• Oliver Daniels

The Rise and Rise of TSMC

Updated: Nov 15

At the heart of the company's rise is one thing: the law of supply and demand

From 2010 to 2019 the Taiwan Semiconductor Manufacturing Company (TSMC) added $6bn in net income. A year later they had added a further $7bn. What has caused this monumental rise in profit and why is the company expecting to grow into 2023 despite a general industry slow down?

Founded in 1987, TSMC has grown to become the most valuable independent semiconductor foundry, supplying leading fabless semiconductor companies such as Apple, AMD and Nvidia, the former of which accounts for over 25% of TSMCs revenue. This is mainly through the leading 5nm and 7nm nodes which form a major component of Apple’s A14 and M1 chips, found in the iPhone 12 and MacBook Pro respectively. Whilst this does make TSMC heavily reliant on a single customer and leaves it at risk should Apple pivot to an integrated semiconductor manufacturing process, this seems highly unlikely given the upfront costs and production delays involved. Apple’s own success (adding nearly $100bn in revenue in 2020 alone) has had a positive impact on TSMC. Most of Apple’s revenue comes from physical hardware, and most of that requires silicon chips – driving up demand for TSMC.

Yet it is not just increases in revenue which have driven net income growth over the past couple of years. TSMC’s gross margins have been steadily on the rise since 2015 with the firm’s net profit margin approaching 43% over the last fiscal year. This is a staggeringly high figure in such a competitive industry and whilst it has been partly driven by cost reduction in the form of increases in manufacturing efficiency and also beneficial foreign exchange rates. However, price rises have also significantly contributed to the company’s margins with sources suggesting an 8% increase in cost for the leading 5nm and 7nm nodes and as much as a two-fold increase in the price of the 4nm node used in Apple’s new 2022 A16 bionic over its 2021 counterpart. But why has Apple accepted such an (arguably unjustified) increase in node cost, especially given their bargaining power as a quarter of TSMC’s revenue?

They don’t have a choice. TSMC is semiconductor manufacturing - at least as far as smartphones are concerned. They hold over half of the market share and no other company can possibly have the capacity to supply the sheer volume of silicon the Californian technology giant consumes. Furthermore, even if they wanted to help Apple by selling the chips at a discount, they couldn’t – not without risking a company-wide fall in gross margins. This is because TSMC is unique for a firm its size in that much of its revenue comes from a limited set of large customers. Each of these expect comparable treatment and as such, a discount for Apple means a discount for Nvidia and AMD and the other major players in the industry who purchase silicon wafers from TSMC. These make up for over half of the firm’s revenue and a fall in price across such a broad range of revenue sources would be catastrophic for the company.

It should be noted that the pandemic-fuelled rise in chip demand has most definitely played a part in increasing TSMCs revenues, but the post-pandemic economic environment is starting to looking more and more negative for the semiconductor industry as a whole. Premium goods such as smartphones and computers are on the decline as rising energy bills eat away at consumers disposable income and production costs are up as historically high oil prices increase shipping rates across the globe. So how can TSMC who, as previously mentioned, make up 50% of semiconductor manufacturing, possible hope to grow in a declining industry?

According to TSMC, the answer lies in capacity – and a lot of it. To their credit, the firm has not sat on their pandemic-grounded laurels and maintained a consistent Revenue to CapEx ratio of 2.5-3. That is to say that the firm has invested around 25-30% of its revenue into new capital which will enable future growth. The $12bn investment into a new fabrication facility in Phoenix, Arizona opening in 2024 is a testament to the firm’s commitment to expansion but it does beg the question – who is buying all of these chips?

The recent cryptocurrency bubble bursting combined with a general return to pre-pandemic demand levels would suggest that the industry can expect to supply fewer chips in the coming years than it has been previously, as is the nature of a cyclical industry such as semiconductor manufacturing. Yet TSMC seems convinced more capacity is needed, and this can really only be for two reasons: TSMC expects to attract customers of competing foundries or TSMC believes there will not actually be a decline in silicon demand.

The former seems unlikely; most competing foundries are specialised and it makes little sense for the company to invest so heavily into specialist technology for little net revenue gain. The latter, however, is more intriguing. Apple, TSMC’s largest customer, is in the middle of large transition from intel-based to proprietary system on chip (SoC) based processors which require silicon wafers from TSMC. AI, another area of significant demand for chips, is also on the rise. Together though, can these really equal and significantly exceed the fall in demand caused by the crypto crash and inflationary crisis?

It remains to be seen if TSMCs net income can continue to grow, but one thing is certain. The world will always need semiconductor chips – and TSMC can make a damn lot of them.