The global artificial intelligence boom is creating a new bottleneck in the semiconductor industry, shifting attention from the production of increasingly powerful chips to the technology needed to connect them. Advanced chip packaging, once considered a relatively routine stage of manufacturing, is emerging as a critical part of the AI supply chain and attracting billions of dollars in new investment.
Companies including Nvidia, AMD and Taiwan Semiconductor Manufacturing Company (TSMC) are expanding their packaging capabilities as demand for AI processors outpaces available capacity. At the same time, smaller Taiwanese manufacturers and international equipment suppliers are seeking to challenge established production methods and capture a larger share of the growing market.
The shift reflects a broader transformation in semiconductor manufacturing. As shrinking transistors becomes increasingly difficult and expensive, integrating multiple chips into a single package is offering another route to greater computing performance.
Why Advanced Packaging Matters for AI Chips
Traditional chip packaging primarily protected semiconductor components and provided the electrical connections needed to attach them to circuit boards. Advanced packaging performs a more demanding function by combining separate pieces of silicon, including processors and memory, into a single integrated unit.
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This arrangement allows components to exchange information more quickly, improving the performance of systems that must process enormous quantities of data. The technology is particularly important for artificial intelligence, where the speed of communication between processors and nearby memory directly affects how efficiently AI models can be trained and operated.
Some modern graphics processing units and central processing units now integrate more than 10 individual chips, with certain designs incorporating as many as 20. Former Intel chief executive Pat Gelsinger, now a partner at Playground Global, estimates that advanced packaging could eventually represent as much as half the value of a chip product.
The economic importance of the technology is already increasing. Research firm Yole Group forecasts that revenue from advanced packaging will exceed revenue from traditional packaging for the first time in 2026. Capital spending on the technology is expected to approach $28 billion.
TSMC’s Dominance Creates Opportunities for Competitors
Taiwan’s TSMC remains the leading supplier of sophisticated advanced packaging, particularly its chip-on-wafer-on-substrate technology, known as CoWoS. The process connects separate silicon components, including processors and memory chips, through a shared base, allowing them to operate together at high speeds.
Nvidia, AMD and Broadcom rely on the technology, as do cloud computing companies developing their own AI processors. However, TSMC’s limited production capacity is creating difficulties for customers seeking to secure enough packaging services to meet growing demand.
The shortage is encouraging chip designers to diversify their supply chains. Nvidia is reportedly providing billions of dollars in financing to expand CoWoS capacity at Siliconware Precision Industries, or SPIL, a subsidiary of Taiwan’s ASE Technology. According to an industry executive familiar with the arrangement, the funding will support additional factory space and equipment.
The reported investment illustrates how far major chip designers are willing to go to secure access to critical manufacturing capacity. Rather than depending entirely on a single supplier, companies are increasingly supporting the expansion of alternative production facilities.
TSMC’s position nevertheless remains difficult to challenge. Its manufacturing expertise, established customer relationships and advanced packaging capabilities give it a significant advantage as the semiconductor industry moves towards more complex chip designs.
Taiwan’s Smaller Suppliers Pursue New Packaging Technology
Taiwanese manufacturers are seeking to capitalise on the capacity constraints by developing alternatives to conventional wafer-based packaging.
Powertech Technology, also known as PTI, is investing in panel-level packaging, which uses larger rectangular panels rather than traditional round silicon wafers as the manufacturing platform. The approach could accommodate more chips in each production cycle while reducing material waste, particularly as AI processors become larger and more complex.
PTI is working with AMD and Broadcom to develop the technology for advanced applications in artificial intelligence and high-performance computing. Its chairman, D.K. Tsai, has indicated that chip designers are increasingly interested in alternatives that reduce their dependence on TSMC.
The company is also planning a $400 million investment in an advanced packaging joint venture with Broadcom in Singapore. Production could begin in 2028, according to Tsai.
TSMC is developing its own panel-based technology, called chip-on-panel-on-substrate, or CoPoS. The company announced in April that it had established a pilot production line and expected manufacturing to begin within a couple of years. However, CoWoS remains its principal advanced packaging technology for AI chips.
AMD is also expanding its involvement in Taiwan’s semiconductor industry, announcing investments exceeding $10 billion across the sector, including partnerships with ASE, SPIL and Powertech.
AMD chief executive Lisa Su has emphasised the need for additional advanced packaging capacity, while describing TSMC as an important partner. Her comments suggest that the industry is pursuing greater production diversity without necessarily abandoning established relationships.
Microsoft Azure hardware chief Rani Borkar has also identified reduced material waste as a potential advantage of panel-level packaging. However, Microsoft has not decided whether or when it will adopt the technology.
Semiconductor Equipment Makers Enter the Competition
The expansion of advanced packaging is creating opportunities beyond chip manufacturers. Semiconductor equipment companies are increasingly targeting a market that has traditionally received less attention than the production of transistors and circuitry.
Companies such as Tokyo Electron and Applied Materials are positioning themselves to supply the machinery required for more sophisticated packaging processes.
The opportunity is significant because advanced packaging is growing faster than the broader market for semiconductor manufacturing equipment, even though it remains a smaller segment. Tokyo Electron Taiwan president Seiji Nakama has highlighted the difference in growth rates, while an Applied Materials executive expects the market, including panel-level packaging, to expand substantially over the next three to five years.
This is also changing the competitive structure of the semiconductor industry. Equipment manufacturers that previously concentrated on the earlier stages of chip production now have an opportunity to become important suppliers in the final stages of manufacturing.
As packaging processes become more complex, demand is likely to increase for specialised machinery capable of handling larger components and integrating multiple chips with greater precision.
What Happens Next in the AI Chip Supply Chain?
The growing importance of advanced packaging highlights a fundamental challenge for the AI industry: producing powerful processors is no longer enough if manufacturers cannot connect their components efficiently and at sufficient scale.
For Nvidia, AMD and other chip designers, access to packaging capacity will increasingly influence how quickly they can deliver new products. TSMC is likely to retain a central role, but investment in alternative suppliers could gradually reduce the industry’s dependence on a limited number of manufacturing facilities.
Panel-level packaging represents one possible route towards greater capacity and lower material costs. However, its commercial viability will depend on whether manufacturers can demonstrate reliable production at the scale and complexity required by leading AI chip designers.
The next phase of semiconductor competition will therefore extend beyond transistor performance and fabrication technology. It will increasingly involve the ability to integrate processors, memory and other components into increasingly sophisticated systems.
As AI infrastructure investment accelerates, advanced packaging is moving from the margins of semiconductor manufacturing to the centre of the industry’s strategic competition.
With information from Reuters.
