The Business Of

Semiconductors | TSMC | Outlook

Morning All!

TGIF! The weekend is so close! But before we get there, we’ve got one final newsletter to round off The Business Of TSMC. Let’s have a quick recap of some of the fun, surprising things we’ve learnt about TSMC this week.

• How Do They Make Money - TSMC made $69bn in revenue last year. And $18bn of that was from one customer… Apple!

• What Are Their Margins - The average S&P500 company has an EBIT margin of 12%. TSMC’s is 50%… outrageous.

• What Do They Do With Their Profits - The cost of building just one fab (the buildings where chips are made) is anywhere between $5-15bn!

And so, like we saw with Nvidia last week, TSMC has a lot going for it. So much so, that even the world’s most famous investor bought shares in the company last year! However, before we close for the week, let’s quickly touch on some of the potential hurdles that may come TSMC’s way. But first…

Career Talk - Consulting

That’s right! It’s the next edition of our Career Talk newsletters. And this week we’re exploring Consulting with my friend Candace Tang. After graduating from the University of Chicago in 2017, Candace worked in Sales at companies like GLG and Meltwater. Before enrolling at London Business School in 2021. She joined McKinsey as a Summer Associate in 2022 before being offered the full-time role post-MBA!

I’ll be chatting to Candace about:

• what consulting actually is,

• how she got into McKinsey despite not having consulting experience before,

• examples of consulting projects she’s worked on, and,

• advice she’d give students wanting to get into this industry.

It really isn’t one to miss! Especially for anyone who’s interested in consulting! But before you click on that, let’s dive into the outlook for TSMC.

Cerebras… No Problem

So, I think a good place to start is going through some of the challenges we talked about last week for Nvidia. Because if Nvidia are facing certain risks. And Nvidia is a customer of TSMC - maybe TSMC will be affected by them too?

Well, the first potential hurdle we talked about for Nvidia was Cerebras. The US startup has developed a unique way of powering AI computing. Their wafers (on the left in the photo below) are much bigger, and faster than Nvidia’s chips (on the right). And the worry for Nvidia investors is that customers may start to prefer the chips from Cerebras.

Now, let’s say that Cerebas take customers away from Nvidia. And AMD. And most of TSMC’s customers who provide chips for AI computing solutions. And let’s say this becomes a real Blockbuster-Netflix scenario and Cerebras actually take ALL of Nvidia and AMD’s customers. This won’t happen - but I’m just using the hypothetical to make a point!

What would this mean for TSMC? Well, if the demand for Nvidia’s and AMD’s chips go down. Then Nvidia and AMD won’t need to ask TSMC to make as many chips. And TSMC will lose lots of revenue from 2 of their main customers right? Well, yes, that’s absolutely right. But the question we have to ask is - who’s making Cerebras chips?

And you guessed it… it’s TSMC! In fact, back in 2020, TSMC actually stated they they see a huge future for the massive chips that Cerebras design. The point I’m trying to make is that TSMC are indifferent to who wins out of Nvidia, AMD or Cerebras. If all of Nvidia and AMD’s customers leave and go to Cerebras - nothing really changes for TSMC. They’ll still be making the chips and making money!

Going In-House… No Problem

Okay, so the rise of Cerebras could affect Nvidia. But not really TSMC. But what about the second threat we talked about for Nvidia. The fact that many of their big customers - like Facebook, Amazon, Tesla - are taking chip designing in-house. Meaning that they won’t ask Nvidia to design chips for them - but hire their own team to do it for them.

Again, this could see Nvidia lose some big customers over time. But again, the question is - does it affect TSMC? And the answer again is a resounding no!

Why isn’t this an issue for TSMC? Well, because whilst these massive companies may be designing their own chips. They sure as heck aren’t going to be making their own chips. Because this would require building their own fabs. And as we saw yesterday, these massive structures take 3 years to build and cost upwards of $10bn!

