TSMC New US Fab to Dent Profits, Hard to Transfer Costs to Customers

· For the already exorbitant 5/4/3nm chips, how to accurately calculate costs and profits in price negotiations with customers will be a significant challenge for TSMC.

· The cost of producing the same chip product in the US is 50% higher than in Taiwan, and no reason can be found for maintaining viable production in America.

· TSMC had earlier announced volume production of its 5nm chips at the Arizona fab set to start in 2024.

· Total investments in both phases are estimated to top US$40 billion (Rs. 2.80 lakh crs).

· The foundry is optimistic that even if production capacity is increased outside of Taiwan, a long-term gross margin of over 53% will remain achievable.

TSMC could hardly achieve profitable mass production of 5/4/3nm chips at its new plant under construction in the US, and will find it a tough challenge to transfer part of its huge construction costs to customers, according to semiconductor equipment supply chain sources.

The overall construction and equipment installation progress at TSMC's new wafer fab in the southwestern state of Arizona reportedly have been delayed, while the foundry also has to tackle serious manpower shortages, soaring costs and emerging education and adaptation issues involving Taiwanese and foreign employees, the sources said.

For the already exorbitant 5/4/3nm chips, how to accurately calculate costs and profits in price negotiations with customers will be a significant challenge for TSMC, particularly under the inevitable increase in the cost of wafer production in the US, the sources stressed.

In fact, TSMC founder Morris Chang had repeatedly stressed that the US efforts to increase onshore manufacturing of semiconductors is wasteful and an expensive exercise in futility due to a lack of manufacturing talent and extremely high costs. He also noted that the cost of producing the same chip product in the US is 50% higher than in Taiwan, and no reason can be found for maintaining viable production in America.

Nevertheless, apparently bowing to geopolitical pressure from the US, TSMC had earlier announced volume production of its 5nm chips at the Arizona fab set to start in 2024 will be upgraded to 4nm chips, and it is also proceeding with second-phase construction at the same manufacturing complex, which is scheduled to commercialize 3nm chip production in 2026. Its total investments in both phases are estimated to top US$40 billion (Rs. 2.80 lakh crs), marking the largest-ever direct foreign investment project.

Industry observers said that apart from fulfilling orders from the US government for military defense and other specific chip demands, TSMC will have to start to adjust taking orders from American customers and maintain a regular capacity utilization of at least 70-80% to avoid a serious drag on its overall profitability. The foundry will inevitably face the challenge of how to persuade clients to share part of its huge construction and manufacturing cost increases for the US plant.

The US Department of Commerce recently has started accepting applications for a US$39 billion chip production incentive program under its CHIPS Act, but has imposed a number of conditions, including that companies receiving the subsidies are required to share profits with the US government and that they cannot expand semiconductor production capacity in countries of concern within 10 years. Most importantly, the subsidies must be returned if the recipient fails to complete investment and construction as planned.

Industry sources commented the conditions are quite unreasonable and will greatly compound production and operation predicaments for TSMC and other large semiconductor players already kicking off capacity expansions in the US, as well as their huge supply chain partners.

For TSMC, whose production expansion costs in the US are already higher than in Taiwan, it has no other choice but to pass part of the costs to the supply chain partners and customers, not to mention Intel and Samsung Electronics, which are less efficient than TSMC in fab construction and capacity expansion, the sources said.

Semiconductor equipment suppliers noted that based on its current progress of engineering and equipment installation, the new TSMC fab in the US will be unlikely to fully scale up production in 2024, and may be delayed to 2025.

Meanwhile, Nvidia has announced it will place wafer starts at the new US fab, but TSMC will find limited room for further foundry quote increases now that it has enforced a 6% hike in 2023.

In response market doubts about its profitability prospects, TSMC has said confidently that it has the ability to absorb higher costs of overseas wafer fabs and will continue to provide customers with the most efficient and cost-effective manufacturing services no matter where its plants are located. The foundry is optimistic that even if production capacity is increased outside of Taiwan, a long-term gross margin of over 53% will remain achievable.

But TSMC has yet to clearly reveal how it will absorb high extra costs for building its new US fab, equipment vendors said, adding that based on the past experiences, if the supply chain partners and clients cannot share the costs, TSMC's profit growth momentum will fall short of market expectations, resulting in profit decreases.