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TSMC continues to thrive despite challenge from Samsung

The chipmaker spends approximately $10 billion per year on equipment, research and development

TSMC logo (Facebook photo)

TSMC logo (Facebook photo)

TAIPEI (Taiwan News) — While Taiwan Semiconductor Manufacturing Co. (TSMC) currently controls half of the world’s contract chipmaking business, it is now facing an increased challenge from Samsung Electronics.

Samsung is planning on pouring tens of millions of dollars into research and development over the next decade in hopes of closing the gap between itself and the Taiwanese company, according to a report from Nikkei Asian Review. However, TSMC’s finances and business strategy could make that goal out of reach for the South Korean company.

In 2018, TSMC began construction on a $40-billion state-of-the-art plant in the southern city of Tainan. The Tainan foundry has started producing 5-nanometer chips designed for new Apple iPhones slated for launch in the second half of 2020, according to the report.

These central processing unit chips will then be slimmed down to 3-nanometers in 2022 to meet new 5G equipment specifications. According an industry observer cited by the Nikkei Asian Review, the Tainan plant will become a vital supply base for 5G gear.

TSMC invests for the long term and is normally unaffected by short-term business fluctuations. This same strategy remains in place despite shaky U.S.-China trade relations and because of TSMC’s strong financials, the company could come out relatively unscathed, the report cited.

At the Taiwanese company, a negative cash flow from investment mirrors positive flow from operations, which is in line with TSMC’s strategy of reinvesting earnings for the sake of expansion. During the 2009 global financial crisis, TSMC said it would continue to make large investments regardless of deteriorating earnings, Nikkei Asian Review reported.

At the time, experts panned the move, but then smartphone demand skyrocketed, allowing TSMC to balance operating and investing cash flow, leading to rapid growth. Since 2013, TSMC has invested approximately $10 billion annually on equipment and research and development, according to Nikkei Asian Review.

According to the report, as of December 2019, consolidated net profit fell two percent from the previous year to $11.7 billion, affected by reduced semiconductor demand. TSMC was not able to achieve an eighth consecutive year of record net profit, but it still was able to reach a profit margin of 32 percent.

TSMC’s global dominance is largely due to the business model developed by founder Morris Chang. Chang’s model of separating design and manufacturing stages transformed the microchip industry, according to the report.

The company’s strength rests in its ability to support customer designs by offering a plethora of intellectual expertise. Take Apple for instance, who on June 22, announced it would be switching from Intel CPUs to ones developed in-house with help from TSMC for its personal computers.

The only other company that was able to make a dent in TSMC’s dominance was Samsung. In 2016, Samsung lost orders for a new iPhone and TSMC became the main Apple supplier. This caused Samsung to drastically slash prices to gain new customers, including Qualcomm.

TSMC responded by grabbing business from emerging companies, while U.S. customers such as Qualcomm and Nvidia continued to buy a majority of their chips from the Taiwanese firm. In the end, Samsung was unable to knock TSMC off its top position.

Samsung says it is now planning to improve its expertise in chip design and is aiming to be a major force in logic chips and the foundry industry. The South Korean company says it plans on spending more than $100 billion on research and development over the next decade, the report cited.

In the meantime, TSMC’s ability to give added value to its customers will continue to be a strategy that sets it apart from competitors and ensure its high profitability, according to the report.