tsmc's profitability in question: overseas expansion challenges margins

2025-04-20 tsmc

Taipei, Sunday, 20 April 2025.
tsmc’s first quarter gross margin hit a strong 58.8%. Despite this, analysts are skeptical about the company’s ability to maintain its long-term target of 53%. New overseas plants, particularly in the U.S., are driving up costs. One analyst predicts a potential drop to 45.5% by 2029 if current trends continue. The increased capital expenditure may dilute profitability in the next five years. The company is investing heavily in facilities in the United States, Japan, and Germany.

margin dilution concerns

TSMC acknowledges that overseas factories, including those in Japan and the U.S. will start production and gradually increase margin dilution over the next five years [1]. Initial dilution is projected at 2% to 3% annually, increasing to 3% to 4% later [1]. Despite this, TSMC aims to maintain a long-term gross margin above 53% through cost structure improvements and strict controls [1]. Analyst Lu Xingzhi questions how TSMC will maintain this target, considering the potential for a 45.5% margin by 2029 [1].

expert analysis and potential strategies

Lu Xingzhi suggests several possibilities for TSMC to maintain its margin target [1]. These include significant reductions in depreciation expenses and increased profitability from Taiwanese factories [1]. Another possibility involves TSMC increasing prices in response to market demand [1]. Lu Xingzhi also considers that TSMC’s dilution guidance might be overstated, with better execution leading to lower actual dilution [1]. He proposes an alternative calculation method for dilution, resulting in a 51.1% margin [1].

u.s. expansion and ai demand

TSMC is significantly expanding its U.S. presence, planning to invest 165.000 billion in the U.S., which includes constructing three more晶圆 manufacturing plants, three advanced packaging plants, and one research and development center [2]. This brings TSMC’s total investment in the U.S. to $165 billion [2]. Approximately 30% of TSMC’s 2nm and more advanced process capacity will be located in Arizona [2]. The demand for TSMC’s advanced packaging technology, particularly CoWoS, continues to outstrip supply due to the surge in AI infrastructure investments [2].

market dynamics and geopolitical factors

The global smartphone market faces continued pressure, impacting TSMC’s revenue [2]. Smart phone revenue contribution to TSMC decreased from 38% in Q1 2024 to 28% in Q1 2025 [2]. Counterpoint Research indicates that global smartphone sales grew by 3% in Q1 2025, driven by emerging markets and Chinese subsidies [2]. However, economic uncertainties from tariffs may reduce consumer demand, potentially leading to a slight decline in the global smartphone market for 2025 [2]. These factors, combined with potential currency manipulation designations and trade tensions, add complexity to TSMC’s financial outlook [3].

competitive landscape and strategic moves

U.S. chipmakers are concerned about losing the Chinese AI market to Huawei [6]. Amid efforts to boost domestic semiconductor production, Intel and TSMC reached a preliminary agreement for a chipmaking joint venture [6]. TSMC will hold a 20% stake in this new company [6]. This deal faces internal resistance due to concerns about technology disruption and job cuts [6]. The evolving U.S.-China trade relations and the increasing demand for AI chips are significantly shaping TSMC’s strategic decisions and market position [6].

Bronnen

Gross Margin Overseas Plants