There is only one major challenge for TSMC in the future, and that is “geopolitics”. And I personally think the situation is very bad for TSMC. Especially from the perspective of Taiwanese, the situation is even more serious.
The point is that this factor, and the topics discussed in this article, are beyond the control of TSMC itself, and each of them is a fatal blow to the future of TSMC.
The United States takes what it wants
The United States is cannibalizing TSMC
The first 5nm fab in Arizona has been completed, and it has recently been reported that another 3nm fab is starting to be built. In fact, it is not surprising, because when the factory was set up, the most planned land was reserved. Six fabs can be built, and the land cost United States is not as expensive as Taiwan. Except for California and New York, most of the land acquisition costs in the United States are very low and will not be the main consideration for companies.
However, Bloomberg reported in early December 2022 that, at the request of American customers such as Apple (ticker: AAPL), the leader of the wafer foundry Daitou Investment in Arizona’s first new factory FAB21 was put into production in 2024, and the 4 -nanometer process agent will be provided at the same time at the same time. Workers, that is, TSMC’s most advanced process technology has been mass yet produced. In other words, this is consistent with the interests of the United States. The United States is equal to the forced TSMC. As long as the United States has the latest and most advanced technology and capacity of TSMC, the mature process is not interested in the United States.
On December 6, 2022, the first tool-in ceremony of TSMC’s new factory in Arizona, Nikkei Asia reported that the investment in TSMC’s U.S. factory has been increased from the existing US$12 billion to US$40 billion, and the construction of a second factory has begun to produce 3 nanometers, and plan to business production by 2026.
I personally think that the $40 billion is just the beginning, because TSMC’s existing Arizona factory site planning originally had six factories, but currently only one is completed and the second is being built. The TSMC investment case is the largest foreign investment case in the United States.
The United States is an enemy, not a friend
I suggest you take a look at my article “Two long-term threats to TSMC: US and SMIC“. Since the publication of this article, the actions taken by the United States to devour TSMC are all deadly. In the long run (in fact, it will not take long, it will take effect within five years) TSMC will hardly retain its current advantages unless it is completely obeyed the United States.
Multiple U.S. government agencies have repeatedly said publicly that the reliance on Taiwan for semiconductor manufacturing must stop immediately. And this is what the U.S. government has been doing in the past two years. Its primary target is of course TSMC, and Taiwanese people should stop being “Ah Q”.
Note: Ah Q; a person who interprets his defeats as moral victories
Going to the US will lose competitiveness
TSMC makes a lot of money by relying on Taiwan’s cheap manpower and various resource costs. If it moves to the United States, all these things will disappear and it will lose competitiveness. Don’t forget, TSMC is a capital-intensive foundry manufacturing industry. It does not have products or other means of making a living like Samsung or Intel. When the cheap manpower and various resource costs disappear, there will be no competitiveness. This is truth. Skeptics, please take a look at my previous article”Why is TSMC’s profit margin much greater than competitors?“
The United States will soon replace Taiwan
According to the current development and TSMC’s announced plan, within 5 years, TSMC will have all the advanced processes from 5nm to 2nm in Arizona by 2027 at the earliest (please note that the United States does not look down on Mature process, because the United States can supply it), so TSMC’s US plant will become TSMC’s largest foundry manufacturing base, and TSMC’s plant in Arizona may produce more advanced processes than Taiwan.
It means that by using various means, the United States will soon replace Taiwan and become the exporter of the world’s most advanced semiconductor manufacturing process without having to pay for it or establish a new company.
Is it ASMC or TSMC?
First of all, are TSMC’s several sites in Arizona called ASMC or TSMC? Is going to the United States to build a field to make America great again? Who is the
beneficiary ultimately? Taiwan or U.S.?
Under the U.S. Chip Act, there are a total of 52 billion U.S. dollars in huge subsidies. Everyone knows that most of them will definitely subsidize local companies from the United States such as Intel and Micron. How much subsidies non-US companies such as TSMC and Samsung can receive is uncertain. A report by Taiwanese media in March 2023: Samsung is expected to receive US$2.6 billion in subsidies for setting up a factory in the United States, and TSMC looks at US$6 billion.
