Unlike manna, volcanic ash and exhausted birds, semiconductors don’t just fall from the sky. Production of such is an exceedingly competitive business, with the players at the top of the industry dictating much of technological progress for the world at large. A few companies own their foundries and brand chips with their own company name (e.g. Intel Corp. [INTC]), while others custom-built chips for their clients. Including one of the largest and most successful companies you might not have heard of. (For related reading, see: Inside Intel: A Look at the Mega Chipmaker.)

Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) has been at the forefront of chip design since its founding in the 1980s, and today produces chips for some of the largest clients in the world. Among many others, the company produces chips for Apple (AAPL), including the powerful A10 series expected to debut in September 2016 with the release of the next generation of iPhones. Apple is Taiwan Semiconductor Manufacturing’s largest client, accounting for one-fifth of sales – sales that exceeded $24 billion in the last fiscal year. (For more, see: The Top 5 Semiconductor ETFs for 2016.)

In Your Ear and Elsewhere

Apple is just one of hundreds of Taiwan Semiconductor Manufacturing customers, which can be divided into three classes. Integrated device manufacturers, “systems” companies, and fabless companies. That last one refers to firms that design and sell chips, but farm out the business of actually making the things to Taiwan Semiconductor Manufacturing itself. Even some giants of semiconductor production, such as Advanced Micro Devices, Inc. (AMD), have switched from the so-called pure-play model and started farming out the production of chips – to companies like Taiwan Semiconductor Manufacturing. Which, as a pure-play foundry, never uses its own brand name on its products. That’s much to the delight of its customers, Apple and the 452 others. Over the last few years, fabless companies and systems companies have accounted for 85-87% of total Taiwan Semiconductor Manufacturing revenue. (For more, see: The Semiconductor Industry Handbook.)

Taiwan Semiconductor Manufacturing sells chips to clients all over the developed world. Geopolitics does make an appearance in the company’s breakdown of its revenue by region. By far the company’s biggest market is North America, which brought in 69% of total revenue in 2014. That’s followed by Asia Pacific at 13%. As a company sufficiently proud of its heritage to include “Taiwan” in its name, Taiwan Semiconductor Manufacturing officially lists its country of headquarters as the Republic of China – a seemingly trivial distinction yet one sure to anger forces in what the company refers to as Mainland China, where Taiwan is officially considered nothing more than a rogue province to one day be readmitted whether by agreement or force. As a practical matter for Taiwan Semiconductor Manufacturing investors, the distinction means that the 7% of company revenue originating in “China” refers to both the free and communist varieties. Beyond that, 5% of company inflows come from Japan, which is yet another curiosity in that almost every other publicly reporting entity considers Japan to be part of its Asia Pacific region. (For more, see: Still More Gains Ahead for Semiconductor Makers.)

Smaller is Bigger, Up To A Point

Right now the industry standard is 28-nanometer system-on-chip production, in terms of volume (and dollar volume) of chips sold. 28-nanometer and its derivatives make up 42% of Taiwan Semiconductor Manufacturing revenue. The firm’s 28-nanometer processes are used in ultra-low-power applications, which include wireless keyboards and mice, Bluetooth-enabled blood glucose monitors and pulse oximeters, and literally thousands more. (For related reading, see: How to Invest in Samsung.)

The imagination of Taiwan Semiconductor Manufacturing’s customers – and to a lesser extent, the laws of physics – is the only limit. As astonishing as 28-nanometer process technology might sound – more than 35,000 gates across your thumbnail – it’s rapidly being supplanted by ever-smaller nodes. Far smaller nodes, in fact. 20-nanometer, 16-, and as of late 2015, a mere 10. Taiwan Semiconductor Manufacturing has to not merely compete, but lead the charge as technology advances, to survive. (For more, see: Place Your Bets on the Chip Makers.)

Taiwan Semiconductor Manufacturing is the archetype of a company that exploits Moore’s Law: the observation that transistors halve in size (or more accurately, double in performance per area) every two years. If we’re nearing the theoretical limits of Moore’s Law, no one bothered to tell Taiwan Semiconductor Manufacturing. Right on a schedule obeying Moore’s Law, the company’s 20-nanometer production started in mid-2014 and within a single quarter was accounting for 21% of all company revenue. That ratio will only increase as 20-nanometer finds applications of its own. And Taiwan Semiconductor Manufacturing isn’t done yet. Once 10-nanometer technology is perfected and adopted, 7- and 5-nanometer are will be in the works by the end of the decade. It’s hard to believe that the nodes of just a decade ago were an order of magnitude larger. (For more, see: The Truth About Trading Semiconductor Stocks.)

The Bottom Line

Few industries are more capital-intensive than chip manufacturing. Even with the prohibitive outlays required in getting a fabrication plant up and running, Taiwan Semiconductor Manufacturing still manages to enjoy high profit margins. Net margins were 31-33% over each of the last three years. (For more, see: Semiconductors Look Set To Lead Tech Higher Sector in 2016.)

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