TSMC (Taiwan)

Where is their head office?

The head office is in Hsinchu, Taiwan.

What does the company do?

Taiwan Semiconductor Manufacturing Company (TSMC) makes integrated circuits that are used in a variety of products today—from laptops and smartphones to cars, industrial equipment and high performance computing. Founded in 1987, the company pioneered the pure-play foundry business model where instead of designing or making semiconductor chips under its own brand name, it focuses exclusively on manufacturing its customers’ products.

Why do we like the investment?

Semiconductors is a structurally attractive industry. By 2030, it is expected to grow to US$1 trillion —averaging from 6% to 8% growth a year—driven by megatrends such as artificial intelligence and the Internet of Things, which require high-power computing. We view TSMC as a high quality catch-all play of this trend, underpinned by its positioning as “everyone’s foundry.”

TSMC has a strong financial profile. The strength of its balance sheet has allowed it to invest billions of dollars a year to stay ahead of global peers on the technology curve and in terms of production capacity. By doing so, the company is able to manufacture the most advanced semiconductors for its customers, making it a global leader in an industry where cutting-edge tech raises the barrier to compete. In fact, we have seen several of TSMC’s competitors dropping off over time in the race as the size of semiconductors shrank.

Beyond manufacturing excellence, TSMC’s market-leading position in the foundry business and its long experience in the field gives it tremendous scale advantage, allowing it to operate at the best yield and utilisation levels in the industry. That translates to the lowest cost among competitors. The strength of its customer relationships is also difficult to replicate. We also like the fact that TSMC has a strong management team with an excellent track record.

On the geopolitical front, the impact from the fallout between the US and China is relatively less severe on TSMC. Given its global technological leadership among foundries, there are currently no alternatives to TSMC if countries want to invest in their own semiconductor capabilities. Evidently, we have seen the company leading the charge in establishing new cutting-edge factories in the US, European Union and Japan. We continue to closely monitor the evolving geopolitical dynamics between China and the US.

What is our key area of engagement?

We have engaged TSMC in areas of sustainability, including water conservation as well as human capital development. Going forward, engagements will focus on the company’s progress on producing more energy efficient products as well as its commitment to reach Net Zero emissions by 2050.

What is the result?

TSMC is one of the most advanced companies in Taiwan on the ESG front, and is rated AAA by MSCI. The bulk of the company’s semiconductor manufacturing facilities in Taiwan had high exposure to water-related risks in 2021 due to a severe drought, which prompted the government to place restrictions on the supply and usage of water by industrial companies. Semiconductor manufacturing is a water-intensive process, hence water usage and conservation is a material ESG risk. As a result, TSMC took strides towards sustainability by investing in water conservation and recycling measures—it set a 2030 target of reducing water usage per unit to 30% below 2010 levels. Further, the company is working to develop water reclamation technologies as well as using reclaimed water during manufacturing. TSMC aims to increase more than 60% replacement of water resources with reclaimed water in 2030.

TSMC also leads the domestic industry in corporate governance and corporate behaviour practices. Most directors on the TSMC board are independent, while the company leads peers in initiatives such as employee development programs. While we do think highly of its ability in human capital management, there is a risk that their edge—in sourcing, training and retention—may erode in view of TSMC shifting some of its manufacturing capabilities to the US, where the market for talent is more competitive and the work culture differs from Asia. The management is aware of this risk and remains focused on getting this right and it remains an area we will continue to monitor.

TSMC is also a full member of the Responsible Business Alliance, which is dedicated to electronics supply chain sustainability. It conducts environmental, safety and health audits to suppliers’ manufacturing sites and routinely encourages them to implement measures to save energy, reduce carbon emissions, conserve water and reduce waste. In 2020, TSMC was also the first semiconductor manufacturer worldwide to join RE100, committing to source 100% renewable electrically globally—an important step given the company’s net zero target.

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