 2010s, this involved spreading malicious software to ordinary people’s computers. The software would encrypt pictures, documents and so forth, transforming them into unreadable gibberish. If the victims paid a ransom, the hackers would provide the decryption key necessary to restore the scrambled files—at least, in theory.These days the practice is more professional. Hackers increasingly focus on big organisations rather than individuals, since firms are more likely to pay larger ransoms. Hospitals, universities and even police forces have been attacked. Besides Apple, REvil claims to have stolen data from Kajima Corporation, a big Japanese construction firm, the government of Fiji, Pierre Fabre, a French pharmaceutical company, and dozens of smaller businesses. And as big organisations usually store back-ups of valuable data, which makes scrambling attacks less damaging, hackers increasingly threaten their victims with leaks instead. Working out the size of the problem is tricky. Coalition, a firm which provides insurance against cyber-attacks, says ransomware assaults made up 41% of claims in the first half of 2020. (“Funds transfer fraud”, the second-biggest category, accounted for 27%). According to Palo Alto Networks, a cyber-security company,the average ransom demand rose from $115,000 in 2019 to $312,000 in 2020. (REvil has reportedly demanded $50m from Apple.) Ransoms are often paid with cryptocurrencies. Chainalysis, which analyses the blockchains that underpin cryptocurrencies, calculates that ransomware gangs took nearly $350m in cryptocurrency payments in 2020, more than four times as much as the year before.Cyber-insurance—for which premiums amounted to $5bn in 2020—can take the sting out of attacks for individual firms, at the cost of making things worse for everyone else. The willingness of insurers to pay ransoms, says a Western former cyber-security official, is one reason why ransomware is booming. That may change as governments become more interested. The head of GCHQ, Britain’s electronic-spy agency, recently called for “concerted action” to tackle the problem. A report published on April 29th by American law-enforcement officials and big technology companies, including Amazon and Microsoft, suggested that ransomware be treated as a national-security threat. The Justice Department has created a dedicated task-force. Not all victims stump up. When CD Projekt, a Polish video-game company, was attacked in February, it refused to pay. But “more often than not”, says the ex-official, those that do cough up will find that the crooks uphold their side of the bargain. After all, their professional reputation is at stake: if they keep their word, future victims are likelier to pay, too. More

ONLINE SHOPPERS often feel they are being watched. Put an item in your basket but fail to buy it, and it may follow you plaintively around the internet for days. Announce your engagement on social media and you will be hit with adverts for the honeymoon. As you turn 40, expect the attention of elasticated-trouser merchants.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

