How Taiwan Semiconductor Manufacturing Company Makes Money

The production of semiconductors is an exceedingly competitive business. Semiconductors (or microchips as they're commonly known) are a key component in electronics. You'll find them in a variety of everyday devices, including televisions, radios, computers, tablets, and smartphones. But they're also used in other industries, such as healthcare, transportation, communications, and military systems.

Some of the top players in the industry dictate much of technological progress for the world at large. A few companies own their foundries and brand chips with their own company name, such as Intel (INTC), while others custom-build chips for their clients. This group includes one of the largest and most successful companies you've probably never even heard of—Taiwan Semiconductor Manufacturing Company (TSM). Keep reading to find out more about this company and how it makes a profit.

Taiwan Semiconductor Manufacturing Company: An Overview

Taiwan Semiconductor Manufacturing Company is one of Taiwan's largest companies and among the world's leading semiconductor companies. Founded in 1987, the company is headquartered in Hsinchu, Taiwan, or the Republic of China.

As noted above, Taiwan Semiconductor plays a very important role in the production of electronic devices. Like its competitors, it researches, designs, and manufactures microchips used in different applications. So the tablet you play your games on and the phone you use to text contain technology that is produced by semiconductor companies like TSMC.

TSMC produced more than 12,300 products for 535 clients worldwide in 2021. In fact, the company produces chips for some of the largest names in the world. This includes A-series chips for Apple (AAPL), which is the company's largest client. Other top TSMC semiconductor clients include Advanced Micro Devices, Broadcom, Intel, MediaTek, NVIDIA, NXP Semiconductors, OmniVision Technology, Qualcomm, and Renesas Electronics.

Its shares trade on the Taiwan Stock Exchange and the New York Stock Exchange (NYSE). The company's market capitalization as of Jan. 30, 2023, was $429.45 billion. The company's consolidated net revenue came in at $75.89 billion at the end of its 2022 fiscal year.

Taiwan Semiconductor Manufacturing Company Clients

Taiwan Semiconductor sells chips to clients all over the developed world. Geopolitics does make an appearance in the company’s breakdown of its revenue by region. The company’s biggest market, by far, is North America, which brings in more than 65% of the company's revenue. TSMC's customers can be divided into three classes:

• Integrated device manufacturers
• Systems companies
• Fabless companies

This last one refers to firms that design and sell chips, but farm out the business of actually making the things to Taiwan Semiconductor Manufacturing itself.

Even some giants of semiconductor production, such as Advanced Micro Devices (AMD), have switched from the so-called pure play model to farming out the production of chips to companies like TSMC. As a pure-play foundry, it never actually uses its own brand name on its products. That’s much to the delight of its customers.

Taiwan Semiconductor Manufacturing Company's Microchips

The industry standard is 28-nanometer system-on-chip production of all the chips sold, at least when it comes to sales and dollar volume. Along with its derivatives, 28-nanometer makes up nearly 11% of TSMC's revenue. The firm’s 28-nanometer processes are used in ultra-low-power applications, which include central processing units, graphic processors, smartphones, tablets, automotive, and consumer electronics.

The imagination of the company's customers (and to a lesser extent, the laws of physics) is the only limit. As astonishing as the 28-nanometer process technology may sound, it’s rapidly supplanted by ever-smaller nodes. Taiwan Semiconductor Manufacturing doesn't merely have to compete, but lead the charge as technology advances in order to survive.

TSMC is the archetype of a company that exploits Moore’s Law, which is the observation that transistors halve in size or double in performance per area every two years. If we’re nearing the theoretical limits of Moore’s Law, no one bothered to tell Taiwan Semiconductor Manufacturing. The company has everything from 90nm tech to developing 5nm tech. The company hopes to have 3nm fabs ready at the end of 2022, possibly spending a reported $7 billion on the technology.

The Bottom Line

Few industries are more capital-intensive than chip manufacturing. Even with the prohibitive outlays required in getting a fabrication plant up and running, Taiwan Semiconductor Manufacturing still manages to enjoy high-profit margins.