Brian Bandsma

Taiwan Semiconductor Thinking Too Far Ahead

They want to upgrade to 16" wafers for the same reason they are going from 8" to 12". The per chip costs goes down by 30%. Just like most Taiwanese hardware manufacturers the business model is to bring costs down. As mentioned very few companies are willing or able to make that kind of investment, especially US based ones. Hence more IDM outsourcing to foundries, even more so if you can no longer compete with the cost structure. Although TSMC is 40-50% of the foundry business, depending on how you measure it, it is only 7% of total global semiconductor manufacturing.

I would also not be too quick to criticize Morris as his past investment decisions have built a company that is unmatched in the industry. As I recall, TSMC has an R&D budget equal to the next three largest foundries combined. So pushing the technology curve forward is a critical competitive advantage for the company.

Even in this seasonally weak quarter the company still generates an annualized ROE of 24%, ex-cash. And it is the only foundry that is consistantly profitable. Even when the tech bubble burst and orders dropped off a cliff they still generated a 10% operating margin.