However, the salary of American employees is much higher than that of employees mobilized from original Asian factories, which will definitely erode the profits of TSMC and Samsung. Intel and Micron and other local companies from the United States have been in an unequal position in terms of official subsidies and costs from the very beginning.
Moris Chang said that building a semiconductor factory in the United States was a nightmare he had when he founded TSMC 25 years ago. In the late 1990s, TSMC’s 8-inch wafer fab WaferTech in Washington State failed and even turned into a nightmare. Now, Moris Chang said that “globalization is almost dead, and free trade is almost dead.”
As we all know, the founder Moris Chang is an U.S. citizen, and the media also reported that Mark Liu is a U.S. passport holder as well. According to Mark Liu, chairman of TSMC at the first tool-in ceremony, TSMC’s investment in Arizona will create 31,000 construction jobs and an additional 13,000 high-paying technology jobs, including 4,500 TSMC employees.
C.C. Wei The CEO of TSMC has repeatedly admitted that TSMC encountered great difficulties in finding local American engineers in the United States, so it had to relocated engineers from Taiwan. According to media reports, nearly 300 employees and their family members of TSMC have been sent to the United States by the first batch of chartered flights. However, the TSMC engineer who moved to the United States said that although the basic salary has doubled, the bonus has not increased, but the living cost in the United States is three times higher than that in Taiwan, and life is still a bit difficult.
Furthermore, American employees and Taiwanese employees are performance evaluated separately, and American employees are easier to be promoted. Taiwanese employees only have 14 days of paid leave, while American employees have 21 days. Moreover, American employees are not allowed to work overtime, but employees from Taiwan must take the overtime shift.
Gradually lose the Chinese market
TSMC’s two factories in China
Although there are two wafer fabs in China, due to the obstruction of the United States, coupled with the rise of Taiwan’s own anti-China atmosphere, forcing TSMC to withdraw its plan to upgrade the Nanjing factory to a more advanced process, which will be very unfavorable for TSMC’s advantage and future. TSMC’s two Chinese factories, the Shanghai Songjiang factory, are very old processes and cannot be said to be competitive.
SMIC now even ships 7nm, which means that China can actually make the mature process. If the Nanjing plant is not upgraded to an advanced process, it will be very unfavorable for TSMC.
The Huawei case
Huawei accounted for 15% of TSMC’s revenue in 2019, and Apple accounted for 23% that year (for the revenue ratio of Apple’s main suppliers, please see section 4-1, page 259 of my book “The Rules of Super Growth Stocks Investing“). Now Huawei has become zero, and most of Huawei’s mobile phone market has been replaced by Apple (in 2019, Huawei mobile phones sold 240 million units in the whole year, with a market share of 17.6%, surpassing Apple and becoming the second in the world), Apple contributee 25% of TSMC’s revenue in 2021.
Without Huawei restricting Apple, Apple can take whatever it wants from TSMC. Because the main customers of TSMC’s most expensive and latest and most advanced processes are mobile phone chips. If Apple refuses to use it, the return on investment of TSMC’s most advanced process will be lower, and the company’s revenue and profits will be greatly reduced, because there are no other customers big enough to compete with Apple to fill the hole.
China’s semiconductor market
Except for Apple and Samsung, the world’s top mobile phone manufacturers are all Chinese manufacturers. The world of the electric vehicle industry is also very similar, with the exception of Tesla and Volkswagen, the major manufacturers are all Chinese. Mobile phones and electric cars are the fastest-evolving industries in the technology world today, using the most and most advanced chips.
According to a report released by the Semiconductor Industry Association (SIA), global semiconductor sales in 2021 will reach a record $555.9 billion, of which the mainland’s sales will reach $192.5 billion, accounting for 34.63%, ranking first in the world. Decoupling from China means that in the worst case, TSMC may lose all orders from Chinese customers. Mind you, China is a long-term bullish market and demand for semiconductors will only increase unabated. For the global semiconductor market, please see my previous post, “”A detailed analysis of the global semiconductor chip market, 9 major breakdowns.”Global semiconductor chip market in detail, big dominators and markets“
Taiwanese government is unable to protect
Government shirks responsibility
Do you remember the unreasonable US government asking TSMC for customer lists and sales secrets? It also requires TSMC to go to the United States to set up factories, and it also specifies that it must use the latest high-end 5nm process at that time. Please don’t underestimate these two matters. The Taiwan government’s reply was very Ah Q, saying that we respect TSMC’s own decision. At least we don’t see the Taiwanese government protesting or negotiating with the US government on Samsung’s behalf like the South Korean government.
