Mila Davids
Companies like the Dutch Advanced Semiconductor Materials Lithography (ASML) and the Taiwan Semiconductor Manufacturing Company (TSMC) are no longer unknown to the general public since the computer chip crisis. Both play a key role in the global supply chain; ASML as the producer of the world’s most advanced lithography systems to make chips and TSMC as the largest chip manufacturer.
Both ASML and TSMC are rooted in Dutch company Philips. Founded in 1891 as a manufacturer of light bulbs, Philips expanded its operations into consumer electronics, medical equipment, transistors and chips. After complaints from Philips’ chip factories about its internally made production machines, the research laboratory began developing a new machine. Eventually, this led to a new joint venture between Philips and ASM International launching a lithography machine in 1984. This now independent company, ASML, had to compete with strong companies such as Nikon and Canon. It was therefore very fortunate that TSMC, founded in 1987, decided to buy ASML’s lithography machine in 1988 and remained an important customer.
In search of the micron
Philips also played an important role in the creation of TSMC in 1987. It was the main private investor in this joint venture with the Taiwanese government. Important to the start of TSMC was the government decision made in the 1970s to invest in a science-driven industrial policy. Despite the transformation initiated in the 1960s from a predominantly agricultural to an industrial society, Taiwan lacked knowledge about and activity in chip technology. Whereas the government would fund the more challenging and risky R&D, it was up to industry to turn the results into manufacturable semiconductor products. To this end, the national research institute ITRI (Industrial Technology Research Institute) with its semiconductor and electronics laboratory, the Electronics Research Service Organization (ERSO), was established in 1973. To build up a knowledge base in the semiconductor field, in addition to its own research, knowledge from foreign companies was of great importance. In 1980, the first Taiwanese semiconductor company United Microelectronics Corporation (UMC) was created on the basis of knowledge transferred to ERSO by the U.S. RCA.
Despite these first steps into the semiconductor market, Taiwan was still far behind in miniaturization. UMC could only fit thousands of transistors on a single chip (called Large-scale Integration (LSI)). The leading semiconductor companies such as Intel and Motorola produced Very Large-Scale Integration (VLSI) chips with ten times as many transistors, capable of performing many more functions than LSI chips. Manufacturing with the smallest possible linewidths was required. This, however, ERSO did not master, while it was clear that the entire semiconductor industry, in accordance with Moore’s Law, would continue to invest in further miniaturization. To build up VLSI skills to a line width of 1 micron, the Taiwanese government invested $72.5 million in a VLSI project to be implemented by ERSO in the early 1980s.
Philips, a most attractive partner
In 1985, developments gained momentum when Morris Chang, a former top executive at Texas Instruments, came to head ITRI. He proposed the creation of a VLSI factory. It would be set up as a public-private enterprise with a government share of less than 50 percent. The rest of the equity would have to come from private investors. Taiwanese companies and other semiconductor manufacturers did not initially appear interested, after which Philips entered the picture.
Philips was of interest to the Taiwanese government because it was the first European investor in Taiwan in 1966 with the establishment of an assembly plant of magnetic memory matrices for television sets in southern Kaohsiung. Philips also invested in more technologically advanced and capital-intensive products. In 1970, for example, it started production of black-and-white picture tubes for TV producers in Taiwan, mainly American companies. Philips indicated that the presence of cheap labor was not the only reason for investment. This was in contrast to most American companies that withdrew from Taiwan after wage hikes in the 1980s.
Furthermore, Philips was also an attractive partner from a knowledge perspective. Philips mastered VLSI technology, had the latest manufacturing technology, and wanted to continue chip development. Although American companies like Intel were leading the way, Philips, unlike Intel, was willing to share its knowledge. TSMC would also gain access to Philips’ cross-licensing agreements with global semiconductor industry players. Finally, Philips’ image was a plus. With this internationally known company with a long history, other private investors would be more likely to step in, (foreign) employees would be more likely to work for TSMC, and (international) customers would be more likely to have their ICs made at the new company.
An opportunity for Philips
Philips responded positively to the Taiwanese government’s request to invest in TSMC. This allowed Philips to strengthen its position in the growing computer chip market and gain a greater foothold in the East Asian chip market without major expenditures. UMC’s proven viability also contributed to Philips management’s favorable decision. They were convinced of the technological capabilities of the ERSO employees and their ability to ensure further miniaturization (to 1 micron and beyond) and thus the viability of the new venture in the government-backed high-tech business environment.
Another advantage was that Philips’ chip assembly and test site in Kaohsiung would no longer depend exclusively on imported ICs. When participating in the joint venture, investment would be much lower than when setting up Philips’ own chip factory. Participation in the joint venture would also solve the personnel problem. About 150 engineers and technicians from the ERSO research institute would transfer to TSMC. There they would harmonize the (2-micron) chip manufacturing process developed at ERSO with Philips’. With a position as a “preferred customer” for shortages, Philips could claim much of TSCM’s capacity in times of overcapacity.
Participation in TSMC also allowed Philips to stay abreast of future technological developments in the chip field. On the other hand, Philips, the main private investor with 27.5% of the shares, did not have to fear competition from the local partners in TSMC. The main partner in the joint venture was the government, with 48.3% of the shares, while Taiwan’s largest investors Formosa Plastics (5%) and Sino-American Petroleum (4%) were not competitors.
TSMC’s proposed business structure was also crucial to Philips’ participation. As an independent foundry – foundry – TSMC would focus only on chip production and leave the design and sales to others. The foundry would produce them based on the design specifications of customers, who would also sell the ICs. This prevented the future company from competing with Philips in the chip market. Finally, in exchange for knowledge and cross-licensing, Philips would receive 3% of sales annually for the next ten years.
Enduring cooperation
On February 21, 1987, TSMC was established as a Taiwanese-Dutch co-production. The new joint venture offered benefits to both parties and consolidated the relationship between Taiwan and the Dutch multinational Philips. Over time, Philips’ role changed. Philips disposed of its shares in TSMC and divested its activities in Taiwan. However, close cooperation in the semiconductor supply chain between TSMC and ASML is more vibrant than ever, building on Philips’ Taiwanese-Dutch relationship.
