In the Hsinchu Industrial Park in Hukou in Hsinchu County, an abandoned TV assembly factory is finding new life.

A new production line is being installed that by the end of the year will produce some of the most expensive electronic products Taiwan has ever exported – Nvidia’s AI-related DGX H100 server and H100 GPU (graphics processing unit), which combined will cost more than US$313,000 and weigh 170 kilograms. 

Owing to the global frenzy to jump on the AI bandwagon, orders for the H100 GPU, which is packed with 80 billion transistors and runs faster than traditional chips by a factor of 100, are booked well into next year.

The business represents a major stepping stone for the H100 GPU’s contract manufacturer, Taiwan-based Wistron Corporation, while at the same time thrusting the company to the forefront of geopolitical conflict after the United States banned the sale of the H100 to China. 

It also symbolizes the “transformation” of Taiwan’s robust electronics industry.

Smartphones: No Longer an Economic Catalyst

During the first half of 2023, Taiwan’s exports saw a decline of 18.1 percent compared to the previous year to US$202.08 billion, the biggest decline in 14 years. Most eye-catching, however, was a US$15.5 billion tumble in exports of electronic components that accounted for more than a third of the US$44.6 billion export drop-off.

A key factor behind the fall was the slumping smartphone sector, long a major engine of Taiwan’s economic growth.

Many of the standard bearers in Taiwan’s smartphone supply chain, including IC design house Mediatek Inc. and camera lens maker Largan Precision Co., saw sales fall by more than 10 percent in the first half of the year, with some others reporting declines of as high as 30 percent. 

Several vendors are pinning their hopes for a rebound on the unveiling of the iPhone 15, which is expected to offer more new features than any new iPhone in recent years, including a CPU (central processing unit) using TSMC’s most advanced 3-nanometer chips, a titanium frame, and periscope lens technology. 

Can this new product launch significantly boost the multi-trillion Taiwan dollar Apple supply chain and the overall Taiwanese economy?

Largan CEO Adam Lin (林恩平), whose company is believed to be the exclusive supplier of the new iPhone’s periscope lens, delivered an unwelcome response in a neutral tone at an investor conference in July.

“We are not optimistic about high-end smartphones. There’s no demand,” he said.

Another top executive in the iPhone supply chain told CommonWealth: “We revised our June forecast down by about 10-15 percent compared to February.”

In fact, global smartphone shipments fell to a nine-year low in 2022, and “this year will likely be the lowest in 10 years,” said Han Wen-yao (韓文堯), a senior analyst at Isaiah Research, predicting that smartphone shipments this year will be at least 8 percent lower than in 2022.

MediaTek CEO Rick Tsai (蔡力行) forecast that only 1.1 billion mobile phones will be shipped worldwide in 2023, down from 1.4 billion pre-COVID, a fall-off of 300 million phones. 

These trends all suggest that the smartphone industry, which accounts for more than US$125 billion in output value and has been an essential driver of prosperity in Taiwan’s tech sector for more than a decade, is on the way to becoming a sunset industry, as was the case with the PC sector 10 years ago.

Less Reliance on Apple, All In on AI

Fully aware of the smartphone market’s potential decline, Taiwanese vendors in the Apple supply chain are pursuing new opportunities for growth that reflect their strengths.

Pegatron Corp. and ASE Holdings subsidiaries Advanced Semiconductor Engineering Inc. and USI Global have moved aggressively into automotive electronics, while printed circuit board supplier Compeq Manufacturing Co. is exploring the low-orbit satellite business.

For other companies, AI is the top priority, including for semiconductor benchmark TSMC. Its sales from its AI-focused high-speed computing business outpaced smartphone business revenue for the first time in 2022 to become its biggest revenue earner.

Another key player in the semiconductor supply chain, printed circuit board manufacturer Unimicron Technology Corp., has invested NT$60 billion in two new factories to produce AI and high-speed-computing products.  

Tzyy-Jang Tseng, Chairman of Unimicron, the world's largest IC carrier board manufacturer, is optimistic about the rapid growth of AI and high-speed computing in the next few years, and has invested in two new factories to expand production capacity. (Source: Ming-Tang Huang)

In recent years, the focus of Hon Hai's Tech Day has been on the latest technology for electric vehicles. In the field of AI servers, Hon Hai is the exclusive OEM of the upstream GPU module of NVIDIA. (Source: Chien-Tong Wang)

ChatGPT has also played a role in igniting this AI battle of an unprecedented scale. Hon Hai Precision Industry (Foxconn) and Wistron, the world’s biggest and third-biggest contract electronics manufacturers have morphed into AI-related stocks, with Wistron one of the biggest winners of the AI wave, its stock price soaring 3.5-fold since the beginning of 2023.  

AI Winner No. 1: Wistron

As a close ally of NVIDIA, Wistron's stock price has soared 3.5 times this year. Pictured is Chairman Simon Lin. (Source: Ming-Tang Huang)

As it has built an AI presence, Wistron has been unloading its smartphone production lines. It sold its iPhone assembly plant in China three years ago, and is in the final stages of negotiations with the Tata Group to sell its factory in India. 

The company’s booming AI server business has taken over as Wistron’s money maker, prompting Morgan Stanley to raise its forecast for the company’s earnings per share in two years by 49 percent. It was bullish on Wistron because of its leading position in the regenerative AI wave and its extremely close partnership with Nvidia.

Other prominent contract manufacturers Quanta Computer, Giga-Byte and Super Micro Computer are a step behind, having to buy Nvidia’s GPU boards made by Wistron to produce their AI servers. 

