Wafer prices have increased by 22% in a year. Why does TSMC dare to increase prices when the industry is in recession?

Today, chip demand has not reached an all-time high, but despite the industry downturn, TSMC's 300mm wafer average selling price (ASP) rose to $6,611 in the fourth quarter, a single-year increase of 22%. As analyst Dan Nystedt pointed out, he attributed this increase to the improvement of TSMC's N3 (3-nanometer) process technology. Bernstein Research's Stacy Rasgon also pointed out that most of the semiconductor industry's growth now comes from increased pricing rather than increased processor shipments.

In many ways, TSMC's wafer shipments prove this: The world's first-generation fab shipped 2.957 million 300mm equivalent wafers in the fourth quarter of 2023, down from 3.702 million in the fourth quarter of 2022. This is the first time they have fallen below 3 million since 2020.

Despite a sharp 20.1% drop in wafer shipments, TSMC's net revenue in the fourth quarter of 2023 reached US$19.62 billion, a 1.5% decrease from US$19.93 billion in the fourth quarter of 2022. Meanwhile, as Nystedt observed, the average price of processed 300mm TSMC wafers reached $6,611 in the fourth quarter of 2023, up from $5,384 in the fourth quarter of 2022. This is due to increased N3 wafer shipments from TSMC to its alpha customers, including Apple. Some analysts estimate that TSMC could charge as much as $20,000 per wafer processed using its N3 technology, and while that number may not be entirely accurate (as TSMC's quote depends on many factors), the point is that TSMC charges more for N3 than it does. Suitable for N4/N5 or N6/N7 process technology.

In fact, rising prices for wafers processed at the latest nodes have largely driven nearly all of the semiconductor industry's growth in recent years, said Stacy Rasgon, senior analyst for U.S. semiconductors and semiconductor capital equipment at Bernstein Research.

"How much has pricing contributed to the growth of the semiconductor industry in recent years?" Rasgon asked rhetorically in the X post. “Would you be surprised to learn that the answer is ‘more than anything else’?”

Simply put, new process node technologies become more and more expensive over time. Rasgon's report shows that while total chip shipments (units) actually declined from 2019 to 2023, the average selling price (ASP) increased significantly, resulting in more revenue growth for chip manufacturers.

Speaking of more expensive process nodes, it's important to note that 15% of TSMC's wafer revenue in the fourth quarter of 2023 came from wafers processed with N3 technology, while N5 and N7 technologies contributed 39% and 17% respectively. From a monetary perspective, N3 technology brought TSMC $2.943 billion in revenue, N5 technology brought TSMC $6.867 billion in revenue, and N7 technology brought TSMC $3.3354 billion in revenue.

Overall, TSMC's advanced technology nodes (N7, N5, N3) account for 67% of its total wafer revenue. Additionally, the broader category, which includes all FinFET-based process technologies, accounts for 75% of the company's wafer sales.

Interestingly, the revenue share of systems-on-chip (SoC) used in smartphones and high-performance computing applications (TSMC's umbrella term for a range of products from game consoles to PCs and from network chips to data centers) is the same at 43% each, which is different from TSMC's shipments in recent years, which have been dominated by smartphone SoCs. Automotive chip revenue accounted for 5%, and IoT chips also contributed 5%.

To add more details about TSMC's N3 shipments, we should note that Apple (likely the main customer of N3) is using 3nm processors in both its iPhone 15 Pro smartphones and MacBook Pro laptops, which is a bit different from its usual strategy of adopting the leading node for phones first and then using it for PCs in the quarter. For obvious reasons, this is good news for TSMC, as it can sell more wafers processed using its leading process technology.