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An EM Stock Story: Taiwan Semiconductor Manufacturing Company
- The Fundamental Growth and Core Equity team’s (FGC) research process focuses on five key attributes that are likely to lead to sustainable growth.
- Viewed through the lens of that research process, Taiwan-based semiconductor firm TSMC is a stock to watch.
The global semiconductor sector rose 771% from 2009 to 2019, benefitting from mega-trends that included smart phones, cloud computing, the Internet of Things, e-commerce, and e-Sports. More recently, semiconductors have been one of the strongest performing sectors during the COVID-19 pandemic, benefiting from both consumer stay-at-home activities and corporate work-from-home” demand. As technology increasingly touches virtually every aspect of our daily lives, the digital revolution continues.
Over the next decade, we believe the favorable trend for this sector will continue, supported by emerging technologies that include 5G, artificial intelligence, self-driving cars, and blockchain. Semiconductor companies should be well positioned to capture value from these innovations. And while there are always concerns about a Moore’s Law slowdown, innovation in chiplet-based design and 3D-packaging technology should help drive semiconductor technology migration to meet the huge demand.
Assessing Company Quality
The Fundamental Growth and Core Equity (FGC) team’s research process, which helps to identify investment opportunities, focuses on five attributes of a company that are likely to lead to sustainable growth (see Figure 1). These attributes are qualitative and forward-looking; our assessment is based on the expertise and judgment of our analysts and is therefore unique to the FGC team.
Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest contract manufacturer of semiconductor chips. We believe that TSMC’s fundamental momentum is strong and long-lasting, and that its unique qualities make TSMC is a stock to watch.
The Winner in a Winning Industry
TSMC has a worldwide market share of 56% of semiconductor contract manufacturing, which makes it more than three times the size of the number two player, Samsung. Semiconductor chip manufacturing is one the most capital-intensive industries in the world. In 2020, TSMC spent approximately US$17 billion on equipment alone.
TSMC benefitted from its market position not only due to economies of scale, but also, more importantly, because the firm made the contract manufacturing (aka, “foundry”) business model extremely competitive relative to the integrated device manufacturer (IDM) business model. The IDM model is used by companies like Intel, Samsung, and Fujitsu, which do almost everything in-house, including designing, manufacturing, and selling integrated circuit (IC) products. However, leveraging the foundry business model invented by TSMC founder Morris Chang, most chip designers now prefer to outsource chip manufacturing rather running their own fabrication plant.
The advantage of TSMC’s technology is obvious. Not only is TSMC the only company capable of mass producing the most advanced 5nm semiconductor chips globally, TSMC also has an excellent track record and clear future timetable on technology migration (node migration), which makes transistors smaller so that more transistors fit on a chip to achieve greater performance. This is an important element of future semiconductor development.
Lastly, TSMC is running a pure foundry model, so it does not compete with any of its clients or potential clients. This is not the case for the second largest foundry player, Samsung, which competes with its clients in some applications.
Management Strength
We have strong conviction regarding the quality of TSMC’s management team. Integrity, commitment, and innovation are the three stated core values of TSMC, and they have been successfully embedded into company culture. Throughout the years, TSMC has been committed to the pure-play foundry business model, to its clients, and to its employees. Since 1990, TSMC has grown rapidly and transformed the entire semiconductor industry from the IDM or JV model to a “pure foundry plus fabless” model in which companies design and sell chips without owning a fabrication plant.
Morris Chang founded TSMC as the world’s first pure-play foundry company in 1987. He is now recognized around the world as the father of the dedicated semiconductor foundry. Chang retired in 2018 at the age of 86, but his values and culture remain within TSMC. The new chairman and CEO both worked together with Chang for more than 20 years. The company is considered the most reliable foundry partner in the world.
In terms of management execution, TSMC’s track record of technology migration is unrivalled. Beginning as a distant follower, TSMC management has repeatedly delivered excellent outcomes and closed the gap with the world chip manufacturing leader Intel. In 2019, TSMC’s 7nm chip became a world-leading semiconductor manufacturing technology, and TSMC announced a future technology roadmap all the way down to 2nm, forecasting mass production in 2024. On top of this, TSMC also delivered innovation in semiconductor packaging solutions—its 3D packaging technology can potentially further extend Moore’s Law.
Potential Risks
Notwithstanding the positive attributes listed here, there are always multiple risks to a company’s competitive positioning. One such key risk to TSMC might be slower-than-expected 5G global development and adoption, due to Huawei sanctions. In addition, TSMC's cost of developing a leading-edge technology node is getting high due to rising complexity. If leading-edge technology demand is reduced due to macro factors like COVID-19 and geopolitical tension, TSMC may not be able to fully pass on its development costs to customers, which could lead to weaker profitability.
Closing Thoughts
We live in an ever-changing world, full of surprises and shocks, challenges, and opportunities. With its technology, integrity, commitment, and continuous innovation, we believe TSMC has the ability to navigate these changes as well as capture future opportunities – an extremely valuable attribute in an environment where the only certainty is uncertainty.
TSMC has the largest scale, the best technology, and the strongest commitment to the foundry model, supported by industry best practices. Importantly, this all translates into profitability and shareholder returns, putting TSMC at the top in terms of market position.
This information should not be considered a recommendation to invest in a particular security or to buy or sell any security shown. It is not known whether the securities shown will be profitable in the future.
1The SOX Index increased by 771% during the period from January 1, 2009, to December 31, 2019. The S&P 500 rose 258% over the same time frame.
2Moore's Law refers to the observation that the number of transistors on a microchip doubles every two years, while the cost of computers is reduced by half over the same time period.
3A model in which a foundry and chip design company co-invest in a fabrication plant.
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Tracking Code: 3401159.1.1.GBL.RTL
Exp. Date: 01/31/2022