The race between TSMC and Intel is heating up

Taiwan Semiconductor Manufacturing, also known as “TSMC,” is the undisputed global champion of semiconductor manufacturing. The company is the main contract manufacturer for NVIDIA (NVDA), Apple (AAPL), AMD (AMD) and many others. Its presence in the semiconductor industry is so ubiquitous that some have compared its position today to that of Intel in the 1990s.

It might seem incredible to younger readers, but Intel was once the dominant company in the semiconductor space. Its name recognition was at its peak in the 1990s when Windows PCs sported Intel Inside stickers like the one shown below, while the actual financial benefits of Intel’s reputation peaked in 2018, the penultimate year of the company’s relationship with Apple.

Intel lost the battle for chip supremacy when Apple decided to start making its own chips. Apple began designing iPhone chips in 2010, then moved to designing its own laptop and desktop chips exactly a decade later. This loss of a major manufacturing customer took Intel from the King of its industry to a bit player overnight. In 2019, the company had $22.4 billion in operating income. By 2021, that sum had shrunk to $22.08 billion. Although Intel’s sales have increased slightly since the launch of Apple’s home-grown chips, its profit has fallen, possibly because of the loss of this most lucrative customer.

Today, Taiwan Semiconductor is what Intel used to be: the largest company in the semiconductor industry, doing more revenue than even the mighty NVIDIA (NVDA). Some would say that that company is #1 in the industry–it does have the highest market cap of its peers–but TSM is #1 in the business sense.

This fact makes Taiwan Semiconductor and Intel two companies worth comparing. Not only have they occupied the same position in the world, they have also increasingly been operating in the same sub-sector. Contract manufacturing–TSMC’s bread and butter–is an increasingly important part of Intel’s business. In its most recent quarter, Intel’s revenue declined 8%, thanks to weakness in its core semiconductor design business. At the same time, its foundry revenue–that is, revenue from the segment that competes with TSMC–increased 299%. So, it looks like Intel is really making gains in foundry services.

Ample Government Support for Both TSMC and Intel
As of 2023, both Intel and TSMC are getting support from the U.S. government. Yes, TSMC is getting some money right alongside its U.S. competitor. The Biden Administration wants semiconductor manufacturing to come to the U.S. so badly that it’s paying foreign countries to build fabs right along with domestic ones.

It’s all thanks to the CHIPS Act, a 2022 law that provides funding for companies that build semiconductors in the United States, among other things. The act is a bonanza for certain companies, notably those like Intel that are trying to break into the foundry business. For others, like sellers of chip equipment or components to China (e.g. Micron (MU)), the act merely slightly offsets revenue lost to trade restrictions on China. Micron’s revenue and earnings abruptly fell off a cliff when the company was banned from selling memory to Huawei. Revenue never recovered to its peak 2018 levels. Now the company is pledging to invest $100 billion in a New York City mega fab. This spending could bring in up to $30 billion in subsidies, but Micron is losing $2.34 billion every year that Huawei isn’t a client (calculated as 2019 revenue times 10%, the percentage by which the company said the ban reduced its sales).

The CHIPS act is designed to give funding to companies that manufacture chips in the United States. Thanks to the Act’s provisions, Intel’s $52.7 billion spending on U.S. fabs is expected to yield $17.5 billion in subsidies. The cost savings alone will improve Intel’s bottom line. On top of that, the company will, when the project is over, have a $52.7 billion revenue-generating asset. At the end of its most recent quarter, TSMC had $97 billion in property plant and equipment, and Intel Foundry Services will have an asset costing about half that much when construction is done. The fact that it cost about half of what TSMC’s fabs are worth doesn’t mean it is worth half as much–it might get written down. And even if it is “worth” as much in accounting terms, it might not generate half of TSMC’s earnings level. Expertise and customer relationships are a factor in how much money a company can earn from an asset. Nevertheless, with a $50 billion fab, Intel will have the infrastructure in place to potentially compete with TSMC.

Intel Wants Preferential Treatment
Although TSMC and Intel are both getting money from the CHIPS Act’s provisions, Intel is widely seen as the biggest winner. Indeed, it seemingly is. Investor’s Business Daily wrote that the company’s $10-$15 billion in forecasted subsidies was the most any company got (the figure has since swelled to $17.5 billion). TSMC for its part is only expecting $7 to $8 billion. Seeking Alpha