The world’s largest contract chipmaker is enjoying surging sales on the back of an AI chip boom and stepping up its global presence, but faces several risks it must manage carefully.
Taiwan Semiconductor Manufacturing Co. (TSMC) is on a roll.
The world’s leading contract chipmaker and largest Taiwanese company posted sales of NT$257 billion (US$7.9 billion) in July, marking a rise of 45% year-on-year. This performance positions it to exceed Wall Street analysts’ expectations of 37% annual growth in the third quarter. TSMC has shown no sign of slowing down from a record second quarter, during which it gained NT$673.5 billion in revenue.
A key driver of TSMC’s explosive revenue growth is the seemingly insatiable market demand for advanced artificial intelligence (AI) chips. PricewaterhouseCoopers, the British professional services firm, estimates that AI could contribute up to US$15.7 trillion to the global economy by 2030.
For the first time ever, TSMC’s high-performance computing (HPC) division in the second quarter accounted for the majority of its sales (52%), signaling that the chipmaking giant is no longer reliant on Apple’s iPhone and the smartphone industry for growth. The Hsinchu-based company is now capitalizing on its role as the sole supplier of critical AI chips for rising tech star Nvidia Corp., whose market capitalization has increased 171% over the past year to US$3.16 trillion. This growth rate is only slightly less than that of Apple, the world’s most valuable public company. TSMC also makes advanced AI chips for U.S. tech giants Qualcomm, Intel, and AMD.
Without a doubt, TSMC is benefiting from a disequilibrium of AI chip supply and demand. During July’s second-quarter earnings call, C.C. Wei, the company’s chairman and CEO, said that TSMC would try to boost supply wherever possible but that he did not foresee supply catching up with demand before 2025 or 2026.
Investors continue to invest eagerly in AI, despite concerns among some analysts that it may not fulfill the lofty expectations for productivity gains. In a June report, Goldman Sachs noted that US$1 trillion is expected to be spent on AI capital expenditure in coming years. But “this spending has little to show for it so far,” the report said. “Whether this large spend will ever pay off in terms of AI benefits and returns, and the implications for economies, companies, and markets if it does – or if it doesn’t – is top of mind.”
Paul Triolo, senior vice president for the Albright Stonebridge Group (ASG) consultancy in Washington, D.C., has looked at how uncertain future returns on AI could affect TSMC. He notes that the company “does have a fairly narrow base of high-volume customers, many of them now in the AI space, but it supports a wide range of clients and technology nodes.”
Triolo notes that Taiwanese chipmakers produce a range of mobile processors, including those from U.S. and Chinese design houses. “Even with some drop-off in the AI hardware boom, TSMC has other areas of potential growth,” such as 5G and automotive chips, adds Triolo, who is partner in ASG’s China practice.
Global expansion
While TSMC’s international presence was once largely confined to several large manufacturing facilities in southern China, the company has since 2020 responded to a changing geopolitical environment by launching fab projects in the United States, Japan, and Germany. The latter two countries are crucial markets for TSMC’s automotive chips. The move came with a commitment to high capital expenditure – TSMC has committed to invest US$65 billion in its Arizona facilities alone – and despite uncertainty about whether the company’s business model can be replicated further afield.
An August New York Times report, citing interviews with 12 TSMC employees, referred to “culture clashes” between Taiwanese managers and American workers at the Taiwanese company’s Arizona plant. The report further noted that the start of mass production at the facility has been pushed back to the first half of 2025.
“The U.S. and Germany, with their Western cultures that prioritize personal life over work, may find it difficult to adapt to the work culture of semiconductor foundries,” says Cheng Kai-an, a senior industry analyst at the semi-governmental Market Research & Consulting Institute (MIC) in Taipei. “This could lead to challenges in workforce allocation and operations.”
Some observers are more optimistic. “It is important to keep in mind that the Arizona facility is the first major foray by TSMC outside of Taiwan for advanced-node production,” says J. Travis Mosier, a Washington-based semiconductor industry consultant and adjunct senior fellow at the Center for a New American Security. “There are major cultural differences between Taiwan and the United States. There are naturally going to be some adjustments that will need to be made by both sides.”
