What challenges are behind TSMC's high revenue?

What challenges are behind TSMC’s high revenue?

2024-08-10

Produced by Zhineng Smart Chip

As a giant in the global semiconductor manufacturing field, TSMC set a new revenue record in the second quarter. This is undoubtedly a remarkable achievement. However, there are also hidden concerns behind it.

Revenues hit record highs, but its gross profit and operating profit have not yet returned to their previous peak levels.Semiconductor manufacturing is a capital-intensive industry, and TSMC needs to continue to invest large amounts of money in equipment maintenance and upkeep to ensure the stability of its manufacturing capabilities.

In the past few years, TSMC's capital expenditure has significantly exceeded the maintenance level. Although it has now been adjusted to slightly above the maintenance level, the commissioning of new capacity has reduced utilization revenue. While TSMC management reported an increase in manufacturing utilization, there is still idle capacity, which means that TSMC still has room for optimization in terms of capacity planning and matching market demand.

Part 1

TSMC's business status and challenges

There are many factors that affect TSMC's gross profit margin.Inflation has led to rising material costs, and as the largest electricity consumer in Taiwan, TSMC faces tremendous pressure on electricity costs.Rising electricity prices as investments in new clean electricity increased also had a negative impact on its gross profit.

In addition, the higher operating costs of the Arizona and Kumamoto manufacturing plants in the future, as well as the time and resources consumed in the conversion from 5nm to 2nm process, will pose challenges to gross profit margin.

In terms of market perspective, TSMC is gradually becoming an important supplier in the high-performance computing industry.Although the mobile business remains important, its share has declined due to changing demands from customers such as Apple.

HPC business revenue has shown an amazing growth trend.Both the annual and quarterly growth rates have been outstanding, which has led TSMC to gradually shift its business structure toward high-performance computing.

Technology has always been TSMC's core competitiveness.In terms of process technology, TSMC's 2nm business transformation is highly anticipated. Although Apple has obtained exclusive rights to the new 2N process, it is not expected that this situation will last as long as the 3nm process.

TSMC expects the transformation of its 2nm business to be faster than ever before.The customers involved will also be more extensive, including Nvidia, AMD and Intel. From the perspective of business growth, the growth of TSMC's 3nm business does not rely solely on Apple as a single customer.

Although Apple's business is seasonal, the significant growth of 3nm business in the second quarter indicates that new products from other customers have contributed to its revenue.It could be Intel's Lunar Lake or AMD's Instinct series, etc. This reflects TSMC's transformation from relying on a few cutting-edge technology customers to having many customers, and its importance to customers in the field of high-performance computing is becoming increasingly prominent.

Part 2

TSMC's Technological Breakthroughs and Development Strategies

In terms of technology development, TSMC continues to advance process technology upgrades, bringing significant performance improvements to customers.The N16 process has obvious application advantages in specific HPC products and is planned to be mass-produced in the second half of 2026.

At the same time, TSMC's N2P process, as an intermediate upgrade, brings benefits almost equivalent to a new process node, with lower risks and costs, which is very attractive to AI GPU competitors.

Advanced packaging technology is a key driver of TSMC's Foundry 2.0 strategy.Despite TSMC's efforts to increase production capacity for advanced packaging technology, it is currently unable to meet market demand.

but,As the yield rate increases, the profit margin is gradually approaching the corporate average.Through the Foundry 2.0 strategy, TSMC aims to transform itself from a component company to a subsystem company, reducing its reliance on Moore's Law while controlling more supply chain links and consolidating its supplier position among CPU and GPU customers.

TSMC's capital allocation strategy also reflects the importance it places on each business area.Although new advanced packaging, testing and mass production only account for 10% of the total capital expenditure budget, this investment is already considerable for the testing and packaging industry. Compared with traditional OSAT companies, TSMC's large-scale investment shows its determination to enter this field.

TSMC's new strategy is very comprehensive and ambitious.While competitors such as Intel and Samsung are still struggling to operate advanced foundry nodes and expand their customer base, TSMC has taken the lead in expanding its business into advanced packaging, further enhancing its position among key AI customers. This strategic transformation is expected to not only enhance TSMC's bargaining power, but also enable it to create more value in the AI era.

summary

TSMC is also facing many challenges. Intensified market competition, high investment in technology research and development, rising costs, and supply chain uncertainties all require TSMC to continue to respond and optimize.

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