TSMC Faces Pressure to Expand U.S. Operations Amid Cost Challenges
Summary:
- TSMC is under pressure from the U.S. to invest in five additional wafer fabs, escalating its initial commitment of $165 billion.
- The construction costs in the U.S. are projected to be significantly higher than in Taiwan, affecting TSMC’s profit margins.
- Increased production costs could severely impact TSMC’s competitive edge in the semiconductor market.
The Taiwanese semiconductor giant TSMC (Taiwan Semiconductor Manufacturing Company) has recently found itself in a challenging position as the United States government has demanded that the company expand its operations by constructing five additional wafer fabrication plants (fabs) in the region. Initially, TSMC had committed to a $165 billion investment, intended to bolster its manufacturing capabilities in the U.S., but the latest demands underscore a growing concern over the country’s semiconductor production capabilities.
While specific details regarding the additional fabs remain undisclosed, the implications of this request are significant. It is expected that these expansions will enhance production capabilities on U.S. soil, a move that serves national interests. However, these expansions pose considerable challenges for TSMC, which faces escalating costs and operational hurdles.
In 2020, TSMC had hesitated to establish factories in the United States, but mounting pressure resulted in a shift in strategy. The company ultimately announced an investment of $65 billion for the construction of two factories. Additionally, last year, TSMC was compelled to earmark another $100 billion for three more fabs, justified by concerns over diversity and equity in staffing practices.
The potential addition of five more fabs could necessitate an investment surge into the hundreds of billions of dollars. This not only risks depleting TSMC’s financial resources but also involves transferring valuable technical personnel to the U.S., which could affect the company’s operational profits significantly.
Former TSMC founder Morris Chang has previously indicated that the cost of establishing manufacturing facilities in the U.S. is approximately 50% higher than that of local operations. However, insiders suggest that the actual disparity in costs may be even greater. Former CEO C.C. Wei disclosed that the expenses involved in constructing U.S. factories can be four to five times higher than TSMC’s existing facilities in Taiwan. Compounding this issue are labor shortages, inflation, and regulatory complexities that further complicate cost assessments.
At a financial level, TSMC CFO Wendell Huang has noted that the gross profit margins might be diluted by 2-3 percentage points due to the international expansion. However, with a clearer understanding of the overseas factory development strategy, expectations have shifted, and the assessment now indicates a potential margin reduction of 3-4 percentage points over the next five years.
Although these reductions seem minimal, their impacts can be profound. For instance, recent analyses highlight a stark contrast in production costs for 12-inch wafers between U.S. and Taiwanese facilities. The cost of producing wafers in a U.S. 5nm factory has reportedly reached $16,000 per wafer, in stark contrast to the approximate $6,681 cost in TSMC’s local plants. This discrepancy also reveals a substantial divergence in gross profits: $1,377 for U.S. fabs versus $10,819 for those in Taiwan. As a result, gross profit margins for U.S. facilities could plummet from 62% domestically to a mere 8% for the expanded operations.
Beyond initial construction expenses, the ongoing operating costs in the U.S. remain prohibitively high. At a ratio of 2.4 times greater than that of local factories, the sustained production costs pose long-term challenges to TSMC’s ability to maintain healthy gross profit margins. Such financial strain could compromise the company’s competitive position in the ever-evolving semiconductor landscape.
As TSMC grapples with these demands and cost realities, it must navigate a precarious balance between meeting governmental expectations and ensuring its financial viability. The outcome of this situation will be pivotal, not just for TSMC but for the broader semiconductor industry, as nations vie for dominance in this critical technological domain.
In conclusion, the expanded investment in the United States could redefine TSMC’s operational strategy, with potential repercussions for the company’s market standing and profit margins. As this situation unfolds, industry stakeholders will be keenly observing TSMC’s next moves in response to external pressures and internal challenges.
