A few weeks ago, we learned about some of the proposed price increases coming for TSMC’s N2 process starting some time next year. We have been thinking through the implications of this since then, and in light of the developments at Intel, we think their significance has become even more relevant. Put simply, absent any viable competition TSMC goes from ‘effective’ leading-edge monopolist, to true monopolist. They can raise prices as high as they want. Work through the math on that and it quickly becomes apparent that many companies who today design chips for the leading edge will have to step off the Moore’s Law curve because it is no longer economically viable.
Of course TSMC is not going to raise prices to infinity and cut off all demand, but they will price to maximize their own value extraction and that will likely lead to a much smaller pool of customers who can afford to design chips at the leading edge.
Let’s use as an example. Imagine a largish TSMC customer, not in the Top 3, but maybe in the Top 10. They probably pay TSMC $20,000/wafer today, with lower volume customers paying closer to $25,000. Let’s say this company has a chip that is 170 mm^2. Using the handy Semi-Analysis Die Yield Calculator, that works out to 325 chips per wafer, or $61 per chip. If the company prices that at $140 per chip, they get a gross margins of 55%, good but not great.
Now suppose TSMC raises its price to this customer to $40,000 for its next process. Estimates for density improvements for N2 are still coming in, but let’s assume we get 15% more die per wafer (375 KGD), but the cost is now $107 per chip. This is the heart of the Moore’s Law slowdown – density increases now greatly lag price increases. If the design company cannot pass on cost increases to customers, and is stuck at that $140 price, gross margins fall to 22%, which is not good.
We can play around with the numbers and debate the ability for chip designers to pass on some of those costs to their own customers, but the point remains the same. As TSMC raises prices the attractiveness of producing chips at the leading edge becomes less viable for a growing category of customers. We based the example above loosely on Qualcomm, and so we would include them in that category, but it applies equally to AMD. Hardest hit will be the customers with smaller volumes which spans the range from start-ups to hyperscalers. Moore’s Law starts to become very difficult for everyone. Of course Nvidia and a few other companies have a lot more leeway to absorb those costs, but many, probably most companies, do not.
We imagine that TSMC is unlikely to turn the screws quite that hard on its customers, but the point is they could.
Some will counter that TSMC has had an effective monopoly for several years now and could have raised prices in this fashion long ago, the fact that they have not yet means they will not in the future. But conditions are changing. Until recently, a cautious, paranoid company needed to worry that Intel or Samsung could someday become competitive again. That now looks increasingly unlikely. And this is why Intel Foundry matters. Today, people can credibly argue that there is no commercial need for Intel Foundry in the industry, that customers do not need a second source to TSMC. But look ahead a few years, to a world in which TSMC can raise prices freely. At that time, everyone will be desperately looking for that alternative.
Image by Microsoft Co-Pilot
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