ONLINE SHOPPERS often feel they are being watched. Put an item in your basket but fail to buy it, and it may follow you plaintively around the internet for days. Announce your engagement on social media and you will be hit with ads for the honeymoon. As you turn 40, expect the attention of elasticated-trouser merchants.On April 26th Apple, which supplies one-fifth of the world’s smartphones and around half of America’s, introduced a software update that will end much of this snooping. Its latest mobile operating system forces apps to ask users if they want to be tracked. Many will decline. It is the latest move forcing marketers to rethink how they target online ads.By micro-profiling audiences and monitoring their behaviour, digital ad platforms claim to solve advertisers’ age-old quandary of not knowing which half of their budget is being wasted. In the past decade digital ads have gone from less than 20% of the global ad market to more than 60%, according to GroupM, the world’s largest media buyer. Even last year, amid the pandemic, the business grew by 9%. As lockdowns ease it is going gangbusters. On April 27th Alphabet, Google’s parent company and the world’s biggest digital ad platform, reported first-quarter ad revenues up by 34%, year-on-year. The next day Facebook, the second-largest, said its own ad revenues had grown by 46%.Stronger privacy protections may make their ads less effective. In 2018 the EU imposed its General Data Protection Regulation (GDPR) and America’s most-populous state introduced the California Consumer Privacy Act. Both made it harder to harvest users’ data. Apple’s Safari web browser has blocked the “cookies” that advertisers use to see what people get up to online since 2020. Google has similar plans for its more popular Chrome browser.Apple’s latest change makes explicit an option that was previously hidden deep in its phones’ settings. Users can forbid apps to access their “identifier for advertisers” (IDFA) code, which singles out their device, and from tracking their activity across other firms’ apps and websites. It amounts to a “seismic shift” in in-app advertising, says Jon Mew, head of the Internet Advertising Bureau, an industry bodyThe platforms best-placed to survive the shake-out are those with lots of consumer data of their own. Google’s $147bn ad business gets most of the information it needs from the terms users type into its search bar. Amazon, whose digital-ad business is the third-largest and growing fast, has the advantage of being able to track what people buy after seeing ads on its site—a “closed loop”, as marketers call it. Apple knows where iPhone-users go, what time they wake up and much besides. It has a small but growing ad business, selling prominence in its app store, for instance.For Facebook, which knows more about its users’ interests than about their shopping needs, Apple’s changes are more worrying. In August it warned they might reduce revenues at its Audience Network, through which it sells ads to other apps, by as much as 50%. But the Audience Network represents less than a tenth of its business. Thanks to its deep knowledge of users, it will still be better at targeting than almost anyone else. “In a world with a lot less data, who has relatively more?” asks Brian Wieser of GroupM. The effect of GDPR was, if anything, to increase Facebook’s and Google’s market shares, he adds.To improve its tracking of purchases, Facebook is moving to create a closed loop of its own. Last year it introduced Facebook Shops on its flagship social network and Instagram Shops and ts sister photo-sharing app. Mark Zuckerberg, Facebook’s boss, speculated in March that “we may even be in a stronger position if Apple’s changes encourage more businesses to conduct more commerce on our platforms, by making it harder for them to use their data…outside of our platforms”.Not every ad platform will be able to adapt as easily. Smaller publishers with fewer data and resources will suffer, believes Nicole Perrin of eMarketer, a research firm. Publishers that rely on third-party cookies will be hit hardest. The day Apple launched its new policy, a group of German publishing companies lodged a legal complaint with Germany’s antitrust authorities. Small platforms may also find it harder to persuade phone users to trust them with their data. AppsFlyer, an ad-tech company, found that iPhone users agreed to tracking from shopping and finance apps more than 40% of the time, but 12% of the time with casual gaming apps. The inability to share data is forcing advertisers to come up with new ruses. One is to bypass rules banning data transfers between ad-tech companies by consolidating. In February AppLovin, a mobile-software company, acquired Adjust, which provides mobile-ad attribution, reportedly for $1bn. Another is to ask users to “sign in”, which lets an app monitor their behaviour with no need for IDFAs. And instead of targeting individuals, marketers can target broader interest groups—coffee lovers, Daily Mail readers, and so on—much as they did in the pre-internet age. It’s “back to the future”, says Mr Wieser. In another throwback, advertisers will have to resort to old-school techniques for gauging ads’ effectiveness, such as looking for a rise in sales in a region where an ad ran but not elsewhere. That will favour campaigns which promote general awareness of a company’s brand; effects of so-called direct-response ads, which require consumers to take an action (like clicking), would be too small to measure. Platforms that mostly attract brand advertising will thus benefit. Snap, whose social network popular among teenagers belongs to that group, posted a year-on-year rise in revenues of 66% in the first quarter.The less advertisers know about their audience, the costlier advertising will become. Facebook has argued this will hurt small businesses. It is probably right, thinks William Merchan of Pathmatics, a data company. Digital ads promise to cut waste in media buys, he says. Now that ad firms are again in the dark about which half of their budget is wasted, they are “going to have to just spend more”. More

