Is This Taiwan Semiconductor Mfg. Co. Ltd. Risk Factor Playing Out?

It's well known that contract chip manufacturer Taiwan Semiconductor ("TSMC") has been steadily gaining market share. This has allowed the company to post impressive revenue and profit growth over the last several years. However, there has always been the looming risk that the company might lose share to competitors.

According to DigiTimes, this might finally be playing out. The newspaper reported that Qualcomm and MediaTek, the two major vendors of smartphone applications processors, are moving some of their 28-nanometer chip manufacturing business to other foundries. DigiTimes named United Microelectronics , Semiconductor Manufacturing International , and GlobalFoundries as the companies taking share from TSMC.

Let's take a closer look at what might be going on.

Is it price?DigiTimes reported that prices for entry-level and midrange smartphone chips have plunged 20% over the last year, which has led chip designers to look for ways to reduce their own costs. The site, though, also said TSMC is "standing firm on prices."

The implication here seems to be that if TSMC were willing to slash wafer prices (which would have a negative impact on its gross profit margin), it might be able to prevent the share loss cited by DigiTimes.

I'm not completely convinced this report holds up in light of recent analyst reports, though.

What did we just hear from TSMC's CFO?Barron's reported that TSMC participated in an analyst conference last week that was "closed to media." During that conference, according to a report from an analyst who was at the event (via Barron's), TSMC's CFO made the following points:

  • Business has seen a "slowdown in the past 4-5 weeks" as a result of a stronger U.S. dollar. This, according to the analyst, has affected European and emerging market purchasing power.
  • As a result, "near-term demand is being reduced across multiple nodes and end-markets." TSMC, as a result, doesn't expect the foundry market to grow at the rate that it previously expected. TSMC does think it will be able to "grow a few points above the industry due to market share gains."

So, on one hand, TSMC is reportedly losing share to smaller foundries due at least in part to aggressive pricing. On the other, TSMC is telling analysts that it still expects to gain share in the overall foundry market.

Given that TSMC has openly said it expects to have lower 14/16-nanometer share than Samsung this year (and it seemingly reiterated this view during the closed-doors investor meeting), the share gains would need to come from older technologies. Those are the very same technologies in whichDigiTimessaid TSMC could face share loss.

We'll find out soon enoughTSMC is expected to host its quarterly earnings call on April 16, and I think the situation will become much clearer then. In particular, I expect TSMC to talk about its share position with respect to 28-nanometer technology. I also expect an update on TSMC's forecast for overall foundry growth this year and by how much it expects to outperform the market.

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Ashraf Eassa owns shares of Qualcomm. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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