Show weakness to America
Now Taiwan’s only remaining core competitiveness is semiconductor manufacturing. The Taiwan government’s showing weakness toward the United States will only weaken Taiwan’s remaining core competitiveness.
Substantial impact on the Taiwan factory
As previously analyzed, major U.S. customers of TSMC, such as Apple, AMD (ticker: AMD) and Nvidia (ticker: NVDA), have indicated that they will switch to TSMC’s U.S. factory to place orders after they have a U.S. factory. Of course, these large customers want TSMC’s most advanced manufacturing process, not the mature manufacturing process; and they account for the largest proportion of TSMC’s revenue, and they are also the main users of the production capacity of TSMC’s advanced manufacturing plants in Taiwan.
In 2020, North American customers will contribute approximately 62% of TSMC’s annual revenue. When U.S. customers, which account for the largest proportion of TSMC’s revenue and utilization, switch to the U.S. factory to place orders, the capacity utilization rate of TSMC’s advanced process factory in Taiwan is bound to be affected.
In the worst case, many years later (you can say that it is the result of the decision of the market mechanism), TSMC’s most advanced manufacturing process will definitely be in the United States, and TSMC’s Taiwan factory will only leave the more mature manufacturing process factory. As for whether it will evolve like this, there is no need to argue. In a few years, time will soon give an answer (TSMC’s original plan to establish a 7nm factory in Kaohsiung, Taiwan, the CEO has publicly announced the delay, perhaps this is a sign) .
Lessons from Japan
In the 1980s, Japanese semiconductors accounted for 53% of the global market, allowing the United States to suppress its development. In 1988, Japanese semiconductors accounted for more than 50% of the global market. In 1992, the top ten companies in the global semiconductor rankings included 6 companies including NEC (ticker: RNECY) and Toshiba (ticker: TOSYY).
Have you forgotten how Japan’s semiconductor industry collapsed? A 1986 “The United States – Japan semiconductor accord of 1986“. The current situation of TSMC is very similar to that of Japan’s semiconductor industry 30 or 40 years ago, when it dominated the world and instantly disappeared into today’s embarrassed appearance; now, among the top ten semiconductor companies in the world ( please see the table in sections 3-2, page 126 of my book “The Rules of 10 Baggers“), Japan does not even have a single one, and the Japanese government still needs to come forward. Subsidized TSMC to set up a factory in Japan to assist Japan in the production of semiconductors.
Taiwan’s power supply is a big problem
Three major power outages across Taiwan: the 8.15 blackout affected 5.92 million households in Taiwan, the 513 blackout affected 4.62 million households in Taiwan, and the 303 blackout this year affected 5.49 million households in Taiwan. It is a well-known fact that Taiwan’s electricity is unstable.
What most Taiwanese don’t know is that the European Union has officially listed nuclear energy as a green energy source. Germany, the United States, and Japan, which had a nuclear power plant accident in earthquake, have all announced their re-embracing of nuclear energy. Add the UK, France, and China, and all major powers are expanding nuclear power generation.
However, because Taiwan pursues the so-called energy policy of abolishing nuclear energy in the future, Taiwan, which relies on imports for almost all its energy, may have doubts about power shortages in the future.
Only Taiwan is against the trend, and now there are power shortages or blackouts at all times. Among the 500 dirtiest carbon emission sources in the world that released at the 27th United Nations Climate Summit (COP27) in 2022, Taiwan’s TaiChung Power Plants, Mailiao Power Plants, Xingda Power Plants, Sinosteel Plants, and Linkou Power Plants are all on the list, for every 100 major carbon emitters, there is one in Taiwan.
