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Taiwan Semiconductor Manufacturing Company plans to charge customers more for making their chips outside of Taiwan, as global capacity expansion, power costs and increasingly complex cutting-edge technologies weigh on its profitability.
“If a customer requests to be in a certain geographical area, the customer needs to share the incremental cost,” said CC Wei, chief executive of the world’s largest chip manufacturer, to investors on Thursday during the company’s first-quarter earnings call.
“In today’s fragmented globalisation environment, cost will be higher for everyone, including TSMC, our customers and our competitors,” Wei said, adding that discussions with customers about price increases had started.
TSMC’s price increases come as governments and companies around the world are seeking to alleviate geopolitical risks by securing additional chip supplies outside Taiwan, where more than 90 per cent of the world’s most advanced semiconductors are produced. China claims Taiwan as part of its territory and strives to bring it under its control.
Last week, TSMC said it would increase its US investment from $40bn to $65bn in exchange for $6.6bn in subsidies. With the additional investment, it will start making its most cutting-edge 2-nanometre chips by 2028 and will build a third fabrication plant, or fab, by the end of the decade.
The company’s first fab at its new campus in Arizona, which is scheduled to begin mass production next year, started operating this month, TSMC said on Thursday. The company also has plants in Japan and plans to build one in Germany.
However, the cost of production outside of Taiwan is significantly higher. TSMC generally allocates capacity to fulfil customer orders according to its efficiency calculations.
The price warning came as TSMC forecast profitability to slip this year due to soaring power costs at its main manufacturing base in Taiwan, the impact of Taiwan’s April 3 earthquake and a slower rise in 3nm manufacturing efficiency, the most advanced chip technology in mass production.
First-quarter net profit outperformed market expectations with an 8.9 per cent increase compared with the same period last year. TSMC forecast revenue to grow 27.6 per cent to about $20bn in the second quarter driven by booming demand for artificial intelligence chips, and reiterated its bullish outlook for that market segment.
The processors that power AI servers were expected to account for more than 20 per cent of its revenue by 2028, up from under 15 per cent this year, TSMC said. But it kept its capital expenditure budget at $28bn to $32bn for this year, flat compared with 2023.
The company forecast a gross margin between 51 and 53 per cent for the three months ending June 30, only slightly down from the first quarter but the lowest level since the third quarter of 2021.
TSMC said the Taiwanese government’s hefty power price increases would have a more significant impact on profitability than the earthquake. It forecast a 25 per cent increase in electricity costs beginning in April that would reduce the gross margin by up to 0.8 percentage points in the current quarter. The expansion of 3nm production at the expense of the more mature 5nm will further dilute the margin by up to 4 percentage points in the second half of the year.
Wendell Huang, TSMC’s chief financial officer, said the 3nm chips were taking longer to reach the company’s average level of profitability. He said this happened because the technology was more complex and TSMC had been hit by higher costs after having set 3nm prices.
“We believe we are doing a better job with pricing” for 2nm, which was scheduled to go into mass production in late 2025, Huang said. He added that the company continued to consider that a gross margin of above 53 per cent was achievable in the longer term.