Taiwan Semiconductor Manufacturing (TSM 1.26%) is the undisputed leader of the semiconductor foundry industry. The company's market share in terms of revenue reached 59% in the first quarter of 2023, according to Counterpoint Research, dwarfing all competitors. Second-place Samsung (NYSEMKT: SSNLF) managed a market share of just 13%, and that includes internal revenue.
TSMC has been able to pull so far ahead partly because of the lead it built up in manufacturing technology. The company's 5nm process is its current workhorse, generating 31% of total revenue in Q1 2023. Apple has reportedly booked the initial run of TSMC's 3nm process for its upcoming iPhone and Mac processors, which could give the company a serious edge in performance and efficiency.
For companies like Apple that need the absolute best manufacturing technology at an immense scale, TSMC is the only game in town. "To be honest, Samsung Electronics' foundry technology lags behind TSMC," said Samsung executive Dr. Kye Hyun Kyung earlier this year.
A target on its back
Why avoid TSMC stock if the company is the undisputed market leader? Because both Samsung and Intel (INTC -9.20%) are investing tremendous sums of money to catch up with and surpass TSMC.
Samsung plans to invest roughly $230 billion to build five new semiconductor manufacturing facilities in South Korea over the course of the next two decades, and it's currently building a facility in Texas with an initial price tag of $25 billion. Earlier this week, the company laid out an updated roadmap for its foundry business.
The company plans to increase its clean room capacity by a factor of 7.3 by 2027 compared to 2021, driven by new manufacturing lines in South Korea and its new facility in Texas. The company is going to push hard on its upcoming 2nm manufacturing process, with plans to begin mass production for mobile chips in 2025, then expand to high-performance computing applications in 2026 and automotive applications in 2027. 2027 will also see mass production of Samsung's 1.4nm process.
Intel's roadmap is even more aggressive. The company has been investing around the world, most recently announcing plans for a $4.6 billion assembly and test facility in Poland and a $25 billion factory in Israel. That's on top of a 30-billion-euro investment in Germany to build two new facilities, as well as a $20 billion investment in two new facilities in Ohio.
This new manufacturing capacity will help fuel Intel's ambitions to become a major player in the foundry business. Including its own internal revenue, the company expects to surpass Samsung as the No. 2 foundry in 2024. Revenue from external customers is negligible right now, but Intel is launching new process nodes at an unprecedented pace. The company expects to regain its manufacturing edge over TSMC with its Intel 18A process, which is set to be manufacturing-ready in the second half of 2024.
The 18A process will also be optimized for manufacturing Arm-based mobile chips, thanks to a partnership with Arm. If everything goes to plan, Intel will be competing for mobile chip orders in 2025 with industry-leading manufacturing technology.
A threat to profit margins
TSMC is making its own investments and pushing its own manufacturing roadmap forward. The company certainly isn't going to sit idly by as both Samsung and Intel attempt to steal market share. But even if TSMC holds on to the No. 1 spot, profit margins could come under pressure.
Right now, TSMC has a lock on customers like Apple that need the best manufacturing technology. Apple chose TSMC's 3nm for future products because it was the only viable option. TSMC has immense pricing power for this reason. Apple reportedly agreed to a price increase from TSMC last year, something that most Apple suppliers couldn't get away with.
In 2022, TSMC managed an operating margin of nearly 50%. If Samsung and Intel successfully make inroads over the next few years and are able to offer manufacturing technology on par with TSMC, TSMC's pricing power could be greatly diminished. Companies like Apple would be able to shop around and secure the best combination of technology and price.
TSMC is an incredible company, and a lot must go right for Samsung and Intel for either company to pose a serious threat. But increased competition isn't going to do TSMC any favors, and the days of ultra-high profit margins could be numbered.