Not only local business groups in Taiwan have repeatedly called on the government to reconsider, but also the AmCham Taiwan in Taiwan and The European Chamber of Commerce Taiwan (ECCT) have expressed similar concerns to the government many times.
And TSMC, Taiwan’s largest super user of super power (For TSMC’s detail power consumption numbers, please see detail in my previous article “Why is TSMC’s profit margin much greater than competitors?“), it is impossible to expand Taiwan’s production capacity before power shortages issues resolved, TSMC can only set up new factories in the future abroad.
TSMC highlights insufficient power shortage issue
Mark Liu, chairman of TSMC, attended the regular meeting of Sansan, the most important and influential organization for business leaders in Taiwan, on November 30, 2022. When the on-site companies were concerned about power issues, Mark Liu rarely called for the government to solve the problem of power shortage.
Mark Liu said bluntly, “I’m not a professional, but I want the government to solve it. It’s too late to have enough electricity in 2023, but we need to care about whether there will be enough electricity in five years’ time.”
Competitors are all all strong peers
Intel (ticker: INTC) has been criticized by the industry and Wall Street for many years. The biggest company in semiconductors, since getting a new and energetic CEO Patrick P. Gelsinger, has done the right thing so far (at least in my opinion). But the premise is that these plans must be implemented, so that investors can pay for it and regain Wall Street’s confidence in it, otherwise it will be nothing.
The first is to sell unprofitable or non-core sectors, such as solid-state drives, wireless communications and many other sectors that are not leading the industry. And let the self-driving car division Mobileye (ticker: MBLY) in the downturn in the stock market, the low valuation is now split and re-listed, making Intel’s original acquisition a waste of time, because it did not make Intel any money at all. For Mobileye, see my previous article “”How does TSMC make money?“
The most important thing is to announce this year that the company’s manufacturing department IFS (Intel Foundry Service) will be turned into a self-operated unit within the company. It is only a matter of formal spin-off. In the future, it will be self-sufficient and find customers by itself, including Intel itself, it has now become its customers. According to the progress disclosed by the CEO, at present, the top ten semiconductor design companies in the world (please refer to the 126-page list in section 3-2 of my book “The Rules of 10 Baggers“), seven of them have signed up to become IFS customers.
As for the strength of IFS, Intel has announced that the 1.8nm (no doubt, it is 18 angstroms, no typo) process has been successfully tapeout by customers (what is tapeout? Please see my explaination in the book “The Rules of 10 Baggers” section 3-2, 121 pages), will be in pilot production by the end of 2022, and mass production in 2025.
As for the future advanced process schedule of Intel IFS, please see the detailed list and description in my previous article “Comparison of TSMC, Intel, and Samsung’s new process roadmaps for future chips“. If these plans of Intel IFS can come true, then Intel will be able to regain the throne of the global semiconductor market value after 2025.
Investors should keep in mind that Intel is an American company, TSMC is not. The U.S. government will be on that side, the answer is clear, and there is no need for debate on this issue.
When I published “Two long-term threats to TSMC: US and SMIC” in 2021, SMIC could no longer get EUV device. No one thought that SMIC could make breakthroughs in advanced manufacturing processes in the short term, and the United States also thought that it was stuck, complacent with the key technologies of SMIC. But the answer is out now, SMIC still figured out a way to jump from 14nm to 7nm technology in just 2 years, and it has shipped to customers! Compared with the first-tier foundries, 3 years for TSMC, and it took Samsung 5 years to launch 7nm. No one should think that 7nm is not an advanced process, right?
That’s all I want to say about SMIC, because that’s enough.
In my previous posts “Comparison of TSMC, Samsung, Intel’s Yield and Advanced Process” and “Comparison of TSMC, Intel, and Samsung’s new process roadmaps for future chips“, I compared Samsung and TSMC in depth; interested readers can refer to these two articles.
Regarding Samsung, the main points I would like to make are as follows:
- Samsung’s current problem is mainly in the improvement of yield rate (which directly affects its market share and profits); unlike Intel, it lags behind the other two companies in all aspects.
- On the whole, Samsung is the most active company among the three major wafer foundries, TSMC, Intel, and Samsung.
- The first company to mass-produce the three-nanometer process is Samsung.
