AI boom reshapes the foundry landscape! UBS: Surging demand accelerates capacity expansion for advanced nodes, mature nodes enter an upcycle.

UBS Group AG noted in a research report released recently that in the wafer foundry market, the serviceable market size (TAM) for the N2 (2nm) node far exceeds expectations, A14 (1.4nm) capacity expansion is accelerating, and the upcycle for mature process nodes has already begun. N2 demand inflection point exceeds expectations UBS Group AG's proprietary bottom-up analysis of the N2 foundry TAM shows that by 2028, demand is expected to surge significantly to 320k wafers/month, well above the bank's forecast of about 230k wafers/month a year earlier. UBS Group AG said the increase in demand is mainly driven by stronger server CPU demand and accelerated AI computing deployment, especially as more ASIC projects are expected to enter mass production alongside GPUs in the coming years. At the same time, as execution improves, the bank expects Intel Corporation to migrate a larger share of PC CPU production to the 18A process. Accordingly, UBS Group AG estimates that by 2028, server CPUs and accelerators will account for 54% of N2 foundry demand, up from its previous forecast of 44%; PCs are expected to contribute 19%, and smartphones/tablets 26%. The larger market opportunity for N2 will support Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US), as the world's leading foundry supplier, in maintaining strong revenue growth in 2028-2029, even as competition slightly intensifies from Samsung Foundry, Intel Corporation (INTC.US), and Tesla, Inc.'s (TSLA.US) Terafab project. N3/N2, A14 capacity expansion accelerates To meet the higher N2 demand expectations, UBS Group AG raised its forecast for global N2 capacity by the end of 2028 from about 230k wafers/month to 312k wafers/month. The bank expects Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's N2 capacity to reach 210k wafers/month in 2028, up from its previous forecast of 160k wafers/month. Intel Corporation will also expand capacity more aggressively, with its internal CPU production capacity expected to exceed 60k wafers/month by 2028, compared with the bank's previous forecast of 40k wafers/month. At the same time, stronger cloud AI demand in 2027-2028 prompted UBS Group AG to raise its 2028 global N3 (3nm) capacity forecast from about 270k wafers/month to 290-300k wafers/month, with the increase driven entirely by faster capacity expansion at Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's A14 node is still expected to achieve mass production on schedule in 2028, supported by steady R&D progress and increasing customer engagement. Industry feedback indicates that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is advancing its expansion plans ahead of schedule. According to UBS Group AG's estimates, when the A14 node enters mass production, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR plans to achieve about 60k wafers/month of A14 capacity in 2028. Given the more aggressive advanced-process expansion plans, the bank raised its capital expenditure forecast for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR from $63 billion this year to $90 billion in 2027 and $105 billion in 2028. Mature-node foundry: supply-demand and pricing outlook improves in 2027-2028 UBS Group AG earlier presented a contrarian view to market consensus, namely that the mature-node foundry industry will enter an upcycle driven by industry-wide supply and resource reallocation. Since 2026, capacity utilization and pricing trends have continued to improve, and UBS Group AG expects more pronounced earnings upside in 2027-2028. The bank's latest analysis shows that, supported by growing server PMIC demand, 8-inch foundry capacity utilization could rise to 95% in 2027, up from 85% in 2026. Although demand for 12-inch 28/40nm processes may be dragged down in the short term by weak smartphone and consumer electronics demand, UBS Group AG still expects capacity utilization to rise from 84% in 2026 to 88% in 2027, supported by moderate capacity growth. The bank also believes that the competitive behavior of Chinese foundries should remain rational in 2027, as major players increasingly shift capital allocation toward advanced-process technologies. Stock recommendations UBS Group AG reiterated its "Buy" rating on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR and expects market forecasts for 2027-2028 revenue, earnings per share (EPS), and capital expenditure to be revised further upward. In mature-node foundry, United Microelectronics Corp. Sponsored ADR (UMC.US) remains the bank's top pick, as United Microelectronics Corp. Sponsored ADR should be one of the main beneficiaries as capacity spills over from large foundries, while silicon photonics and advanced packaging businesses will also provide additional upside. UBS Group AG is also bullish on Powerchip and Semiconductor Manufacturing International Corporation, while maintaining "Neutral" ratings on GlobalFoundries (GFS.US), Vanguard International Semiconductor, and Hua Hong. Risks UBS Group AG added that the semiconductor industry is relatively sensitive to economic cycles, so both upside and downside risks are related to macroeconomic drivers. Other specific downside risks related to semiconductor capital equipment include rapid market share loss due to factors such as product launch timing, product performance, design, or distribution. Supply chain companies serving the mobile phone industry are also in a highly cyclical market environment, affected by both macroeconomic factors and inventory cycles within the supply chain. These companies also operate in a highly competitive environment, where product innovation and research and development (R&D) investment are key to success.