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How TSMC Makes Money

Production of semiconductors is an exceedingly competitive business, with top players in the industry dictating much of technological progress for the world at large. A few companies own their foundries and brand chips with their own company name—think Intel (INTC)—while others custom-build chips for their clients. This group includes one of the largest and most successful companies you’ve probably never even heard of—Taiwan Semiconductor Manufacturing (TSM). Keep reading to find out more about this company and how it makes a profit.

Key Takeaways

  • Taiwan Semiconductor is one of Taiwan’s biggest companies and one of the world’s largest semiconductor companies.
  • Semiconductor companies design and manufacture microchips that are used in communication devices, radios, televisions, medical equipment, as well as video games. 
  • Taiwan Semiconductor makes its money by selling chips to clients all over the world.
  • Apple accounts for about one-fifth of TSMC’s annual revenue and North America is TSMC’s largest market.

Taiwan Semiconductor Manufacturing: A Brief Overview

Taiwan Semiconductor Manufacturing is one of Taiwan’s largest companies and among the world’s leading semiconductor companies. Founded in 1987, the company is headquartered in Hsinchu, Taiwan, with shares trading on both the Taiwan Stock Exchange and the New York Stock Exchange (NYSE). As of the company’s 2021 annual report, it had earned $477 billion in revenue and employed more than 65,000 people.

If you’re interested in investing in Taiwan Semiconductor Manufacturing, shares trade on both the Taiwan Stock Exchange and in U.S. dollars on the NYSE.

But what does a semiconductor company like TSMC do? The semiconductor industry plays a very important role in the production of electronic devices. Companies in this field research, design, and manufacture microchips that are used in communication devices, radios, televisions, medical equipment, as well as video games. So that tablet you play your games on and the phone you use to text contain technology that produced by semiconductor companies like TSMC.

According to the company’s website, TSMC produces more than 12,300 products for 535 clients worldwide. In fact, the company produces chips for some of the largest names in the world. Among many others, the company designs and manufactures chips for Apple (AAPL), for whom TSMC is the only company to make A-series chips. According to Appleinsider, Apple is TSMC’s largest client, generating revenue that is estimated to earn more than $17 billion by the end of 2022, an increase of more than 23% over 2021. Other top TSMC semiconductor clients include Advanced Micro Devices, Broadcom, Intel, MediaTek, NVIDIA, NXP Semiconductors, OmniVision Technology, Qualcomm, and Renesas Electronics.

In Your Ear and Elsewhere

Apple is just one of the hundreds of Taiwan Semiconductor Manufacturing customers, which can be divided into three classes—integrated device manufacturers, systems companies, and fabless companies. That last one refers to firms that design and sell chips, but farm out the business of actually making the things to Taiwan Semiconductor Manufacturing itself.

Even some giants of semiconductor production, such as Advanced Micro Devices (AMD), have switched from the so-called pure play model to farming out the production of chips to companies like TSMC. As a pure-play foundry, it never actually uses its own brand name on its products. That’s much to the delight of its customers, Apple, and the 534 others.

Taiwan Semiconductor sells chips to clients all over the developed world. Geopolitics does make an appearance in the company’s breakdown of its revenue by region. The company’s biggest market, by far, is in North America, which brings in more than 65% of the company’s revenue.

Taiwan Semiconductor Manufacturing officially lists its country of headquarters as the Republic of China—a seemingly trivial distinction, yet one sure to anger forces in what the company refers to as Mainland China, where Taiwan is officially considered nothing more than a rogue province to one day be readmitted whether by agreement or force. As a practical matter for Taiwan Semiconductor Manufacturing investors, the distinction means that company revenue originating in China refers to both the free and communist varieties.

Smaller Is Bigger, Up To A Point

The industry standard is 28-nanometer system-on-chip production, in terms of volume—and dollar volume—of chips sold. Along with its derivatives, 28-nanometer makes up nearly 11% of Taiwan Semiconductor Manufacturing revenue. The firm’s 28-nanometer processes are used in ultra-low-power applications, which include central processing units, graphic processors, smart phones, tablets, automotive, and consumer electronics.

The imagination of Taiwan Semiconductor Manufacturing’s customers, and to a lesser extent, the laws of physics, is the only limit. As astonishing as 28-nanometer process technology might sound—more than 35,000 gates across your thumbnail—it’s rapidly supplanted by ever-smaller nodes. Taiwan Semiconductor Manufacturing has to not merely compete, but lead the charge as technology advances, to survive.

TSMC is the archetype of a company that exploits Moore’s Law. This is the observation that transistors halve in size or more accurately, double in performance per area every two years. If we’re nearing the theoretical limits of Moore’s Law, no one bothered to tell Taiwan Semiconductor Manufacturing. The company has everything from 90nm tech to developing 5nm tech. The company hopes to have 3nm fabs ready at the end of 2022, possibly spending a reported $7 billion on the technology.

The Bottom Line

Few industries are more capital-intensive than chip manufacturing. Even with the prohibitive outlays required in getting a fabrication plant up and running, Taiwan Semiconductor Manufacturing still manages to enjoy high-profit margins.

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