Trump's strong push for "Made in America" raises costs, TSMC (TSM.US) warns that overseas expansion will erode profit margins in the long term

Wallstreet.cn has noted that pressure from U.S. President Trump’s demands for advanced semiconductors to be manufactured in the United States is pushing up costs for the world’s largest chipmaker TSMC (TSM.US) and squeezing its profit margins.

After Trump returns to office in 2025, the president has repeatedly threatened to impose tariffs on companies that do not manufacture products in the United States.

Since then, TSMC has announced a total investment commitment of $200 billion in the United States, including an additional $100 billion investment in advanced semiconductor manufacturing and packaging facilities in the U.S. announced last week.

TSMC said that even though its market capitalization has more than doubled over the past 12 months thanks to the artificial intelligence (AI) boom, its strong earnings this quarter have still been affected by overseas expansion.

TSMC CFO Wendell Huang said during the earnings call that gross margin growth was above the guidance, but the dilution effect from overseas fabs offset some of that gain. He added that profit margins will face further dilution in the coming “years” as overseas fab projects “ramp up capacity.”

U.S. Secretary of Commerce Howard Lutnick said in a statement: “President Trump’s leadership is driving corporate investment in American manufacturing.” “Following a historic trade and investment agreement, TSMC’s additional $100 billion investment will create tens of thousands of American jobs and bring advanced semiconductor manufacturing back to the U.S.”

While other Asian chipmakers, including SK Hynix, are also building facilities in the United States, TSMC’s commitment is by far the largest. Its aggressive U.S. expansion exposes it to higher production costs, creating a potential drag on profit margins.

Political Pressure

Last Thursday, TSMC announced a 77.4% year-on-year increase in Q2 net profit, far exceeding expectations and setting another all-time high for the world’s largest chip foundry.

Wendell Huang told the media that due to the “multi-year demand trend” from customers, the company is also pursuing aggressive U.S. business expansion.

Political pressure is another key driver behind this overseas expansion.

The White House spokesperson stated: “The multi-trillion dollar investments from TSMC and other semiconductor companies are the result of President Trump’s trade and economic policies, from the historic trade deal with Taiwan to the renegotiated CHIPS Act investment plan.”

Building plants in the United States is much more expensive. Morningstar senior equity analyst Felix Lee said, “Overall, we estimate it costs 20% to 50% more for TSMC to produce chips in the U.S. compared to Taiwan, depending on the timing of subsidies, recognition of tax credits, and other cost fluctuations.” Lee added that he expects customers to bear more of these increased production costs.

TSMC plans to raise contract prices for both advanced and mature process chips by up to 10% in 2027. TSMC declined to comment on pricing issues to the media.

Gartner Vice President and analyst Gaurav Gupta said, “What benefits TSMC is the lack of substantial competitors.”

Gupta noted that due to TSMC’s dominant position in the advanced process market, “the bulk of increased costs will have to be absorbed by its customers, who are either seeking supply chain diversification or have received executive orders from the U.S. government to buy domestic chips.”

Profit Margins

Wendell Huang stated that the company expects dilution of gross margins from ramp-up of overseas fab capacity to be 2% to 3% in the initial years, expanding to 3% to 4% in the later stages.

D.A. Davidson Head of Technology Research Gil Luria said, “Given TSMC’s overall very high profit margin levels, this is a margin gap it can sustain.” TSMC’s second-quarter gross margin was 67.7%, slightly higher than 66.2% in the first quarter.

Morningstar's Lee said that despite Trump’s amplified calls for domestic manufacturing, “after the COVID-19 pandemic disrupted global supply chains, customers are increasingly seeking geographical diversification.”

He added, “Customers are preparing for potential geopolitical, logistical, and other disruptions in supply chains. We expect the pressure of ‘Made in America’ to persist beyond Trump’s term, although the exact mix of ‘carrot and stick’ policies will be less certain at that time.”