Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is the world's largest contract chip manufacturer. It serves a broad range of customers building an even broader range of products, spanning from low-cost mobile applications processors all the way to state-of-the-art artificial intelligence chips.
Though TSMC is extremely successful, it has historically operated, and continues to do so, in a highly competitive environment. That competition also isn't concentrated in a single area or technology segment; it has competitors vying for business on older, mature technologies as well as for its business at the cutting edge of chip manufacturing.
On the company's most recent earnings call, TSMC co-CEO C.C. Wei offered some commentary around its competitive positioning, "especially on those 16-nanometer, 28-nanometer and all the technology nodes." Let's dig into Wei's comments.
TSMC's three big advantages
Wei began his commentary vis-a-vis competitive positioning by saying that TSMC's "policy is to achieve full utilization of our [manufacturing] capacity in all [manufacturing] nodes." It is important for chip manufacturing companies to achieve high factory utilization rates because higher factory utilization translates into better margins.
"We believe we can achieve this objective because we compete from a position of strength," Wei continued. The executive then went on to enumerate the company's strengths. The first, Wei said, is that the company develops "many derivative technologies to satisfy all customers' requirements." One high-profile example of TSMC doing just this is the company's 12-nanometer FFN technology. This is a derivative of TSMC's 12-nanometer technology designed specifically for graphics specialist NVIDIA's (NASDAQ:NVDA) needs (the 'N' presumably stands for "NVIDIA"). The second advantage, per Wei, is that TSMC is "trusted by [its] customers."
TSMC's long track record as a contract chip manufacturer, coupled with the fact that it is a pure-play chip manufacturer that fundamentally exists to serve its customers and doesn't have any internal chip development efforts that compete with its potential customers' own products, is likely what the executive is referring to here.
And finally, Wei says that TSMC's chip manufacturing cost structure is "very competitive."
"In fact, we believe we are the lowest cost producer," Wei said. "We can still [thrive] when competitors start to lose money."
It's all believable
I'm inclined to believe TSMC's claims. The first claim is demonstrably true, given that the company does routinely announce many so-called "derivative technologies."
The second advantage is harder to find examples of, but at the very least, the reasoning behind it is sound.
The final advantage is, again, hard to prove but it's certainly plausible. TSMC has a level of scale that many, if not all, of its competitors just can't match. That scale allows it to amortize its significant research and development expenses across a very large revenue base.
Any company wishing to seriously compete with TSMC, on the other hand, likely doesn't have anywhere close to the foundry revenue that TSMC does, so if that potential competitor invests at the rate required to be truly competitive, the profitability of that competitor will be relatively fragile compared to TSMC's.