TAIPEI / SEOUL – Taiwan Semiconductor Manufacturing Co. is the heavyweight champion of contract chip manufacturing. But the company, which controls half of the business worldwide, now faces a serious challenge from Samsung Electronics, its archrival in South Korea.
Samsung is using its massive war chest to catch up on the next battlefield: 5G, the next-generation mobile communication standard. But TSMC’s leadership can be unsurpassed, given founder Morris Chang’s stellar financial and business strategy.
The city of Tainan, in southern Taiwan, is full of economic vitality. It’s where, in 2018, TSMC began construction of a state-of-the-art plant worth nearly $ 40 billion. Since then, the city has become a magnet for people and money around the world.
The new coronavirus pandemic has forced Taiwan to restrict the entry of foreign clients and talents, but this has not slowed TSMC. An executive at a Japanese supplier said “demand for TSMC has not decreased and more staff is needed” to deal with the voracious appetite of the Taiwanese giant. Foreign companies are obtaining special permission from the authorities to increase the staff, even though the staff must be quarantined upon arrival.
The Tainan plant has started producing 5-nanometer chips for Apple’s new iPhones to be launched in the second half of 2020. These incredibly thin chips for central processing units will shrink to 3nm in 2022 to meet the new requirements for 5G equipment. . An industry observer commented that the Tainan plant will become the most crucial supply base for 5G equipment.
TSMC’s Tainan plant makes 5-nanometer chips for Apple’s new iPhones.
However, amid fortuitous tail winds, TSMC has encountered a storm. The administration of the President of the United States, Donald Trump, announced in May the tightening of the export restrictions of the Chinese technologies of Huawei, cutting the business of TSMC with its second largest client for a sum of 15% of sales. totals.
However, TSMC was apparently unflappable.
At a general shareholders’ meeting on June 9, President Mark Liu said there would be no change to the company’s capital spending plan for the year ending December 2020, which is to spend a record $ 15 billion. at $ 16 billion.
TSMC invests long-term and is generally unaffected by short-term fluctuations in business. The same strategy that propelled TSMC to its leadership position remains in place amid the caustic relations between the United States and China. And due to its strong finances, TMSC could emerge unscathed.
“This is a work of art,” said a source from the Japanese financial industry after plotting TSMC’s cash flows on a chart. “It is completely different from the uneven charts of Japanese electrical machinery manufacturers.”
At TSMC, the negative cash flow from the investment reflects the positive cash flow from operations, reflecting the company’s strategy of reinvesting profits for expansion. “Painting a textbook-like cash flow chart is rare in the semiconductor industry, which is prone to fluctuations,” the source said.
The chart clearly illustrates a successful investment strategy. Amid the global financial crisis, TSMC announced in 2009 that it would continue to make large investments despite deteriorating earnings. Analysts widely criticized the measure, but demand subsequently increased as smartphones became ubiquitous. This allowed the company to balance operating and investment cash flows, ensuring rapid growth.
TSMC stands in stark contrast to its peers at home and abroad. United Microelectronics of Taiwan, which ranks fourth in the industry, saw cash outflow from investing activities exceed the inflow from operating activities for the second consecutive year that ended in December 2016. Since then, the company has reduced investment. The third largest foundry in the world, US-based GlobalFoundries, is not listed, so its financial situation is unknown. But the company pulled out of advanced product development in 2018, perhaps unable to balance cash flows as development costs soared.
Since 2013, TSMC has spent approximately $ 10 billion annually on equipment and research and development, primarily paying out-of-pocket costs. In the year ended December 2019, consolidated net income fell 2% from a year earlier to 345.3 billion new Taiwan dollars ($ 11.7 billion), hurt by lower demand for semiconductors. While he failed an eighth consecutive year of record net profit, he managed to maintain a 32% profit margin.
TSMC’s strong position is largely due to its business model, developed by its founder. After serving as a senior vice president at Texas Instruments, the Taiwanese government asked Chang to help the semiconductor industry, which led to the establishment of TSMC in 1987. Chang built the company in anticipation of a growing factory-free sector.
The model, which separates the design and manufacturing stages, revolutionized the microchip industry. TSMC supported Qualcomm and Nvidia, both of which are prominent US fabulous service companies. TSMC eventually became one of the world’s top 3 semiconductor companies, along with Intel and Samsung.
TSMC’s strength lies in its ability to support customer designs by offering a wide range of intellectual knowledge. On June 22, Apple announced that it will use internally developed CPUs for its personal computers. The company is changing CPUs for the first time since 2006, when it adopted Intel products. TSMC helped Apple’s new design and production projects.
As Apple aims to strengthen the Mac’s link to the iPhone and other products that are already equipped with internal CPUs, TSMC may deepen its ties to the American company.
CPUs made by TSMC power Fugaku, the world’s fastest supercomputer.
TSMC’s added value is what makes it so attractive to customers, a strategy that sets it apart from its rivals and ensures high profitability.
“We don’t know who comes out first, but whoever does it will also be a winner,” Chang said, describing TSMC’s strength. Although the company can no longer deal with Huawei, it is confident that increased demand from other companies may regain slack, including Advanced Micro Devices.
The only rival who had the now-retired founder looking over his shoulder was Samsung. In 2016, Samsung lost orders for a new iPhone, and TSMC ended up being Apple’s dominant supplier. The South Korean company resorted to a sharp price cut, taking advantage of its excess capacity to help Samsung gain new customers, including Qualcomm. Some TSMC experts suggested they do the same. However, Chang ignored the advice.
In the end, TSMC came out scarless, at least on the surface. This is because it was able to benefit from a sharp increase in demand from startups, including Bitmain Technology Holding, a major Chinese provider of cryptocurrency equipment, and Huawei. US customers, including Qualcomm and Nvidia, continued to place most of their orders at TSMC. Therefore, Samsung was unable to break TSMC’s control over the industry.
Lee Jae-yong, Samsung vice president and de facto leader, is determined to topple TSMC as the world’s dominant chip foundry.
This has forced Samsung to change tactics. Under its Semiconductor Vision 2030 program announced in April 2019, the company is now aiming to bolster its experience in chip design. Vice President and de facto leader Lee Jae-yong said the company is aiming for global dominance in logic chips and the foundry business.
What is remarkable is Samsung’s breakdown of its projected investment of 133 trillion won ($ 110 billion). The company said it will spend 73 trillion won on research and development, 13 trillion won more than on equipment and facilities, and will hire 15,000 experts in advanced chip design and manufacturing technology.
Samsung is also moving to the Silicon Valley of the United States.
The company held a forum there last fall to solicit business partners in chip design and development. He also exchanged intellectual property information with more than 400 engineers and offered to collaborate to increase efficiency in chip design. Additionally, Samsung hopes to recruit an army of California designers.
US tech giants like Google, Amazon.com, and Facebook are expected to start outsourcing production of their self-designed server CPUs, a new market that Samsung is eager to tap into as it already has a share of the 40% of the global memory market and could meet all customers’ semiconductor needs.
He now plans to spend more than $ 100 billion over the next decade, while TSMC spends around $ 10 billion on R&D and equipment annually, leaving rivals matched in expenses.
Chang said in 2017 that the rivalry with Samsung “would turn into a war.” More prophetic words have never been spoken about the industry.
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