Wistron has been plotting quietly for seven years to achieve this position.

The global smartphone business peaked in 2017, when shipments reached 1.5 billion units for the first time. It was also good for Wistron. Its iPhone assembly business accounted for 27 percent of its total revenues, and the company even launched an iPhone assembly line in India for Apple.

That same year, Wistron launched its AI business, and began shipping the DGX-2 server to Nvidia in small volumes of about 1,000 units a year.

After more in-depth research on the issue, however, Wistron concluded that GPUs would be better suited to future AI applications than the CPUs at the heart of most computers and smartphones.

An industry insider familiar with Wistron’s operations said the company had a more positive attitude toward AI from that point on, and that “in the later stages of its R&D, Wistron started cozying up to Nvidia, occasionally sending people to check out its production line.”

Wistron Chairman Simon Lin (林憲銘) decided to bet on Nvidia president and CEO Jensen Huang, a decision that would change the company’s destiny.

Wistron’s Hukou factory set up an office exclusively for Nvidia that fully cooperated with any Nvidia request, whether it was to have a product shipped the next day or to make a design change late in the product development stage.

Though the company has never publicly stated that Nvidia is one of its customers, Wistron President Jeff Lin (林建勳) noted at an investor conference this year that the company had designed unique test methods for “GPU customers.”

“We believe that these technologies will not be quickly replicated by our competitors,” he said.  

Early on, Wistron invested in high-wattage electrical equipment to test GPUs that came with high-speed networks and switches and more efficient cooling systems, preparing itself for this day.

Putting Companies to the Test

Chen Chung-jen (陳忠仁), a professor of business administration at National Taiwan University, said that if Taiwan’s electronics contractors are unable to upgrade product specifications or develop new products, their gross margins will inevitably fall.

He believed that the current business environment would put the flexibility of these companies to the test.

Wistron has certainly passed the test, deciding to pull out of the smartphone market when iPhone growth stagnated and filling the gap with AI server production.

Another key iPhone supplier morphing into an AI vendor is Taoyuan-based TXC Corp., the world’s biggest supplier of quartz components, especially quartz crystals, which are used in electronic products to convert mechanical energy into signals. 

AI Winner No. 2: TXC Corp.

Behind Peter Lin, Chairman of Taiwan's Crystal Technology, hangs a carefully crafted quartz component manufacturing process diagram, which also shows the CXO quartz oscillator used in Pfizer's H100 AI server. (Source:  Ming-Tang Huang)

AI Adds New Value to Quartz

Early in his business career, TXC Chairman Peter Lin (林萬興) launched an electronics component company that sold more than 20,000 different types of components. From among those, he saw an opportunity to substitute imported quartz parts with domestically made versions, and founded TXC. Two years ago, TXC vaulted past Japanese rivals for the first time to become the global leader in quartz crystals. Its components can be found in Apple iPhones, AirPods, and MacBooks.

There is a process map hanging on the wall behind Lin in his office. Three letters on the map – CXO – that stand for “clock crystal oscillator” symbolize the benefit of transitioning to AI. This oscillator is used in the world’s most powerful supercomputers, including Nvidia’s H100, which has five or six CXOs, and they sell for five times as much as the quartz crystals once installed in smartphones.

Quartz crystals are only one-fifth as thick as a human hair, and they depend on semiconductor-grade equipment, all of which is made in Taiwan.

“We started planning this in 2019,” Lin said.

That year, he visited the influential CES consumer electronics trade show in the United States and discovered that big brands were already talking about high-speed computing and mass data transfer in the context of 5G, AI and electric vehicles.

After Lin returned to Taiwan, he realized that the servers, switches and fiber-optic modules that would be essential for high-speed computing would need quartz components that could handle higher frequencies.

Lin explained that the AI servers, 5G small cell base stations and fiber optic modules used in high-speed computing, known in the quartz world as “extreme equipment,” all require high-precision quartz oscillators.

But going from passive components TXC made for smartphones to the active components required in AI products represents a huge leap in both technology and process.

The first challenge was temperature control in a high-speed computing environment. The faster the computations, the more energy used, sending printed circuit board temperatures to 100 degrees Celsius, well above the 65 degrees in general consumer electronics products TXC was accustomed to supplying parts for. Under such intense heat, the frequency of the quartz crystal must still be controlled within a narrow range. 

The second challenge was that the “extreme equipment” moved into high frequencies when running 5G. That meant the very thin quartz crystals used in the quartz oscillators had to be made even thinner, to about 1/10th of their previous thickness.

To meet these more demanding specs, TXC’s equipment needed an upgrade, from mechanical machine tools to semiconductor-grade instruments, forcing the company to budget NT$1.1 billion in capital expenditures in 2020. 

R&D expenses also spiked to develop more demanding technologies, rising to nearly 9 percent of the company’s revenues from 4 percent. That has paid dividends, however, with AI-related components accounting for 12 percent of total TXC’s revenues so far this year.

Eager to get a step up on the competition, Lin has already begun contemplating potential demand for even tinier quartz oscillators for use in 6G equipment.

Like many others, Lin has come to realize that the iPhone alone can no longer sustain Taiwan. He is one of many Taiwanese supply chain pioneers who grew his business with PCs, then conquered the smartphone market and are now emerging as pillars of the global AI arms race. It is now this market that Taiwan is hoping will come to its economic rescue.

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Translated by Luke Sabatier
Uploaded by Ian Huang