AI chip demand is too hot! Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR(TSM.US) announced a 15% price increase for the 3nm process in the second half of the year, with the possibility of further increases next year.

According to informed sources, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) plans to raise its 3-nanometer wafer outsourcing price again in the second half of 2026, with the highest increase reaching 15%. It may further increase by 5% to 10% in 2027. The Chairman and CEO of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, Wei Zhejia, is expected to provide a systematic explanation on AI demand, advanced process layout, and overseas factory expansion at the shareholder meeting on June 4, which has attracted high attention from the market. Shift in supply and demand imbalance This is not the first time in recent years that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has raised prices. In the fourth quarter of 2025, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR notified some customers of the price increase for the 5/4-nanometer process. However, compared to the previous price increase cycle driven by mobile SoCs, this 3-nanometer price increase has a completely different underlying logicit marks the semiconductor pricing power officially transitioning from the "consumer electronics era" to the "AI infrastructure competition era," where a fundamental shift in the supply-demand structure of advanced processes is unfolding. "Historic Drift" in supply-demand structure: From mobile SoCs to AI multi-engine resonance The direct driving factor behind the current 3-nanometer price increase of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR comes from the "historic drift" in demand structure. In the past, the main demand for the 3-nanometer process came from smartphone SoCs, supported by a few customers such as Apple Inc. However, now, as the AI server upgrade cycle is in full swing, NVIDIA Corporation, AMD, Alphabet Inc. Class C, AWS, and many other cloud service providers are accelerating the adoption of 3-nanometer technology. The demand for AI accelerators and custom ASICs is also on the rise, leading to an increase in wafer orders. The shift in demand structure from "single-engine" to "multi-engine" is at the core of this price increase. ASIC manufacturers point out that large cloud service providers have been actively developing their own ASICs in recent years to reduce their dependence on general-purpose GPUs, further broadening the demand sources for 3-nanometer technology. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's Fab18 main factory is maintaining a high capacity utilization rate, with no sign of customer queue easing. In terms of wafer production data, the monthly production capacity for 3-nanometer technology reached about 130,000 wafers at the beginning of this year, gradually increasing to 160,000 to 175,000 wafers in the second quarter. However, even with continuous capacity expansion, the growth in AI demand continues to outpace market expectations, making the capacity gap difficult to bridge in the short term. Analysts at UBS Group AG commented in a report, "AI demand is not a cyclical bubble, but a multi-year capacity building cycle, and currently chip companies are generally limited by supply capacity." Capacity urgent: an "underfed" factory and a gap in 2027 From the supply side, the tight capacity of the 3-nanometer technology is not a temporary capacity allocation issue but a systematic gap that will persist until 2027. Wei Zhejia stated in the latest earnings conference call that the company is investing a significant amount of money to accelerate the expansion of existing wafer factories and build new production capacity to cope with the growing demand. He also admitted that the supply shortage situation will extend into 2027 due to continued rebooking of wafer orders from major customers such as NVIDIA Corporation, AMD, and Apple Inc. Meanwhile, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's 3-nanometer wafer factory in Taiwan, originally scheduled to achieve a monthly capacity target of 150,000 wafers by the end of 2026, has now been raised to 180,000 wafers per month, about 20% higher than the original plan. However, Deutsche Bank Aktiengesellschaft issued a warning in January that the capacity for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's 3-nanometer technology has been fully booked for the whole of 2026 and extended into 2027, forcing the company to significantly increase its capital expenditure plan for 2026. Faced with the pressure on 3-nanometer technology capacity, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has had to postpone some new 3-nanometer projects and guide customers to shift their mass production plans from 2027 to 2028 to the 2-nanometer GAA process. The situation of supply falling short of demand has even led some urgent order customers to pay a higher premium to lock in production capacity. There were reports last year that some customers were willing to pay a premium of up to 100% to obtain urgent 3-nanometer orders, a phenomenon that is redefining the pricing anchor for advanced processes. Financial landscape: the necessity of raising advanced process prices In the context of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's latest financial landscape, the strategic necessity of the price increase becomes clearer. In the first quarter of 2026, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR delivered an "historic best" performance: quarterly revenue reached about NT$1.134 trillion (about USD 35.9 billion), an increase of 35.1% year-on-year; net profit reached NT$57.25 billion, up 58% year-on-year; earnings per share (EPS) was NT$22.08, achieving another historical best for a single quarter. On the profit side, the first quarter non-GAAP gross margin reached a high of 66.2%, up 7.4 percentage points year-on-year and 3.9 percentage points quarter-on-quarter, surpassing the previously estimated range of 63% to 65% upper limit and setting a new record. The core drivers of the soaring gross margin include: an increased proportion of advanced processes (gross margins for 3-nanometer and 5-nanometer technology have exceeded 70%), maintaining a capacity utilization rate of over 95%, diluting fixed costs through economies of scale, and further thickening profit margins due to favorable exchange rates. In terms of business structure, revenue from high-performance computing (HPC/AI) platforms in the first quarter increased by 20% quarter-on-quarter, accounting for over 60% of the overall revenue. In contrast, revenue from smartphone business declined by 11% quarter-on-quarter, accounting for 26% of the total revenue, highlighting a stark contrast between weak demand