The semiconductor industry has recently experienced a trend of reducing prices to offset losses. While the United States is a major consumer of chips, TSMC's entry into the market may not be a wise move. According to semiconductor equipment supply chain sources cited in a DigiTimes report, TSMC may find it difficult to achieve profitable mass production of 5/4/3nm chips at its new plant under construction in Arizona, and it will be a challenge to transfer part of its enormous construction costs to customers.
Sources suggest that the construction and equipment installation progress at TSMC's new wafer fab has been delayed, while the company is also facing serious manpower shortages, increasing costs, and education and adaptation issues involving Taiwanese and foreign employees. For the already expensive 5/4/3nm chips, it will be a significant challenge for TSMC to accurately calculate costs and profits in price negotiations with customers, particularly considering the inevitable increase in the cost of wafer production in the US.
Despite TSMC founder Morris Chang's previous statements that onshore semiconductor manufacturing in the US is an expensive exercise due to a lack of talent and high costs, TSMC has been pushed by geopolitical pressure from the US to upgrade its Arizona fab to 4nm chips with volume production set to start in 2024. It is also proceeding with the second phase of construction at the same manufacturing complex, with commercial production of 3nm chips planned for 2026. TSMC's total investments in both phases are expected to exceed US$40 billion, making it the largest-ever direct foreign investment project.
Industry observers suggest that aside from fulfilling orders from the US government for military defense and other specific chip demands, TSMC will have to start taking orders from American customers to maintain a regular capacity utilization of at least 70-80% and avoid a serious drag on overall profitability. However, the foundry will inevitably face the challenge of persuading clients to share part of its enormous construction and manufacturing cost increases for the US plant.
The US Department of Commerce has recently started accepting applications for its US$39 billion chip production incentive program under the CHIPS Act, but with several conditions. Companies receiving subsidies are required to share profits with the US government, cannot expand semiconductor production capacity in countries of concern within 10 years, and must return the subsidies if they fail to complete investment and construction as planned. The conditions are considered unreasonable by industry sources and will greatly compound production and operation challenges for TSMC and other large semiconductor players.
TSMC has confidently stated 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, regardless of the location of its plants. However, the company has yet to clearly reveal how it will absorb the extra costs of building its new US fab. If the supply chain partners and clients cannot share the costs, TSMC's profit growth momentum may fall short of market expectations, resulting in profit decreases.