Taiwan Semiconductor Manufacturing (TSM 1.26%), the world's largest contract chipmaker, produces the world's smallest, densest, and most power-efficient chips. That makes it a bellwether of the semiconductor industry and a crucial partner for fabless chipmakers like Apple, Advanced Micro Devices, and Nvidia.
However, TSMC wouldn't have sprinted ahead of Intel (INTC -9.20%) and Samsung in the "process race" to manufacture more advanced chips without the Dutch semiconductor equipment maker ASML (ASML 2.04%), the world's leading producer of lithography systems for etching circuit patterns onto silicon wafers. TSMC's earlier adoption of ASML's extreme ultraviolet (EUV) lithography systems enabled it to produce the world's tiniest chips.
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TSMC started to mass produce its smallest 3 nanometer chips in late 2022, and it plans to start mass producing its 2nm chips in 2025. But to manufacture chips with processors smaller than 2nm, TSMC will likely need to use ASML's new high-NA (numerical aperture) EUV systems. That's why it was surprising when analysts at China Renaissance and SemiAnalysis recently claimed TSMC wouldn't actually start adopting those high-NA EUV systems until after 2030.
Meanwhile, Intel -- which aims to catch up to TSMC and Samsung in the process race by 2025 -- has already been installing its first high-NA systems at its foundries. Therefore, TSMC's decision seems like a risky move that could narrow its competitive moat. But for Intel, this could represent a golden opportunity to gain some ground against TSMC.
Why isn't TSMC upgrading its EUV systems?
TSMC isn't rushing to upgrade its systems for three reasons. First, it already spent billions of dollars on its existing EUV systems, which were first used to mass produce its chips back in 2019. A single EUV system costs about $200 million, is shipped in pieces via multiple planes, and requires additional training to use.
TSMC likely believes there's still a lot of mileage left in these systems, and it could push the technology to the limit to manufacture high-end chips for a lower cost than high-NA systems through the end of the decade. That's what it previously did with ASML's older deep ultraviolet (DUV) systems (up to the 7nm node) before switching over to EUV systems.
Second, TSMC's earlier adoption of ASML's EUV systems was partially subsidized by Apple, which was shifting its production away from Samsung at the time and needed the Taiwanese chipmaker to mass produce its top-tier chips. TSMC had actually been reluctant to adopt the expensive technology before Apple stepped in.
Once again, TSMC seems reluctant to adopt ASML's latest systems. But this time, there's no guarantee Apple will subsidize those purchases -- and the recent rumors suggest the tech giant won't foot the bill for the chipmaker's high-NA upgrades.
Lastly, TSMC might be trying to avoid a bidding war that might erupt between Intel and Samsung for ASML's first batch of high-NA systems, which each cost over $300 million. Spending too much money on installing new high-NA systems over the next few years could disrupt its current development roadmap for its 3nm and 2nm chips.
Why does this represent an opportunity for Intel?
Intel is already installing ASML's high-NA systems, but it won't actually deploy the machines to mass produce its chips until a few years down the road. Intel expects to continue using ASML's EUV systems up until its 18A (1.8nm) node, which should be comparable to the density of TSMC's 3nm node when it arrives in the second half of 2024.
But beyond the 18A node, Intel plans to start using its high-NA systems to produce smaller chips. That means it will start producing its equivalent of TSMC's 2nm chips with high-NA EUV systems while TSMC continues using its low-NA systems.
In February, Intel will reveal its full post-18A roadmap. I believe it will reiterate its commitment to ramping up its near-term spending to pull ahead of TSMC and Samsung with denser and more power-efficient chips -- and its earlier investments in high-NA systems could give it an edge against its two Asian rivals over the long term.
For now, Intel's investors are likely focused on the cyclical recovery of the PC market, which should finally stabilize its sales of desktop and laptop CPUs this year. But looking further ahead, Intel's investors should focus on the company's decision to adopt high-NA EUV systems years before TSMC -- and how that move might help it regain the process lead, win over more fabless chipmakers, and make it a compelling long-term investment once again.