- Samsung has always been the world’s second largest foundry business, accounting for about one-third of TSMC’s market share, and it has been going on for a long time.
- Samsung’s chairman, Lee Jae-yong, announced as early as 2020 that Samsung would overtake TSMC in 2030 to become the leader in non-memory logic semiconductors (Samsung is already the world’s leader in memory semiconductors).
Under the sluggish business situation of the economic recession and the bear market of the stock market since the beginning of 2022, Globalfoundries (ticker: GFS), which was listed in October 2021, has been listed by almost everyone for more than a year (until 11/10/2022), it rose by 25.15%. Of all the semiconductor stocks I’ve tracked myself, it should be the only one that hasn’t fallen but has risen sharply.
Globalfoundries is currently a profitable business, and the company is optimistic about the future, unaffected by the U.S. operating costs that most people look down on. In contrast, please take a look at the stock price performance and operating outlook of its rivals TSMC, UMC (ticker: UMC), Samsung Electronics, and SMIC in 2022, and they should be impressed by the performance of Globalfoundries.
It is not difficult to understand the reason, mainly because it is a local company in the United States. The United States passed the chip pact in 2022, spending US$52 billion to subsidize all chip factories. This amount is actually very small in terms of the cost of tens of billions of US dollars for the construction of advanced semiconductor fabs, but the significance of the US government’s declaration is higher than that.
Globalfoundries is not a direct competitor to TSMC right now, but it will be soon.
Taiwan’s competitiveness is gradually losing
High-end production moved out of Taiwan
Due to the U.S. embargo against China, U.S. customers currently account for about 75% of TSMC’s revenue. As the first factory in the United States enters trial production at the end of 2022. State-of-the-art 3nm process, has been determinated as the second phase of the Arizona plant. The largest customer, Apple (US stock code: AAPL), has announced that it will start placing orders with U.S. factories after 2024. If all of this comes true, the result will naturally become that TSMC can only gradually move high-end production capacity out of Taiwan to meet the actual needs of American customers.
On December 6, 2022, at the first tool-in ceremony of TSMC’s new factory in Arizona, TSMC Chairman Mark Liu pointed out that: TSMC’s two factories in the United States have an annual revenue of 10 billion U.S. dollars and an annual wafer production of 600,000 pieces (please note that both are latest 3 to 5nm process). The contract will account for 17.5% of TSMC’s total revenue in 2021. Moreover, the market value of the final product is expected to exceed US$40 billion.
Long-run profit margins will fall
On 11/18/2022, the Taiwanese media revealed that TSMC’s first batch of chartered flights with more than 300 people including the families of engineers had already flown to the United States. There will be a total of more than 1,000 people in this echelon, which should be for the first wave of batch arrangement for fab trial production. Such an arrangement proves that TSMC is indeed unable to recruit enough American engineers to keep the factory running (for whatever reason, such as uncompetitive salaries, American’s lower
obedience, etc.). Whether importing cheaper engineers from Taiwan or switching to American engineers in the future will greatly reduce TSMC’s operating profits in the future.
In early December 2022, Taiwanese media disclosed: TSMC stated in a letter to the U.S. Department of Commerce that chip manufacturing costs in the U.S. are 50% higher than in Taiwan, and there is also a shortage of talents, which will directly and significantly increase TSMC’s operating costs for U.S. factories.
The Wall Street Journal report was even more explicit. When the U.S. Department of Commerce asked participating manufacturers for their opinions on the chip subsidy plan, TSMC listed 6 unexpected situations in its reply, including high costs, lack of manpower, and federal regulations. , These conditions have forced TSMC to increase the cost of setting up factories.
The New York Times said in a report on February 22, 2023 that TSMC’s investment in the United States is full of tests. TSMC executives mentioned at the corporate briefing in January 2023 that due to labor costs, licenses, compliance with laws and regulations, and rising prices, the cost of setting up a factory in the United States is at least four times higher than in Taiwan.
Wendell Huang, chief financial officer of TSMC, said in the earnings conference call, “The main reason for the gap in the cost of building factories in Taiwan and the United States is the construction cost. The cost of a fab in the United States will be 4 to 5 times that of Taiwan, including labor, licenses, occupational safety, health regulations, employees and the learning curve, and the cost of inflation in recent years.” Wendell Huang also directly stated that the investment in the United States may damage TSMC’s profitability in 2023.
