How TSMC Makes Money

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

Key points to remember

  • Taiwan Semiconductor is one of the largest companies in Taiwan and one of the largest semiconductor companies in the world.
  • Semiconductor companies design and manufacture microchips used in communications devices, radios, televisions, medical equipment and video games.
  • Taiwan Semiconductor makes its money by selling chips to customers around the world.
  • Apple accounts for about one-fifth of TSMC’s annual revenue, and North America is TSMC’s largest market.

Semiconductor Manufacturing in Taiwan: A Brief Overview

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

If you want to invest in Taiwan Semiconductor Manufacturing, the shares trade both on the Taiwan Stock Exchange and in US 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 and video games. So the tablet you play your games on and the phone you use to text contain technology produced by semiconductor companies like TSMC.

According to the company’s website, TSMC produces more than 12,300 products for 535 customers worldwide. In fact, the company produces chips for some of the biggest names in the world. Among many others, the company designs and manufactures chips for Apple (AAPL), for which TSMC is the only company manufacturing A-series chips. According to Appleinsider, Apple is TSMC’s largest customer, generating estimated revenue of over $17 billion by the end of 2022 an increase of more than 23% compared to 2021. Other major TSMC semiconductor customers 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 hundreds of customers of Taiwan Semiconductor Manufacturing, which can be divided into three categories: embedded device manufacturers, system companies and fabless companies. The latter refers to companies that design and sell chips, but leave the manufacturing of things to Taiwan Semiconductor Manufacturing itself.

Even some semiconductor manufacturing giants, such as Advanced Micro Devices (AMD), have gone from the so-called just for the game model for outsourcing chip production to companies like TSMC. As a pure-play foundry, it never uses its own brand on its products. This is to the delight of its customers, Apple, and the 534 others.

Taiwan Semiconductor sells chips to customers all over the developed world. Geopolitics makes an appearance in the company’s breakdown of its revenue by region. Biggest in the business marketby far, is in North America, which generates more than 65% of the company’s revenue.

Taiwan Semiconductor Manufacturing officially lists its headquarters country as the Republic of China – a seemingly trivial distinction, but one that is sure to anger forces in what the company calls mainland China, where Taiwan is officially only considered that one day as a rogue province be readmitted by will or by force. In practice, for investors in Taiwan Semiconductor Manufacturing, the distinction means that the company’s revenue from 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. With its derivatives, 28 nanometers represents nearly 11% of Taiwan Semiconductor Manufacturing’s revenues. The company’s 28-nanometer processes are used in ultra-low-power applications, including central processing units, graphics processors, smartphones, 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 amazing as 28-nanometer processing technology (over 35,000 gates on your thumbnail) may seem, it is rapidly being supplanted by ever-smaller nodes. Taiwan Semiconductor Manufacturing must not only compete, but lead the charge as technology advances, to survive.

TSMC is the epitome of a company that operates Moore’s law. It is the observation that transistors halve in size or more precisely, double in performance per area every two years. If we are approaching the theoretical limits of Moore’s Law, no one has bothered to tell Taiwan Semiconductor Manufacturing. The company has everything from 90nm technology to the development of 5nm technology. The company hopes to have 3nm factories ready by the end of 2022, spending perhaps $7 billion on the technology.

The essential

Few industries are more capital intensive than chip manufacturing. Even with the prohibitive expense required to set up a manufacturing plant, Taiwan Semiconductor Manufacturing still manages to profit fromprofit margins.