Mosier notes that other Asian semiconductor companies, including Samsung, have been successful in the United States. The South Korean semiconductor giant has invested US$18 billion in operating two fabs at its campus in Austin, Texas since 1996. “I think the situation [in Arizona] will reach an equilibrium, and the investment will be successful in the long run,” Mosier adds.
Fewer concerns exist about TSMC’s prospects in Japan, where it has committed to build two plants in the southwestern Kumamoto region together with joint-venture partners. Private sector investment for the two plants, which will focus on making smartphone and auto-related chips for top local clients Sony and Renesas, totals US$20 billion.
Japan’s interest in courting TSMC is deeply rooted in the country’s longstanding ties to the semiconductor industry. Its role in the supply chain encompasses numerous upstream raw material and equipment suppliers, as well as a wealth of integrated device manufacturers (IDM) and automotive customers, according to Taipei-based market intelligence firm TrendForce. “Whether suppliers or customers, they are all crucial partners for the operation of the foundries,” says TrendForce analyst Joanne Chiao.
MIC’s Cheng notes that Japan and Taiwan have both cultural and geographic proximity. Further, Japan has “a strong history of semiconductor manufacturing and talent development, with a high cultural acceptance of the foundry industry’s work culture. Therefore, the expansion [of TSMC] in Japan is expected to progress the fastest.”
Risk management
Looking ahead, TSMC must carefully manage several considerable risks. The first relates to AI chip demand, which could be adversely affected by setbacks in the much-hyped generative AI (GenAI) segment associated with the launch of ChatGPT. California-based research firm Gartner predicts that at least 30% of GenAI projects will be abandoned after proof of concept by the end of 2025. Gartner analyst Rita Sallam said in a July news release that organizations “are struggling to prove and realize value. As the scope of initiatives widens, the financial burden of developing and deploying GenAI models is increasingly felt.”
Gartner argued that GenAI requires a high tolerance for indirect, future financial investment as opposed to a focus on immediate return on investment (ROI). Yet historically, “many CFOs have not been comfortable with investing today for indirect value in the future.”
A second risk is linked to TSMC’s business in China. ASG’s Triolo notes that Chinese telecommunications giant Huawei, once a significant client of TSMC’s foundry services, can no longer buy chips from the company following the imposition of U.S. sanctions.
“One of the big risks is that if the U.S. puts more companies on the FDPR [Foreign Direct Product Rule] Entity List, more major Chinese companies like Huawei will be unable to use TSMC foundry services,” he says. “If some major players are targeted here, coupled with a downturn on AI, this could pose a risk to TSMC.”
Though it’s no longer the focus of TSMC’s overseas expansion, China remains important to the chipmaking giant’s business. TrendForce’s Chiao notes that both TSMC and UMC – Taiwan’s number-two foundry – each have two fabs in China. Both companies have continued to boost their respective production capacity there in the past two years, “highlighting the importance of the Chinese market to them,” she says.
In a July press release, TrendForce noted a brisk increase in the proportion of TSMC’s orders originating from China in the second quarter. While North America continued to be the largest market for TSMC, accounting for 65% of its orders, China’s share rose to 16% – a 9% increase sequentially and 16% annually. This growth has positioned China as a larger market for TSMC than the rest of the Asia Pacific region.
Citing a Chinese-language report in Taiwan’s Economic Daily News, TrendForce says that “as the U.S. presidential election countdown continues, both party candidates agree on expanding semiconductor export controls to China. Consequently, Chinese companies are stockpiling chips, causing a surge in rush orders for TSMC.”
Because Taiwanese foundries remain well ahead of their Chinese counterparts in terms of both technology and platform diversity, they continue to retain a competitive advantage there, TrendForce adds.
TSMC’s management would likely agree. During the June annual shareholder meeting, Chairman and CEO Wei was questioned about potential challenges from Huawei in chipmaking technology. His response was succinct, stating that there was no need for comment as TSMC remains “unchallenged.”