Investors get hurted
What’s more serious is that all developments are extremely detrimental to TSMC investors, because as Morris Chang has repeatedly emphasized, American foundries are not competitive in terms of profit margins. Coupled with the absence of endless tangible and intangible subsidies from various resources in Taiwan (please see my previous article “Why is TSMC’s profit margin much greater than competitors?“), the result is to lower TSMC’s profits. Investors can also simplify it to use the profits of TSMC’s Taiwan and mainland factories to subsidize the US factory. At least the profit margin of American factories will be much lower than that of Taiwan and mainland factories, which is certain.
Regarding TSMC’s move to the United States to build a factory, TSMC CEO C. C. Wei admitted frankly that “Taiwan’s semiconductor industry moved to the United States and left Taiwan’s ecosystem. It cannot live a good life like in Taiwan.” What he means is those reasons I listed in my post “Why is TSMC’s profit margin much greater than competitors?”
The latest regulations on February 28, 2023. U.S. Secretary of Commerce Gina Raimondo emphasized that the Department of Commerce will ensure that subsidies are not abused. She said, “Subsidy recipients must agree that within 10 years of receiving the subsidy, they will not expand semiconductor manufacturing capacity in overseas countries that have doubts.” In addition, The Ministry of Commerce also stated that “companies that have received more than US$150 million in subsidy, Profits that exceed the original estimated threshold must be shared with the government.” In addition, it also stipulates that “applicants are prohibited from using the subsidy of the chip bill for dividends and stock repurchases, so the applicants need to provide the government with a stock repurchase plan for the next 5 years.”
TSMC is no longer a financial issue for Taiwan. Taiwanese people have invested in it with complex emotions beyond anyone’s imagination. This is difficult for non-Taiwanese to understand, and it will never be understood. After all, strictly speaking, TSMC is the “only” world-class company cultivated in Taiwan in the past 30 years.
At the end of the first quarter of 2022, TSMC’s foreign capital (most of which are American capital) held 73.35% of the shares; at the end of the second quarter of 2020, the peak of the bull market, this figure was 78.48%. As far as technology is concerned, apart from Taiwan Semiconductor Manufacturing Co., Ltd., which is mainly listed in Taiwan, and its head office and main factory are in Taiwan, the actual control of the company is already in the hands of the Americans.
Most Taiwanese are currently concerned about whether TSMC has been emptied and gradually turned into ASMC; although the relevant units try their best to deny it, the facts and objective figures cannot be denied. All of this can be proved by time, and many of them have already been proved.
- “How many fabs and houses does TSMC have currently and in the future?“
- “TSMC negative corp culture and management style are detrimental to its future and growth“
- “The TSMC cost, sell price, and R&D cost of chip foundry“
- “Comparison of TSMC, Samsung, Intel’s Yield and Advanced Process”
- “ASML, who dominate TSMC’s fate“
- “Comparison of TSMC, Intel, and Samsung’s new process roadmaps for future chips“
- “Two long-term threats to TSMC: US and SMIC“
- “Why is TSMC’s profit margin much greater than competitors?“
- “How does TSMC make money?“
- “Zyvex and sub-nanometer semiconductor processes, will Zyvex threat TSMC?“
- “TSMC gets emerging and serious challenges“
- “How does Intel make money? and the benefits to invest in it“
- “Intel’s current difficult dilemma“
- “6 common wrong semiconductor investment myths“
- “The lucrative semiconductor supply chain”
- “Global semiconductor chip market in detail“
- “How does Texas Instruments make money? Amazing long term capital reward and company net profit margin!“
- “How AMD makes money? A rare case of turning defeat into victory“
- “Why is AMD’s performance so jaw-dropping?“
- “Qualcomm diversifies success, no nonger highly dependend on phone“
- “How does nVidia make money, Nvidia is changing the gaming rules“
- “Significant changes in Broadcom’s business approach“
- “Global semiconductor chip market in detail, big dominators and markets“
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