Should Taiwan Semiconductor Worry About Increased Competition?

It's well known that Taiwan Semiconductor (NYSE: TSM  ) had a virtual monopoly on 28-nanometer capacity during 2011 and 2012. Samsung (NASDAQOTH: SSNLF  ) , which looks to be on track to be the second largest general purpose foundry, managed to get its own 28-nanometer process out in high volume in time for Apple's iPhone 5s ramp, but this was years after TSMC began shipping wafers to customers.

The question, however, is whether TSMC -- which enjoyed robust margin expansion as a result of this 28-nanometer lead -- will be able to continue this pseudo-monopoly going forward.

28-nanometer is getting crowded
With Samsung, Semiconductor Manufacturing International (NYSE: SMI  ) , Global Foundries, and United Microelectronics all ready (or readying) viable 28-nanometer manufacturing technologies, the 28-nanometer market is going to get pretty crowded.

In fact, Semiconductor Manufacturing International recently scored 28-nanometer orders for Qualcomm's Snapdragon processors (the world's most popular mobile chips), and is even readying specialty processes for things like RF front end in a bid to capture even more Qualcomm business. 

The good news for TSMC is that at this point, its cost structure is probably better as the 28-nanometer factories have been running for quite some time, which means that the ability to compete on price on the part of its competitors is probably limited.

Additionally, TSMC's yields are probably better as it has had more time to improve them (which again helps TSMC's cost structure/margins). The bad news is that with more competition, average revenue per wafer could come down a bit.

Beyond 28-nanometer? We'll see.
There have been a lot of claims from many of the other semiconductor foundries claiming that the move to 20-nanometer and the 14-nanometer FinFET node will be extremely swift, but this is simply hard to believe. Moving from one manufacturing node to another has been getting harder, not easier, both from the actual manufacturing side of things as well as from the design side of things.

It seems unlikely that TSMC -- which has been ahead at 28, and now at 20 -- will all of a sudden "lose" its lead at next-generation nodes in terms of when products ramp at good yields in volume to the market. If this thesis holds true, then TSMC should continue to have cost structure and pricing power advantages at next-generation manufacturing technologies relative to its general-purpose foundry peers.

Foolish bottom line
It does seem likely that competition at 28-nanometer will intensify, which could somewhat pressure TSMC's margins and market share. However, it looks like TSMC should have a non-trivial lead over its general-purpose foundry competitors at the leading edge. If this is the case, then TSMC should be able to continue its robust revenue growth (as wafer prices continue to rise) as well as its high-40% gross margin profile.

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of these devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and to see Apple's newest smart gizmo, just click here!

Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 11, 2014, at 12:36 AM, chen5631867 wrote:

    Well, you do not worry to TSMC losing their marking shares. Last 5 years, there are more than 40 wafer manufactures were closed worldwide because of the economic crisis.

    Now, all design houses ask for more allocations of producing their products. These companies did place orders, but do not take parts so that these foundry manufactures sell their wafer manufacture and cut investments.

  • Report this Comment On July 11, 2014, at 12:39 AM, chen5631867 wrote:

    All foundry are in overbooking more than twice spaces. They are booming three more yrs.

  • Report this Comment On July 13, 2014, at 12:34 PM, unprogrammable wrote:

    They can't build 20nm fabs quick enough and are getting top dollar for 20nm. They have said they will be running at capacity for 2014 and beyond.

  • Report this Comment On July 14, 2014, at 4:24 PM, chen5631867 wrote:

    If you are not able to produce eough orders for your customers, you just raise your prices to your customers for building more parts to fill your orders. It is too many bad news for semi manufacturing over passing five years, if you are surviving then you make more money, and lots companys were out of business such sanyo..., you do see Micron starting making moneys too. You do not worry if you do not make money, and try to getting from governments that do not work forever.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3022063, ~/Articles/ArticleHandler.aspx, 8/29/2015 11:07:05 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Ashraf Eassa

Ashraf Eassa is a technology specialist with The Motley Fool. He writes mostly about technology stocks, but is especially interested in anything related to chips -- the semiconductor kind, that is. Follow him on Twitter:

Today's Market

updated 13 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
AAPL $113.29 Up +0.37 +0.33%
Apple CAPS Rating: ****
QCOM $57.45 Up +0.09 +0.16%
Qualcomm CAPS Rating: ****
SMI $4.35 Down -0.05 -1.14%
Semiconductor Manu… CAPS Rating: **
SSNLF $875.00 Up +25.00 +2.94%
Samsung CAPS Rating: ***
TSM $20.00 Up +0.06 +0.30%
Taiwan Semiconduct… CAPS Rating: ****
UMC $1.73 Up +0.01 +0.58%
United Microelectr… CAPS Rating: *****