Inside nearly every electronic device are tiny fragments of silicon, called semiconductors, which are crucial for the appliance to function. This makes them the backbone of the modern world, and the technology sector are forever demanding them to be smaller and more efficient. However, in this sector, Taiwan Semiconductor Manufacturing Company (TSMC) rise above the rest. They produce the most advanced semiconductors, giving them a dominant position in one of the most important industries in the world.
TSMC are the world’s most valuable semiconductor manufacturing company, with a market share of 51%. The firm’s financials are strong, with revenue growing at a compound rate of 17.4% of earnings since 1994, and in 2020, revenue reached a record 47.95 billion USD. TMSC is a technological leader, due to large investments in Research and Development (R&D), amounting to 8.4% of revenue in 2020.
Only three companies are considered to be major players in this industry: Samsung, TSMC and Intel. The demand for constant innovation leads to the status of industry leader being a relatively dynamic position. One example is Intel, whose position as being the global leader in this sector has diminished over the past decade. The company is struggling to compete with its rivals, such as TSMC, and progress into making new generation semiconductors. Firms in the technology sector demand the most advanced semiconductors for their products, so it is imperative that TSMC are successful in being able to develop new technology.
The semiconductor industry is highly cyclical, due to the relatively short life span of new technological advancements, which become obsolete quickly. This causes booms in the market when advances are made, which are in high demand and short supply. Conversely, when companies have made adequate reserves of these advanced semiconductors, demand decreases, resulting in a downswing in the market. Therefore, TSMC’s financial results undergo macrotrends over the course of several years, and earnings generally peak annually in Q3 and are lowest in Q1.
TSMC are projected to increase revenue by 24% this year, due to global semiconductor shortages and increased demand due to the world economy reopening after the COVID-19 Pandemic. This has lead to them increasing prices by 20%, with gross profit margins rising to 50%. However there are fears that global material shortages are constraining capacity, which could cause margins to fall. Issues arising in the procurement of silicon itself are causing manufacturing costs to increase, and this could continue long into the future. In a recent speech to investors, Chief Executive CC Wei said “We expect our capacity to remain tight in 2021 and throughout 2022,” which gives these fears considerable weight. Although 100 billion USD has been set aside to increase production capacity in the upcoming years, this will not help resolve their considerable supply issues.
Additionally, despite their financial success, TSMC share price has faltered from all-time highs in January 2021 at a price per share of 673 USD, to 595 USD in October. This may be due to geopolitical issues in Taiwan, where TSMC is located. Consequently, they plan to build a 12 billion USD plant in Arizona, will help to reduce the effect that geopolitics will have on TSMC. It will be the firm’s first foreign factory and will also help to match increased global demand.
For the foreseeable future, the semiconductor market looks to be expanding. New developments that require lots of this technology, such as self-driving cars, are becoming much more commonplace. Furthermore, TSMC is capitalising on its status as a market leader by investing in production capacity and R&D. However, it will take a significant amount of time for TSMC to increase capacity, and the indefinite shortage of materials required for manufacturing will see reduced profit margins. A downturn in demand is expected, as companies will eventually have time to make large reserves of semiconductors, so a disappointing financial performance may occur over the next few years. However, TSMC should be viewed on the timeline of decades; as the firm has excellent prospects, due to its status as the market leader in a crucially important sector in today’s economy.
By Alexander de Souza
Sector Head: Dylan Buckley