Trump’s “Made in America” AI Chip Push Squeezes TSMC

The increasing U.S. domestic manufacturing push, spearheaded by political directives, is adding significant cost pressures and constricting profit margins for Taiwan Semiconductor Manufacturing Company (TSMC), the world’s preeminent semiconductor foundry.

Since a significant shift in political leadership and its subsequent focus on reshoring advanced manufacturing capabilities, there have been persistent policy signals and potential trade actions targeting companies that do not establish production facilities within the United States.

In response, TSMC has announced substantial capital commitments to the U.S., totaling an impressive $200 billion. This includes a recently unveiled $100 billion investment earmarked for advanced semiconductor fabrication and packaging facilities within the United States.

While TSMC has been a significant beneficiary of the burgeoning artificial intelligence sector, experiencing a market capitalization surge of over 100% in the past year, the company’s latest quarterly earnings, despite being robust, were impacted by the financial implications of its international expansion efforts, as disclosed by company executives.

During the latest earnings call, Chief Financial Officer Wendell Huang noted that while gross margins exceeded initial projections, this positive performance was tempered by the dilutive effect of the company’s overseas manufacturing facilities. He further elaborated that these overseas fab projects, as they scale up production, will continue to exert downward pressure on margins for the foreseeable future.

The significant investments made by TSMC and other leading semiconductor firms in the United States are a direct consequence of proactive trade and economic policies, including pivotal trade agreements with Taiwan and strategic investments under the CHIPS program. These initiatives are not only fostering job creation but are also instrumental in revitalizing advanced semiconductor manufacturing within the U.S.

While other Asian chip manufacturers are also establishing U.S. operations, TSMC’s commitment stands out due to its sheer scale. This aggressive expansion strategy into the U.S. market inherently exposes the company to higher production costs, presenting a notable challenge to its profit margins.

TSMC reported a remarkable 77.4% year-on-year surge in second-quarter profit, significantly surpassing analyst expectations and marking another record-breaking period for the world’s largest contract chip manufacturer.

The company’s aggressive U.S. expansion aligns with its long-term outlook for sustained “mega-trend” demand from its global customer base, according to TSMC’s Huang.

This strategic international expansion is also being heavily influenced by political considerations.

The administration views the substantial investments by TSMC and other semiconductor companies as a testament to the effectiveness of its trade and economic strategies, which encompass significant bilateral trade agreements and strategic domestic investment programs.

The operational costs associated with establishing and running chip fabrication plants in the United States are considerably higher than in traditional manufacturing hubs like Taiwan.

Industry analysts estimate that TSMC’s U.S.-manufactured chips could be 20% to 50% more expensive than those produced in Taiwan, with the final cost being subject to various factors such as subsidy availability, tax credit recognition, and other economic fluctuations. It is anticipated that the increased production costs will largely be borne by TSMC’s clients, who are increasingly seeking to diversify their supply chains or are subject to mandates requiring the procurement of domestically produced chips.

Reports indicate that TSMC is planning price increases for both its advanced and mature semiconductor products by as much as 10% in 2027. The company has historically declined to comment on pricing strategies.

TSMC’s commanding position in the leading-edge semiconductor node market provides it with significant pricing power. Given this dominance, a substantial portion of the elevated production expenses is likely to be absorbed by its clientele. These clients are actively pursuing supply chain diversification or are under pressure from the U.S. government to source chips manufactured locally.

The company projects that the ramp-up of its overseas fabrication facilities will lead to a gross margin dilution of 2% to 3% in the initial phases, potentially widening to 3% to 4% in later stages.

This anticipated margin reduction is considered manageable for TSMC, given its historically high overall profit margins. The company’s second-quarter gross margin stood at a robust 67.7%, a slight increase from 66.2% in the preceding quarter.

While there’s a strong impetus for domestic manufacturing, the global supply chain disruptions experienced during the COVID-19 pandemic have accelerated customers’ demand for geographical diversification in their sourcing strategies.

Customers are proactively preparing for potential geopolitical, logistical, and other supply chain disruptions. This trend of seeking geographically diversified manufacturing is expected to continue, irrespective of specific administrations, though the exact mechanisms for incentivizing and enforcing such diversification remain to be fully defined.