Following the news that TSMC reported solid Q4 2022 results;

Josep Bori, Thematic Research Director at GlobalData, offers his view:

“TSMC’s Q4 2022 results are solid despite a significant deceleration in December, but ultimately the investment case hinges on the delicate balancing act between geographic diversification and geopolitical relevance. It is always possible to have too much of a good thing.

“Q4 revenue growth of 43% year-on-year (YoY), and even the more modest 24% YoY in December, is a far cry from the recent profit warnings and negative outlooks from semiconductor sector peers like Intel, Nvidia, Samsung, AMD, Kioxia, and Micron. This is a testament to TSMC’s technology leadership and strategic positioning in the global semiconductor supply chain.

“Despite management warnings of end-market demand softness and customers’ ongoing inventory adjustments, the company remains structurally very well positioned. Its advanced technologies (i.e., five and seven-nanometer nodes) accounted for 54% of total wafer revenue, stable from last quarter. This manufacturing technology leadership places TSMC front and center of any country’s artificial intelligence (AI) strategy, as advanced AI chips require this miniaturization level.

“However, investors are likely to focus on the balance between geographic diversification and geopolitical relevance. For TSMC, geographical diversification  of its fabrication facilities makes sense from an operational risk-management perspective but, from a geopolitical standpoint, it cannot be taken too far.

“Diversifying geographically will make its main Taiwan facilities less critical from a global supply chain standpoint and, therefore, less crucial for the US to defend if China makes any moves on the island. Yet the reduction in capex along with the recent commitments to build fabs in the US and advanced plans for Europe sites suggest this diversification will only accelerate.

“As demonstrated by the rise in geopolitical tension following Nancy Pelosi’s visit to Taiwan last summer, the US export bans on chip technology transcends the semiconductor industry. In GlobalData’s view, this is about AI dominance, which underpins what many call the fifth industrial revolution, and, ultimately, about global economic leadership in the next few decades.

“GlobalData predicts that the accelerating adoption of AI in commercial and military use cases will drive global AI chips revenue from $12 billion in 2021 to $130 billion in 2030, at a compound annual growth rate (CAGR) of 30%.”

For a more detailed analysis of this industry, see our recent ‘AI Chips’ report.