Taiwan Semiconductor Manufacturing Company Limited or TSMC has been dominating the semiconductor industry for decades. It remains the largest pure-play semiconductor foundry and the most valuable semiconductor company in the world. However, despite its seeming unwavering dominance, other pure-play foundries and established chipmakers continue to challenge its status. This paper explores and analyzes the industry and competitive positions of TSMC using the Five Forces Model of Michael E. Porter.
An Analysis of TSMC Based on Porter’s Five Forces Framework: Understanding Its Industry and Competitive Positions
1. Industry or Competitive Rivalry
It is true that TSMC dominates the semiconductor industry and the specific market for contract chipmaking but it is also important to underscore the fact that the phase of technological developments and the emergence of newer trends create a leveled playing field. This means that the status of the top chipmaker in the world remains up for grabs because of disruptive possibilities arising from newer technologies or changing market trends.
Competitive rivalry remains a strong force because it compels TSMC to allocate resources to research and development to keep itself relevant. Chipmaking is a capital-intensive business and the company has a dedicated team of engineers and scientists tasked to work on developing new materials, equipment, and manufacturing processes or techniques. Nevertheless, from its perspective, the competition is still manageable because of the following:
• Moderate Level of Firm Concentration: There are several chipmakers in the world. Some of them are independent foundries similar to TSMC while others are semiconductor companies with their own brand and production facilities. However, despite their presence, the level of firm concentration remains moderate because of the presence of different classes of consumer electronic devices from different brands and other electronic products that require semiconductors.
• High Level of Research and Development: Remember that chipmaking is a capital-intensive business because of the high level of research and development required to gain novel competitive advantages and value propositions. Semiconductor companies are investing billions of dollars to develop process technologies and other techniques to keep up with the phase of technological development. Their level of annual investment has been above 5 percent of their collective compound annual growth rate.
• Moderate Level of Loyalty to Chipmakers: Companies such as TSMC cater to leading fabless chipmakers in the world. These business customers tend to be loyal to their suppliers as long as their manufacturing requirements are being fulfilled. TSMC has been the dominant pure-play foundry in the world because its process technologies and scale of operation or technological and production advantages remain outmatched by its rivals which include United Microelectronics Corporation and Samsung.
2. Threat of Substitutes
Semiconductors such as computer processors, dedicated processors including graphics processors, and integrated circuits are essential products of the modern digital information age. These components power a range of end-use products spanning from personal computers and automobile vehicles to smartphones and even the smallest home appliance. Semiconductors also have commercial and industrial applications.
The threat of substitutes is a negligible force for TSMC. This comes from the simplest reason that semiconductors do not have feasible substitutes. However, considering its business model, which centers on contract manufacturing or production outsourcing, the substitute for its entire operation is in-house production capabilities. This is still a negligible threat because outsourcing is more cost-effective. Below are the specific factors:
• High Cost of Switching From Outsourcing: Companies such as Apple, Qualcomm, Nvidia, MediaTek, and AMD outsource their production requirements to TSMC because it is more affordable to do so than to run their own manufacturing facilities. Outsourcing allows them to focus on designing their branded hardware components such as computer processors and marketing the subsequent end-use products, The costs associated with switching to in-house production are too high.
• High Level of Diversification and Differentiation: There are different types of semiconductors. Furthermore, considering processors, there is also a range of classes. These processors are also based on different instruction set architectures. There are also processors with dedicated functions such as graphics processors, artificial intelligence accelerators, and image signals processors. Chipmaking also uses different fabrication processes or process technologies. TSMC has covered all of these.
3. Threat of New Entrants
It is important to reiterate the fact that chipmaking is a capital-intensive business. The threat of new entrants for companies such as TSMC is low because of the high barriers to entry. Furthermore, aside from the costs or capital requirements, an emerging semiconductor company needs to have the technical expertise to run foundries or production facilities and strong teams of experienced business leaders and technical experts.
TSMC keeps the barriers high through high capital expenditure. This is necessary to maintain its leadership and to invest in research and development to stay ahead of its competitors. Furthermore, to ensure innovation, it has a dedicated program aimed at attracting and retaining top talents in their respective fields, and another program aimed at empowering its business customers. The following are the specific factors:
• High Capital and Reinvestment Requirement: Estimates revealed that building a single semiconductor fabrication facility alone would cost between USD 15 billion to USD 20 billion and it will take three to five years before becoming operational. This facility also needs expensive equipment and devices to function. Reinvestment for research and development or capital infusion is also high. Take note that the annual capital expenditure of TSMC is more than USD 30 billion.
• High Reliance on Technology and Innovation: TSMC has maintained its dominance through its superior and unmatched process technologies. It was the first to mass produce a system-on-a-chip based on the 5nm process node and also the first to introduce the first commercially available extreme-ultraviolet lithographic process. A competent foundry needs to have advanced technologies and a strong commitment to innovation to keep its business customers from switching to alternatives.