YOU HAVE to hand it to the “technoking”. For all his impish self-aggrandisement, mockery of deadlines, baiting of regulators and soon-to-be-sideline as a “Saturday Night Live” comedy host, Elon Musk is deadly serious about technology. So serious, in fact, that as he was discussing the nitty-gritty of neural networks on an earnings call on April 26th, he did not miss a beat when what sounded like his infant son let out a wail in the background. The record net profit of $438m in the first quarter, the seventh consecutive one in the black, came as almost an afterthought.Such is the allure of Tesla’s whirring money machine that many now give the benefit of the doubt to Mr Musk’s more eccentric claims. His latest involves artificial intelligence (AI). In the future Tesla will be remembered not just as an electric-vehicle (EV) and renewable-energy pioneer, he says, but also as an AI and robotics company. He bases this on a belief that it is close to cracking the challenge of self-driving cars using just eight cameras, machine learning and a computerised brain in the car that reacts with superhuman speed. He calls full self-driving “one of the hardest technical problems…that’s maybe ever existed.”Amid the techno-optimism, though, Tesla also faces the dreary reality of everyday life. Though it expects to deliver about 50% more vehicles this year than in 2020, or around 750,000, like other carmakers it is struggling with a shortage of computer chips. The fiery crash of a Model S in Texas, killing two, has raised concerns about its self-driving technology (reports that its Autopilot function was involved are “completely false”, Mr Musk said). A pandemic-related shortage of engineers hit its output in China, source of much of its recent growth. And the Chinese authorities, which used to shower love on the American firm, are showing signs of Tesla fatigue. Mr Musk may one day find the boundaries of his kingdom constrained not by physics but by geopolitics.He is no longer alone in talking in grandiose terms about Tesla. These days more sober sorts vie to justify Tesla’s valuation of $700bn or so, which puts all other carmakers in the shade. Jed Dorsheimer of Canaccord Genuity, a Canadian asset manager, starts with the invention of the printing press in 15th-century Europe when describing Tesla’s potential. Adam Jonas of Morgan Stanley, an investment bank, believes Mr Musk’s EVs are in the midst of something akin to a “Model-T moment”—provided he can, like Henry Ford, crack mass manufacturing to make Teslas more affordable. Both compare Tesla with Apple, the American technology giant, to illustrate how Mr Musk could create a money-spinning ecosystem of gadgets and services that reinforce each other.For some, the comparison with Apple is more apt than that with legacy carmakers. Silicon Valley-like innovation excites Tesla bulls more than car sales do. On Wall Street, the value ascribed to Tesla’s relatively low-margin EV business is increasingly eclipsed by a mixture of more nebulous, but potentially more lucrative ones, mostly involving software. Those include the sort of connected services, such as maps, entertainment, ride-sharing, semi-autonomous driving and over-the-air upgrades that make Tesla cars a geek’s dream. Few assume, as Mr Musk does, that fully autonomous “robotaxis” are imminent. But some, such as Mr Jonas, think fleets of Tesla ride-sharing services, probably with someone at the wheel, will soon be rolling through city streets.The magical realism may go beyond that. Besides AI and software, Mr Musk is also doubling down on Tesla’s original plan to build, alongside an affordable car, a zero-emission energy business. He has outlined the intention of producing three terawatt-hours of battery capacity within a decade, more than 12 times as much as the goal of Volkswagen, its nearest EV competitor. Besides bringing the cost of cars down to $25,000 a pop, the batteries will also go towards Tesla’s home-energy-storage business. That would create what he calls a “giant distributed utility” that can cope with increased electricity demand as more people use EVs, as well as provide grid stability at times of bad weather. Mr Dorsheimer, who is particularly bullish on Tesla’s solar and storage business, thinks its energy brand could become “Apple-esque”.Thinking differentApple, worth more than three times as much as Tesla, is a flattering firm to be compared to. It is also the prime example of how deftly an American company can handle the ebb and flow of superpower rivalry. Yet when it comes to geopolitics, Tesla may be at a disadvantage. It is just as global as Apple: last year it made half its sales outside of America; 21% came from China. But the $2trn global car market is more than four times the size of the one for mobile phones. With many more firms involved, cars are more politically sensitive than smartphones. Initially countries like China and Germany threw down the welcome mat for Tesla’s gigafactories, partly to goad local firms into producing better EVs. Now that this is happening, the pressure to keep Tesla down is increasing.If Mr Musk is right that self-driving is the future of getting around, concerns about data-gathering and national security are bound to rise. China has already hinted it is sensitive to them. This year the government restricted the use of Tesla vehicles by military personnel and employees of some state-owned firms because of data-security concerns. Mr Jonas, for one, thinks Tesla’s position in China will be “substantially diluted” during the coming decade, as the car market morphs into a transportation utility run and regulated by the state in concert with local champions.Cyber-paranoia may, of course, make it as hard to sell a Chinese car in America as an American car in China. And compared with the “insanely hard” problems Tesla is trying to crack, even superpower politics must seem like a minor irritation. But although Mr Musk can claim to be mastering the realm of physics, politicians, bureaucrats and spooks run much of the real world. That is a source of power that even the technoking cannot disrupt. More

IN THEORY, THE battle for e-commerce in India should be a purely commercial one, in which two of the world’s biggest retailers, Walmart and Amazon, compete with each other and Reliance Industries, a conglomerate that also owns India’s biggest retailer. In reality, there is a fourth force: the prime minister, Narendra Modi, and untold numbers of small merchants that support his Bharatiya Janata Party (BJP). As nationalists, they naturally side with Reliance, which is led by Mukesh Ambani, India’s richest man. That makes the battle visceral, mixing business, politics, xenophobia and billionaires.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

FEW COMPANIES have a history as long and interesting as Merck. Founded in 1668 by Friedrich Jacob Merck as a pharmacy in Darmstadt, the world’s oldest apothecary has survived several European wars, two world wars and the Nazi regime. In 1917 America’s government confiscated its American subsidiary under the Trading with the Enemy Act. It has operated as a rival business, based in New Jersey but, confusingly, also named Merck, ever since.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

AS THE VACCINATION programme in most countries accelerates, people will be thinking about going back to the office, if only for a couple of days a week. Many workers will have got out of the habits of the 9-to-5 day and the prevailing customs. The pandemic will also have changed attitudes towards behavioural traits that were seen as quite normal before the appearance of covid-19. Here are some suggested dos and don’ts for the new world order.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More