The pressure from former US President Donald Trump to manufacture advanced semiconductors in America is increasing costs and squeezing profit margins for the world's largest chipmaker, Taiwan Semiconductor Manufacturing (TSM.US).
Since Trump's return to office in 2025, the President has repeatedly threatened to impose tariffs on companies that do not produce goods in the US. In response, TSMC has announced a total of $200 billion in investment commitments in the US, including an additional $100 billion investment in advanced semiconductor manufacturing and packaging facilities announced last week.
The company indicated that while its market value has more than doubled over the past 12 months, driven by the AI boom, its strong quarterly earnings were still impacted by overseas expansion. TSMC's CFO, Wendell Huang, stated on an earnings call that gross margin growth exceeded guidance but was offset by the dilution effect from overseas wafer fabs.
He added that as these overseas fab projects ramp up production capacity, margins would face further dilution over the coming "years." US Commerce Secretary Howard Lutnick commented in a statement that "President Trump's leadership is driving corporate investment in American manufacturing," and that TSMC's additional $100 billion investment would create tens of thousands of US jobs and bring advanced semiconductor manufacturing back to America.
While other Asian chipmakers, including SK Hynix, are also building US facilities, TSMC's commitment is by far the largest. This aggressive US expansion exposes it to higher production costs, posing a potential headwind to profitability.
Political Drivers
TSMC reported last Thursday that its second-quarter net profit surged 77.4% year-over-year, significantly beating expectations and setting another record high for the global top contract chipmaker. Huang told media that while the company continues to see a "multi-year mega-trend" of demand from customers, it is also pursuing aggressive business expansion in the US.
Political pressure is another key driver of this overseas expansion. A White House spokesperson stated that the trillions of dollars in investment from TSMC and other semiconductor companies are a result of President Trump's trade and economic policies.
The cost of building plants in the US is significantly higher. Felix Lee, a senior equity analyst at Morningstar, noted, "Overall, we estimate that the cost of chips produced by TSMC in the US is 20% to 50% higher than those produced in Taiwan, depending on the timing of subsidy disbursements, tax credit recognition and other cost fluctuations."
Lee added that he expects customers to bear more of the increased production costs. TSMC plans to raise foundry prices for both advanced and mature process chips by up to 10% by 2027. The company declined to comment on pricing issues when contacted by media.
Gaurav Gupta, Vice President and Analyst at Gartner, noted that a lack of substantive competitors works in TSMC's favor. Gupta stated that due to TSMC's monopoly in the leading-edge process market, "much of the increased cost will have to be absorbed by its customers, who are either seeking supply chain diversification or have received US government mandates to buy domestic chips."
Impact on Margins
Huang stated that the company expects the dilution effect on gross margin to be 2% to 3% in the initial years of overseas fab ramp-up, expanding to 3% to 4% in later years. Gil Luria, Director of Technology Research at D.A. Davidson, commented, "Given TSMC's overall very high margins, this is a margin gap it can afford."
TSMC's second-quarter gross margin was 67.7%, slightly higher than the 66.2% in the first quarter. Morningstar's Lee pointed out that beyond Trump's amplified calls for domestic manufacturing, "customers are also increasingly seeking geographic diversification after COVID-19 disrupted global supply chains."
He added, "Customers are preparing for potential geopolitical, logistical, and other disruptions to the supply chain. We expect the pressure for 'Made in America' to persist even after Trump's term, though how the 'carrot and stick' policies will be allocated then is less certain."
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