• High Dependence on Economies of Scale: Another significant barrier to entry is the need for a particular pure-play semiconductor foundry to scale its operation to accommodate the production requirements of multiple business customers and generate a significant amount of profits. Achieving economies of scale requires building different production facilities, improving manufacturing capabilities, building a pool of competent employees, and significant capital or financial resources.
• High Cost Advantages and Cost Leadership: It is also important to note that economies of scale bring the cost of production down. Hence, for a new entrant to offer inexpensive production services to its prospective business customers or even match the contract price offered by industry incumbents like TSMC, it needs to have made significant investments geared toward the expansion of its production capacity and improving its manufacturing capabilities.
4. Bargaining Power of Customers
TSMC provides services to leading fabless semiconductor companies in the world. These include AMD, Apple, ARM, Broadcom, Marvell, MediaTek, Qualcomm, and Nvidia. Newer fabless companies such as Allwinner Technology, HiSilicon, Spectra7, and UNISOC are also its customers. It has also handled some of the production requirements of semiconductor companies with fabrication facilities such as Intel and Texas Instruments.
Nevertheless, considering the customer base of TSMC, in addition to its leadership in the industry and the moderate firm-to-customer concentration ratio, the bargaining power of customers is low. This is unique to TSMC. Other semiconductor foundries might experience higher bargaining power from their customers because of the existence and availability of alternative foundries. The following are the specific factors:
• Moderate Buyer-to-Seller Concentration Ratio: There is an abundance of businesses across different sectors and industries that need semiconductors but there is a moderate number of foundries that can provide outsourcing services. Furthermore, considering modern consumer electronics, there is also a moderate number of companies needing powerful processors but only a few foundries can provide cost-effective manufacturing at large volume and high quality.
• Low Availability of Options and Substitutes: Remember that there is almost no substitute for semiconductors. However, considering alternatives to foundries or options from other foundries, business customers still have a moderate level of choice. The problem is that the alternatives are not at the same level as TSMC and other advanced semiconductor foundries. Even the top competitors of TSMC remain unmatched by its manufacturing capabilities and value proposition.
• High Cost of Switching Products or Providers: TSMC has achieved economies of scale that enable it to produce outputs at the highest capacities and the most reasonable cost. Switching to other semiconductor manufacturers can be expensive to its existing business customers. Furthermore, because TSMC has the relevant technologies and expertise, switching can also result in unexpected costs such as opportunity costs arising from production or delivery delays and production reiterations.
• High Volume of Purchases or Orders and Transactions: Customers of TSMC place a large number of orders per production batch. Some customers, such as Apple and Qualcomm, have multiple orders with multiple timelines. This would normally give these business customers a higher bargaining power but such has been mitigated by the unrivaled manufacturing capabilities and value proposition of TSMC and by the fact that it services a large pool of notable business customers.
5. Bargaining Power of Suppliers
Semiconductor companies, especially those that operate as foundries, depend on different raw materials. Silicon is the most common production input but chipmaking also involves rare materials including rare earth metals. Access to these materials and their suppliers is essential to semiconductor foundries. Adding to this is the need to place systems and measures aimed at avoiding potential disruptions to the supply chain.
The bargaining power of suppliers can be high for most average-sized semiconductor foundries. However, considering the size of TSMC, and the level of business it can bring to its suppliers, this bargaining power is moderate to low. It also continues to build strong relationships with its suppliers through empowerment programs, critical assessments, and norm-conforming initiatives. The following are the specific factors:
• High Supplier-to-Firm Concentration Ratio: There are few semiconductor foundries and manufacturers relative to the number of suppliers. TSMC also has a large supplier base that allows it to manage and even reduce the bargaining power of a single or even a few suppliers. The suppliers are fundamentally left with no other choice but to conduct business with TSMC and even other large semiconductor companies to keep their respective businesses afloat.
• High Cost of Switching For Suppliers: A high switching cost for suppliers and a low switching cost for the involved firm translate to weak bargaining power. Remember that TSMC is the largest pure-play semiconductor manufacturer in the world that does business with leading fabless semiconductor companies and has powered most brands of consumer electronic devices in the market. Refusing to do business with a company of this size translates to substantial opportunity costs and losses.
• High Volume of Purchases From Suppliers: TSMC also has high levels of transactions with its suppliers. This stems from the fact that it has the largest semiconductor production operation in the world and its business customers also have high volumes of multiple purchases. This lowers the bargaining power of its suppliers while ensuring that they are receiving a consistent and almost predictable revenue stream. It would be unwise for a supplier to cease doing business with a large customer.