Some of you may be wondering - surely these companies can afford to spend $10bn on a fab? So why am I so sure that they won’t? Well, because if there was any company on Earth that had the cash and incentive to create their own fab. It would be Apple. And even they’re not doing it! Because manufacturing chips like TSMC isn’t just about building a fab. There’s so much expertise and learning involved.

Even Intel - a company who’s been making chips for decades, has found it impossible to keep up with TSMC. So, would Apple be able to make chips like TSMC just by throwing cash at the problem - unlikely. And so, again, TSMC is indifferent to to this issue. Whether Facebook continue with Nvidia or design their own chips - nothing really changes for TSMC. They’ll still be making the chips and making money!

Okay, But Surely TSMC Have Some Worries?!

Right, so we’ve gone through the 2 concerns we had for Nvidia last week. And it doesn’t seem like they’re much of an issue for TSMC. But then, what is a concern for TSMC?

Well, one key risk commentators in the industry talk about is competition. More specifically, that Intel and Samsung, two of TSMC’s competitors are investing heavily to catch up with the Taiwanese leader. Last year, Intel announced that they’d invest $20bn to expand their fab operations in the US. And $70bn globally. Samsung are investing even heavier! With the company last year announcing a $355bn investment plan over the next 5-years. Some of that $355bn is for other tech mind you…

What could this mean for TSMC? Well, for so long, TSMC has been the leader in innovation. They’ve developed the smallest and most advanced chips faster than Intel and Samsung. And so chip designers have chosen them to make their chips. Remember, Intel used to actually make chips for Apple’s Macs. But because TSMC begun to make more advanced chips, Apple left Intel!

However, if Intel and Samsung are investing in these new fabs. And they’re able to start developing smaller and more advanced chips faster than TSMC. It could erode the advantage TSMC has. Apple and other customers may start to take some of their orders away from TSMC and give them to Intel or Samsung…

Now, whilst Intel and Samsung are looking to close the gap. It’s not like TSMC are watching Intel invest loads and are waiting for them to catch up! TSMC are investing a lot themselves. In fact, the Taiwanese giant announced a $120bn investment plan in 2022. Which will include building 4 new fabs in Taiwan. Oh, and remember the fab they’re currently building in Arizona for $12bn? Well, they’ve upped this to $40bn so they can build a 2nd fab there!

And like we mentioned yesterday, TSMC is already developing 2nm chips. Which are super advanced! Experts say that when iPhones are powered by 2nm chips. They’ll be able to last 4 days without the need to charge! There’s obviously plenty of other benefits. But for someone who’s phone is always out of battery, I’m very excited!

What About Geopolitics?

Okay, so last section for the week! And it’s something we’ve touched on already. But the geopolitical landscape in Taiwan is pretty sticky at the moment. With China keen to regain control over the region, the future remains uncertain for Taiwan. But what could be the possible impacts on TSMC?

Well, something that we’ve already seen happen is that governments around the world are trying to reduce their reliance on Taiwan. And hence, TSMC. The US and the EU have both come up with their own CHIPS Acts. Which are basically governments saying that they’ll invest lots of money. To subsidise companies who want to build fabs. For example, Intel’s $20bn fab project will be using government subsidies. And below is Joe Biden speaking at the inauguration of Intel’s project.

As more fabs spring up around the US/EU, we may see Western firms take orders away from Taiwan. And give them to local fabs. Especially if Intel and Samsung’s technologies get close to TSMC’s. This would reduce the risks for US/EU companies from conflict in Taiwan. But it would clearly be detrimental to TSMC’s revenues.

However, the Taiwan-China situation isn’t the only factor at play when it comes to geopolitics. The tensions between the US and China have been bubbling up for a while. And the latest stand-offs are happening in the semiconductor industry. Under the CHIPS Act - companies who receive US subsidies can’t sell chips to China or build leading-edge facilities in the country. 10% of TSMC’s revenue comes from China. And whilst this isn’t a huge proportion, the company will still need to make up some lost revenue!

12th May 2023

Nigel Jacob CFA