for high-end smartphones and the surge in demand for AI. Looking ahead, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has provided a very strong guidance: annual revenue in 2026 is expected to grow by over 30% in USD terms, with capital expenditures reaching the upper range of USD 52 billion to USD 56 billion; second-quarter revenue is estimated to fall between USD 39 billion to USD 40.2 billion, with a mid-range quarter-on-quarter growth of approximately 10.3% and a year-on-year growth of about 32%, while the gross margin is expected to remain high at 65.5% to 67.5%. Based on the long-term high prosperity of the AI computing power market, the company has signed long-term supply agreements with key customers in North America to secure future orders, and the HPC/AI business is expected to maintain a high growth rate. There is a strong certainty about the overall high growth trend in 2026. Increased cost pressures Hidden costs behind the price increase: overseas expansion and depreciation pressure Another layer of logic driving the current price increase of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is the structural shift in the company's cost structure. On one hand, overseas factoriesincluding those in Arizona, Japan, and Germanyhave brought significant increases in capital expenditures and operating costs. On the other hand, the depreciation pressure for advanced processes continues to rise, coupled with the fact that the yield for the 2-nanometer technology is still in the early stage, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR needs to support the overall gross margin stability with reasonable pricing for mature processes. Market analysis suggests that, compared to the 2-nanometer technology, which is still in the early stage of yield improvement, the 3-nanometer technology is more advantageous for AI customers in terms of production stability and cost control, making it the most mature and reliable option for advanced processes. As the global AI computing power competition intensifies, the competition dimensions for advanced processes have evolved from simple technical iterations to a comprehensive competition of capacity, yield levels, and supply chain integration capabilities, where Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has significant leading advantages in all of these dimensions. UBS Group AG further points out that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's ability to raise prices at its most advanced nodes indicates that the company can capture a larger share of the value created by AI computing power demand. However, the higher wafer costs will eventually be passed on to chip buyersNVIDIA Corporation, AMD, and large-scale cloud providerswhich may squeeze their profit margins or raise the prices of AI hardware. Dividend controversies and pricing power: the "employee cost account" behind the price increase The timing of the price increase coincides with an internal "dividend dispute" that has garnered attention within Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. According to reports, there have been discussions within the company about possibly reducing the percentage of employee dividends, leading to backlash among grassroots employees. Some employees have called for actions like "turning off phones after work and not being on call" in a Facebook group. Chairman Wei Zhejia urgently sent a letter to all employees on the afternoon of May 26, canceling scheduled business trips, opening the performance bonus query system earlier, and personally holding an employee communication meeting on May 27. He opened up 41 lecture halls and meeting rooms for online sign-ups for staff to attend. During the meeting with employees on Wednesday, Wei Zhejia stated that the average profit sharing bonus this year would increase by over 30% to address concerns from some employees about the incentive program. As a key pillar of the global AI infrastructure, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is expanding its employee incentive program as profits rise. According to informed sources, during the company's internal employee meeting on Wednesday, Wei Zhejia stated that he firmly believed that the year-on-year growth rate of the average profit-sharing bonus for employees in Taiwan would exceed 30%, surpassing the growth level of the previous year. Industry analysts believe that in order to maintain employee dividends at a high level, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, based on cost considerations, has had to make the inevitable choice of significantly raising prices for customers, laying the groundwork for a 15% increase in the second half of 3-nanometer technology. Market expectations for the June 4 shareholder meeting With the price increase signal released, market attention is turning to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's annual shareholder meeting scheduled for June 4. Wei Zhejia is expected to provide a systematic explanation at the meeting on topics such as AI market demand, advanced process layout, and overseas factory expansion. This will be the first opportunity for the market to directly obtain the management's official stance on pricing strategies and technical roadmaps after the price increase rumors. Notably, just before the shareholder meeting, a "working dinner" between NVIDIA Corporation CEO Jensen Huang and senior executives from Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR also attracted market attention. According to reports, when asked whether Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR could meet NVIDIA Corporation's capacity needs, Wei Zhejia responded with a "zipper closure" gesture, indicating "we are working very hard." This interaction further strengthens market expectations of tight capacity for advanced processes continuing. The shareholder meeting on June 4 will not only provide official explanations for the logic behind the price increase but will also be a crucial window for global semiconductor investors to assess the sustainability of AI demand, the supply landscape of advanced processes, and the boundaries of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's long-term pricing power. For customers like NVIDIA Corporation and AMD, who directly purchase 3-nanometer wafers, the price hike by Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR will increase the manufacturing cost of their AI chipscosts that may ultimately be passed on to end customers through higher prices for AI hardware, such as Alphabet Inc. Class C, Microsoft Corporation, Amazon.com, Inc., and other large-scale cloud service providers. In a market that still focuses on the competition for computing power scale, cloud providers may face increased capital expenditure pressures.