Wafer War; Computer chips: Taiwan is challenging America at the cutting edge of chipmaking technology.(Cover Story)

Byline: Jonathan Adams

Back in 2002, engineers charged with making the next generation of computer chips due out in 2010 found themselves staring into the abyss. Corporate strategies were already being mapped out on the assumption that chipmakers would find an affordable way to shrink tiny electronic circuits down to even smaller sizes. But there was a serious hiccup with a key process called microlithography, whereby a beam of light traces out circuit patterns onto wafers of silicon. Researchers couldn't figure out how to make it work for smaller circuits, and without a solution the manufacturing lines weren't going to move. Then Burn Lin, a top engineer at Taiwan Semiconductor Manufacturing Co., proposed a simple solution: by sending the beam of light through water rather than air, it might be possible to focus it more finely.

Experts from European and Japanese firms were skeptical, not least because they were invested in a different technology. But eventually they took his advice, and TSMC joined the likes of IBM, Intel and Texas Instruments at the forefront of chipmaking. Now Taiwan--and TSMC in particular--has staked out a rarefied position at the leading edge of technology. Although the United States is still ahead in chip design, TSMC is closing the gap. Taiwan's chip-design industry--the high-tech end of chip manufacturing--is expected to grow 36 percent this year, to $7.6 billion, which would put it second only to the United States, according to the market-research ...