key points.
- Why is TSMC sometimes called a 'silicon shield' over Taiwan? Because its factories are considered too valuable to be destroyed
- The company has become so central to the global economy that its going offline would trigger an immediate depression, in our view1
- These factors make TSMC structurally essential to global GDP – providing it with a durable competitive advantage that is geopolitical as well as financial.
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TSMC2 is indispensable to the global technology supply chain. The Taiwanese semiconductor manufacturer creates nearly 100% of the world’s advanced AI chips for key companies. These include: Nvidia’s next generation GPU3 architecture, AMD’s data centre AI accelerator series and the custom silicon inside Google and Amazon servers2. It also makes more than 50% of the chips used in smartphones and PCs worldwide.
TSMC’s advanced chip making capabilities, its consistent reinvestment in innovation and the enormous value of its factories put the company far ahead of competitors and create a powerful barrier to entry. We believe TSMC is both atypical and essential to global growth, with its position strengthened by its geopolitical importance and deep financial and technological strength.
TSMC: the investment view
- Growth theme: the company is integral to the AI ecosystem and a major beneficiary of high industry spending
- Fundamental strengths: as the sole manufacturer of cutting-edge chip technology, with massive free cash flow and extensive R&D spending, it has established an effective monopoly that rivals struggle to compete with
- Differentiation: its integrated manufacturing and packaging capabilities enable it to deliver the fully assembled AI super chips that leading clients require.
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A technological leader
Currently, TSMC stands alone at the cutting edge of chip technology, as it is the only producer of new 2-nanometer chips. The difficulty of this production feat has been likened to hitting a golf ball from Taipei and landing it in a cup in Tokyo, millions of times in a row, without a single miss.
Such precision places TSMC far ahead of competitors such as Samsung and Intel2 and creates financial security. As TSMC makes few mistakes, it generates a strong yield and is highly profitable with a gross margin of 62%. These profits are immediately reinvested into R&D, reinforcing its engine of growth. TSMC’s market-leading capabilities generate strong revenues, which then pay for the next generation of products vying for tech leadership. In short, TSMC’s model makes it hard for potential rivals to compete, in our view.
The company’s 2026 capital expenditure is projected to be USD 52 to 56 billion. The company spends more on factories in a single year than the entire annual GDP of nations the size of Iceland, Estonia or Bolivia. Its fabrication complexes cost approximately USD 28 bn to build – roughly the cost of two US aircraft carriers. In our view, this extremely significant outlay represents a real barrier to entry – it would be almost impossible for a startup to disrupt this industry.
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Globalising operations
The company has broadened its global presence to address heightened geopolitical risks surrounding Taiwan. China has been open in its goal to gain territorial control over the island. So far, this ambition has been partly deterred by the major economic disruption an incursion would trigger. Nearly one-third of global demand for new computing power is estimated to be fabricated in Taiwan, and the global economy would be severely impacted if that supply was interrupted – hence the notion of Taiwan’s ‘silicon shield’.
Aware of such risks, the chipmaker has been rapidly establishing a wider network of overseas facilities. New ‘giga-fab’ semiconductor factories are being developed in Arizona, Kumamoto and Dresden, and we believe this should help insulate the company if regional disruptions transpired in the future.
TSMC is both atypical and essential to global growth, with its position strengthened by its geopolitical importance and deep financial and technological strength.
More than Moore
TSMC is at the vanguard of the latest chip production and packaging. In 1965, Gordon E. Moore, who later co-founded Intel, observed that the number of transistors on chips doubles roughly every two years while costs decrease, leading to more powerful and cost-effective computing power. While ‘Moore’s Law’ has held for the last 60 years, we are now approaching the physical limits of shrinking transistors.
The chip industry has responded by pivoting to a ‘More than Moore’ approach, which seeks to boost performance by making chips smaller and packaging them in smarter ways. Again, we believe TSMC is leading on this frontier.
By combining the production of silicon wafers and the subsequent packaging processes into a tightly connected, streamlined workflow within the semiconductor manufacturing chain, it offers a differentiated solution. TSMC doesn’t merely print the silicon, it stitches processors and memory together into the massive super-chips required for AI. Clients, such as Nvidia, want more than just a foundry to make parts: they need a partner to assemble the engine. TSMC’s complex system integration fulfils this requirement.
TSMC doesn’t merely print the silicon, it stitches processors and memory together into the massive super-chips required for AI.
TSMC: a valuable investment anchor
We believe TSMC represents a distinctive blend of growth and resilience for equity investors.
In the AI race, it is impossible to know whether Meta, Google, Microsoft2 or a disruptive newcomer will ultimately dominate, and investors are rightly becoming more discerning. We believe companies embedded at critical points in the AI ecosystem are more likely to grow through earnings. Given that TSMC is the chip supplier of choice for most participants, we see longevity in its leadership together with an expected increase in revenues (see Figure 1) going forward.
FIG 1. Upwards: TSMC’s AI revenue by segment4
In our view, TSMC should maintain its competitive advantage, strengthen its exposure to structural growth and build on its ability to compound earnings as the AI ecosystem broadens through 2026 and beyond. For these reasons, TSMC remains a core holding in our Asia High Conviction and Emerging High Conviction equity strategies
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