Taiwan Semiconductor’s Technology Dominance And Its Impact On Customers And Suppliers (NYSE:TSM)

On Jan. 10, 2020 I wrote a Seeking Alpha article entitled Taiwan Semiconductor (NYSE:TSM): My Top Pick For 2020 As It Transforms The Semiconductor Market.

The stock is up 78% YTD, and the company reported 3Q earnings with net profit surging 36% to a record T$137.3 billion ($4.8 billion). Revenue beat the company's own estimates, climbing 29.2% to $12.1 billion. The chipmaker now expects 2020 sales to climb more than 30% in dollar terms, compared with a previous forecast of growth of more than 20%.

Revenue increased in the quarter due to Apple's (AAPL) purchases for its new phones and from a boost during the quarter as China’s Huawei, the second-largest customer of TSMC (TSM), raced to stockpile supplies before a U.S. ban on shipments to the Chinese telecom giant came into effect last month.

The point I want to make in this article is that TSMC is such a dominant force in the semiconductor industry, it impacts companies up and down the entire semiconductor supply chain. It will first detail what's so good about TSMC and why it's my top company, then in this article I will analyzed the supply chain, from companies supplying equipment to companies using TSMC to make their chips.

Top Foundry Worldwide

Chart 1 shows that TSMC’s global foundry share has been above 50% since 2014, when the company started increasing production at the 16/20nm node, increasing its share at that node to 21% of revenues at the end of 2014.

Chart 1

Not only does TSMC dominate the foundry market in overall revenues, it also dominates in revenues by technology node.

Chart 2 shows revenue-based share of TSMC, UMC (UMC), and SMIC (OTCQX:SMICY) by technology node for 2019. The U.S. government’s freeze on SMIC means that the company will be restricted from purchasing 7nm and below equipment, primarily EUV lithography systems. I discussed these issues in a Sept. 15, 2020 Seeking Alpha article entitled “TSMC And Samsung Electronics Foundry Business Post SMIC Blockade.”

Of the three foundries, only TSMC has the capability of manufacturing chips at the 14nm node or smaller. At the 28nm/14nm node, TSMC clearly dominates with a 38% share compared just 13% for SMIC and 11% for UMC.

Chart 2

Chart 3 shows total capacity share based on wafers (not revenues as above). TSMC dominates with a 40% share. It's important to note that TSMC's revenue share of 55% is significantly higher that a unit-based 40% share because of the larger ASPs of it wafers due to its lead at smaller nodes, commanding higher prices.

Chart 3

Implications For Key Customers

Apple

In 2019, nearly 40% of TSMC’s revenues came from Apple. As shown in Table 1, TSMC has been gradually miniaturizing its process over the years, going from a 16nm A10 chip in iPhone 7 models to a 7nm A13 chip in iPhone 11 models. iPhone 12 models are expected to use a 5nm A14 chip.

Intel

When Intel moved to 14 nanometers, things started to slow. Chips based on the 14-nanometer process took three years instead of two. The company also began to introduce other innovations in new materials, such as cobalt.

With the 10-nanometer process, things slowed even further. Intel launched a chip called Cannon Lake based on the 10-nanometer process in 2018, after it was originally planned for 2016.

According to the current Intel timeline projection, its 7nm process will be at least four years behind TSMC and three years behind Samsung. The company has been lagging behind node migration after the 14nm and 10nm nodes were delayed for multiple times and finally launched in 2019.

Intel’s prior 10nm pushout did not impact ASML’s EUV shipments. However, for 7nm and the need for EUV systems, the pushout of 7nm until 2022 would suggest delays in Intel purchases.

I contend that Intel pushed out four EUV systems until 2021. That represents a reduction in ASML revenues of more than $500 million for 2020.

EUV sales represented 20% of the $55 billion WFE equipment market in 2019. Pushouts of the estimated four EUV systems equates to $2.4 billion in ancillary processing equipment such as deposition and etch from Applied Materials (AMAT) and Lam Research (LRCX).

AMD

Globalfoundries is actually AMD's own former fabrication division that they spun off to save themselves from bankruptcy in 2009. In 2017, AMD introduced its Zen architecture, manufactured by Globalfoundries at the 14nm node. This was the beginning of AMD’s CPU share increase against Intel, as shown in Chart 4. In 2018, AMD started shifting the production of their CPUs and GPUs to TSMC, following GlobalFoundries' announcement that they were halting development of their 7 nm process.

Chart 4

It is estimated that TSMC has a 7nm capacity of 140,000 wpm (wafers per month) and a total capacity of 1,025,000 wpm. It’s also estimated that AMD will contract for 200,000 wafers over the whole of next year (17,000 wpm), making it TSMC’s largest customer on 7nm.

AMD announced in March 2020 that EPYC Milan, the follow-on to the EPYC Rome chips, will arrive on time by the end of 2020. These chips will come with the Zen 3 architecture and 7nm process. AMD's EPYC Rome processors already are serious challengers for Intel's Cascade Lake lineup, and the fast-follow with Milan will only intensify the competition.

AMD's road maps indicate the company will have its EPYC Genoa processors fully on the market by the end of 2022. Those chips will come with the 5nm process and Zen 4 architecture.

Investor Takeaway

TSMC has a total foundry capacity of 1,025 million wafer per month compared to 380 million wpm for Samsung. In addition, TSMC ramped up purchases starting in 2017, so that through 2020 I estimate TSMC will have 44 systems installed. Samsung will have just 19 systems installed. This suggests that TSMC has at least twice the 7nm and smaller capacity than Samsung based on one EUV system for every 45k wafer starts per month.

As a result, advanced chip companies including Apple, AMD, and Nvidia are utilizing TSMC over Samsung to make chips. Intel’s 7nm chips are also being made at TSMC.

While TSMC has indicated in the recent quarterly earnings call that it would raise capex in 2020, which is good for semi cap stocks, the 7nm delay at Intel will be negative for these companies. I estimate four EUV systems will be pushed out which could push out $2.4 billion in ancillary process equipment purchased.

This free article presents my analysis of this semiconductor sector. A more detailed analysis is available on my Marketplace newsletter site Semiconductor Deep Dive. You can learn more about it here and start a risk free 2 week trial now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments are closed.