Most stock investors might feel clumsy when they start to study an unfamiliar industry or a company. Here are three handy qualitative tools, which could shorten your study time. Furthermore, I will use an example to demonstrate how the three tools work to evaluate the largest semiconductor foundry — TSMC.
The First Tool: Business Model Canvas, a holistic point of view.
Business Model Canvas was invented by Alex Osterwalder in 2010, which offers entrepreneurs (or strategists) to holistically review the business model. Business Model Canvas comprises of nine segments, which are mostly symmetry.
Here is TSMC’s Business Model Canvas.
TSMC has redefined the semiconductor industry and differentiated from the existing integrated devices manufacturer (IDM). It offered a unique business model, i.e., TSMC “only” manufactures IC, but label its own brand. This special business model was mulling by each player, but no one thought this idea was feasible. Yet TSMC made it. That is why people say that what Morris Chang (TSMC’s founder) did not establish a company but two industries.
In 2019, TSMC’s revenue reached US$34.63 billion, 1.3% revenue growth whilst the entire semiconductor industry recessed 12%. Furthermore, the market share in 2019 was 52%. Yet it reached 54% indicated in a recent report.
Three elements made a long-term success:
- Trustworthy culture: the trustworthy culture can be manifested in TSMC’s customer relationships. Their business model can only work on the solidly mutual trusts. In 2019, TSMC manufactured 10,761 various products for 499 customers.
- Constantly tremendous capital expenditure (CapEx): CapEx ensures TSMC’s future competitive moat. TSMC’s CapEx in 2019 reached US$ 14.9 billion which was about 45% higher than the previous year. The CapEx included R&D expenditure which was raised 6% to US$ 3 billion in 2019. TSMC’s overwhelming CapEx are the strategies in both Business Model Canvas’ key activity and key resource.
- virtue-circled ecosystem: TSMC’s state-of-the-art technology could not be implemented without their solid equipment partners. In other words, key partners. E.g., ASML, one of TSMC’s most important equipment suppliers, provides the EUV (Extreme ultraviolet lithography) mask aligner. Without it, 7 nm (or smaller) semiconductor product would not be implemented.
The Second Tool: Porter’s Five forces analysis, the interactions among the ecosystems
Porter’s Five forces analysis is probably the most popular business tool for giving an overview of a business. Thank Lucidchart for the automatically self-generated chart. As the chart below, those five forces interact with each other and determine the company’s competence. Let’s find out how TSMC work in this tool.
- Buying power: TSMC’s largest client, Apple, accounted for 23% revenue; whilst the second largest, Huawei, contributed 14% in 2019. Both the top 2 clients are smartphone companies who mainly purchased the advanced chip products from TSMC.
Apple’s latest iPhone SE and iPhone 11 series are embedded A13 processor with 7nm. In the meantime, Huawei’s IC design fabless, HiSilicon, booked TSMC’s 7nm capacity for its Kirin 980 and Kirin 990 processors. TSMC is the sole manufacturer for both clients’ advanced chips.
The Wafer Sales Plan chart below indicates the tendency of smaller nanometre products would be expected to become a mainstream gradually. TSMC can be anticipated to hold this competition advantage for a while.
- Competitive rivalries: TSMC has dominated the market with 54% market share. Samsung takes the second place with 15.9% in foundry business. Although Samsung has the most competitive semiconductor manufacture technology, its role of no.1 smartphone company is the burden restricting from earning more foundry orders. In another words, TSMC’s market position in the advanced chip product is unshakable.
The pie chart below shows TSMC’s product technology portfolio in the first quarter of 2020. There are still 46% product portfolio greater than 16nm. 28nm product accounted for 14% revenue, the third largest. The competition in this section is more competitive with more players, i.e., SMIC, UMC…etc. The competitors’ gross margins are around 20% or less, and it is a stark contrast comparing with TSMC’s over 50% gross margin. The data show how the price in this section is more sensitive.
- Supplier power: the main incoming material is raw wafers. TSMC varies its suppliers for risk management. The raw wafers are from Taiwan, Japan or even Europe. TSMC can easily drive the suppliers. After all, who doesn’t want to do business with the largest foundry in the world?
- Threat of new Entry: for decades, TSMC has built a solid concrete moat which no new competitor can easily compete with. The difficulties for a new entry are not only the huge CapEx and R&D competence, but also the solid partnership with the customers.
- Threat of Substitution: the whole industry is hard to be substituted within decades. As long as Von Neumann architecture keeps working, the semiconductor industry would not be perished. The only possible substitution might be quantum computing, which has just sprouted.
The Third Tool: PESTEL, a potential game changer
PESTEL stands for six aspects, i.e., political, economic, social, technological, environmental, and legal. The tool is getting more important amid the uncertain era. Comparing with the previous two tools above, PESTEL provides a broader and different point of views which can change the whole game. It could be a joker card in a poker game.
- Political: the international politics is getting harder to predict. The rise of protectionism and the trade war between the G2 are probably the most unpredictable factor.
US government keeps inviting TSMC to build another factory in US. Yet TSMC has mulled about the high manufacture cost in US. However, in May 2020, US announced a restriction of semiconductor technologies used on Huawei. Huawei accounted for 14% TSMC’s revenue in 2019, this restriction is undoubtedly a serious impact to TSMC. Right after the restriction order, TSMC then announced to invest US$ 1.2 billion for manufacturing 5nm chip in Arizona, US. Coincidence? Maybe. The investment can help US holding the advanced technology in the US which somehow mitigates the national security risk especially in military defence application. Besides, TSMC doesn’t seem have other choices, because 59.3% TSMC’s revenue came from US.
- Economic: economic condition may also highly affect TSMC’s business forecast. Right now, the global pandemic glooms the economy and causes a high unemployment rate. TSMC’s customers might put off or downsize their new products forecast.
- Social: the social factor could be the change of a country’s demographic structure and the aftermath brings by the cause.
- Technology: the technology factor could be the diagram shifting in the whole industry. With TSMC’s constant CapEx, TSMC can always be a part of the cutting-edge technological development.
- Environmental: this factor is about reviewing if any pollution takes place during the whole manufacture procedure. The environmental factor could be a potential public risk and could harm a company’s reputation.
- Legal: for example, the labour law amendments could be the potential uncertain factor which might increase a company’s cost. Or a patent litigation may bother a company for the long-term development.
Business Model Canvas, Five Forces Analysis, and PESTEL are three useful tools for qualitative evaluation. They provide various angles, respectively. Business Model Canvas gives a clear view of business procedure; whilst Five Force Analysis provides points of view from the entire ecosystem and reveals how a role interacts with each other. PESTEL provides a “what if” brain storming, in other words, PESTEL is a risk management tool. Combining the three tools, we can have a more objective and holistic view to a company.
TSMC has strived to excel in each aspect in the three tools, so how could they be unsuccessful?
