Taiwan Semiconductor Manufacturing Company (TSM, Financial) (“TSMC”) recorded another strong year of growth, with revenue up 25% in USD. Revenue from the most leading-edge 5nm node (where TSMC’s technology surpasses that of all other foundries) has leapt from nil in the second quarter of 2020 to 23% of revenue in the fourth quarter of 2021. The ramp-up periods of new nodes often depress margins, but the company has managed to improve yields remarkably quickly and has taken advantage of its market strength to raise prices. As a result, it is achieving a higher gross margin than in the past and expects to retain this level of profitability. We are still confident that TSMC is the best foundry in the world.
Historically, TSMC has centered its fabrication facilities in Taiwan, where it has benefitted from a highly educated and hardworking talent pool, a local ecosystem of topnotch suppliers built up over decades, and status as a national high-tech champion. Aside from relatively small-scale subsidiaries and JVs, TSMC has found little reason to build fabs outside of Taiwan. That is changing. Pandemic supply chain jams and US/China political tensions have made access to semiconductor manufacturing a key geopolitical concern. TSMC has responded by initiating or exploring capital investments in the US, Japan, China, and Germany. These new plants will take many years to rival the company’s Taiwanese production base, but we are encouraged that the company is taking steps to diversify its footprint and risk profile.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund 2021 annual report.
