TSMC to charge customers more for semicon chips made in fabs outside Taiwan

Taiwan Semiconductor Manufacturing Company or TSMC is planning to implement a rather unconventional pricing strategy for its customers. It plans on hiking prices for customers who request chips produced outside of Taiwan.

This decision comes amidst a backdrop in which TSMC has been forced to expand its production lines outside Taiwan and expand its global capacity, mainly because of rising tensions with China.

Rising power costs and the increasing complexity of developing advanced chip technologies are having a major impact on TSMC's profitability.

CC Wei, CEO of TSMC, explained to investors during the company's first-quarter earnings call that customers who opt for chips produced in specific geographical areas would need to share the additional costs incurred.

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He noted that in today's globalized and fragmented environment, higher costs are inevitable for TSMC, its customers, and competitors alike. TSMC is already discussing price increases with its customers.

TSMC's move to raise prices coincides with efforts worldwide to diversify chip supplies away from Taiwan, where over 90 per cent of the most advanced semiconductors are manufactured.

This diversification aims to mitigate geopolitical risks, particularly amid China's territorial claims over Taiwan.

Last week, TSMC announced plans to expand its investment in the US to $65 billion, up from $40 billion, in exchange for subsidies amounting to $6.6 billion.

This expansion includes the production of cutting-edge 2-nanometer chips by 2028 and the construction of a third fabrication plant (fab) by the end of the decade.

While TSMC has plants in various locations, including Japan and several upcoming facilities in the US and Germany, the cost of producing semicon chips outside of Taiwan are notably higher. The company allocates production capacity based on efficiency calculations.

TSMC expects a decline in profitability this year due to factors such as soaring power costs in Taiwan, the impact of an earthquake in April, and slower efficiency improvements in 3-nanometer chip manufacturing, the most advanced technology currently in mass production.

Despite these challenges, TSMC reported a better-than-expected first-quarter net profit and forecasts strong revenue growth in the second quarter, driven by demand for artificial intelligence chips.

The company predicts that AI processors will account for over 20 per cent of its revenue by 2028.

However, TSMC has maintained its capital expenditure budget for this year at $28 billion to $32 billion, indicating a flat expenditure compared to the previous year. The company also expects a slight decrease in gross margin for the second quarter, primarily due to rising power costs in Taiwan and the transition to 3-nanometer production.

Looking ahead, TSMC remains optimistic about its long-term prospects, with plans to achieve a gross margin above 53 per cent in the future, particularly with the introduction of 2-nanometer chip production slated for late 2025.