Why Baillie Gifford's Paulina McPadden Says TSMC, SK Hynix, and ASML Are Unbeatable in Chip Manufacturing

Investment Scale and Capital Intensity

The incumbents are pouring capital into production at a scale no Chinese competitor can match. TSMC pledged an additional $100 billion in U.S. investment in July 2026 and reported record monthly revenue of NT$417 billion ($13.17 billion) . Its market capitalization reached approximately $1.85 trillion, accounting for over 40% of Taiwan's entire Taiex benchmark index . SK Hynix launched a U.S. share sale aiming to raise up to $36 billion to fund HBM and advanced memory fabs . ASML commands a $45 billion backlog with 53% gross margins, backed by $13 billion in annual free cash flow and a €12 billion buyback program .

By contrast, China's largest foundry, SMIC, remains at 7nm-class production via DUV multi-patterning—multiple generations behind—and faces widening capability gaps at the advanced frontier .

Technology Gaps That Cannot Be Easily Closed

ASML's position is particularly unassailable. As Baillie Gifford's own analysis states, for the same reason ASML has no competitors in the West, it "will not face significant competitors in China for some time, just because this is the most complex tool that exists today" . Even China's reported DUV breakthrough in late July 2026—which wiped €60 billion off ASML's market value in two days—is viewed by analysts as having "far to go" in matching ASML's performance and yield .

Trillion-Dollar Market Milestones

The AI boom has created an extraordinary geographic concentration of market value. TSMC (~$1.85 trillion) is Asia's most valuable company and alone constituted over 40% of the Taiex index . SK Hynix entered the trillion-dollar club in May 2026; together with Samsung Electronics, it made up over 42% of South Korea's Kospi index—a historic record . Taiwan's equity market surpassed India's to become the world's fifth-largest, fueled almost entirely by TSMC . This concentration means the three companies' fortunes directly dictate the performance of two entire national stock markets—a structural geopolitical vulnerability as well as a strength .

Geopolitical Risks and Resilience

McPadden's thesis acknowledges the risks but argues the moats are durable:

• Export controls: U.S. restrictions on ASML's EUV and advanced DUV sales to China have directly sustained the technology gap. China is forced to develop its own tools under severe constraints .
• Taiwan risk: TSMC operates from an island under direct military threat from China. Yet McPadden's bet is that TSMC's manufacturing sovereignty—the "brain" of its ecosystem—is so embedded that it cannot be replicated elsewhere quickly .
• Diversification pressure: TSMC is building fabs in the U.S. (Arizona, plus a new $100B commitment), Japan, and Germany, but keeps advanced nodes (N2, A16, A14) concentrated in Taiwan, making the island the "primary hub and learning center of mass production" .
• Self-reinforcing cycle: Each year of export controls widens the gap, because TSMC, SK Hynix, and ASML reinvest their massive free cash flows into next-generation R&D while Chinese firms remain locked out of the cutting-edge tooling and process knowledge needed to catch up .

Key Caveats

China has made genuine progress. SMIC produces 7nm-class chips, CXMT floated at a 466% gain in Shanghai in August 2026, and a domestic DUV tool was reported . However, analysts uniformly assess these as still far behind the incumbents at the advanced frontier . McPadden's argument is an investment thesis from a long-only growth manager—it is inherently bullish on the incumbents and may underweight disruptive scenarios such as a full-scale Taiwan blockade or an unexpected Chinese lithography breakthrough.

Bottom Line

McPadden argues that TSMC, SK Hynix, and ASML benefit from a self-reinforcing oligopoly: immense capital spending ($100B+ TSMC commitment, $36B SK Hynix raise), a widening technology gap (92% of advanced chips, 100% EUV monopoly, decades of process-learning data), trillion-dollar market caps that fund even more R&D, and export controls that block China from accessing the essential tools. The Taipei Times editorial corroborates this by describing TSMC's manufacturing system as "arguably the world's most difficult to replicate" and noting that competitors "could begin to feel that it is increasingly difficult to close the gap" . The evidence supports the thesis that these positions are structurally durable, though not immune to geopolitical shock.