Can TSMC really save Intel?

Will TSMC acquire Intel's wafer fabs?

Recently, media reports have suggested that TSMC may establish a joint venture with Intel and operate Intel's wafer fabs. On February 15, Reuters pointed out that the Trump administration may not support foreign companies operating Intel's factories in the United States.

In response, JP Morgan and Morgan Stanley both released research reports on February 16 stating that the probability of TSMC acquiring or operating Intel's wafer fabs is low.

JP Morgan: Sharing process technology with Intel? Almost impossible

JP Morgan noted that, on one hand, for TSMC to take this path, it would need significant concessions and agreements from multiple stakeholders, including the government, shareholders, and customers.

Secondly, TSMC's management has repeatedly stated that due to the significant differences in wafer fab layout, cost structure, and organizational culture, acquiring or operating external wafer fabs is not a priority strategy for the company. Therefore, JP Morgan believes that the likelihood of TSMC acquiring or operating Intel's wafer fabs is extremely low, unless the U.S. government provides strong financial subsidies and makes clear commitments regarding TSMC's role; otherwise, such actions are unlikely to occur.

Furthermore, some media reports have suggested that TSMC may share N3 and N2 process technologies with Intel, or even send engineers to support Intel. However, JP Morgan believes that this scenario is overly idealistic and almost impossible to happen. TSMC places a high value on intellectual property (IP) protection and is highly unlikely to voluntarily open its most advanced process technologies to Intel. It can be anticipated that TSMC will firmly oppose any similar requests.

JP Morgan pointed out that since Intel's wafer foundry business is expected to incur a loss of $7 billion in 2024, if TSMC were to take over its factories or establish a joint venture, it could have a significant negative impact on the profit and loss statement in the short term, leading to a potentially negative initial market reaction. Additionally, TSMC's management resources would face greater pressure, as the operational model of Intel's wafer fabs is quite different from TSMC's own.

From a valuation perspective, this move could further enhance TSMC's market position, solidifying its status as the only company in the world with large-scale advanced process capabilities. Therefore, although it may have a negative impact on earnings per share (EPS) in the short term, in the long run, it could drive an increase in the price-to-earnings ratio. JP Morgan expects that Intel will become a larger customer of TSMC in the next 3-5 years, as Intel's primary goal is to regain market share and revenue, rather than independently enhancing its wafer foundry capabilities.

Morgan Stanley: TSMC has clearly denied any intention to acquire Intel's wafer fabs

Morgan Stanley stated that TSMC has established a leading advantage in the wafer foundry sector through years of accumulated R&D investment and holds a significant share in the advanced process market. Morgan Stanley believes that TSMC's decision regarding expansion of wafer fabs in the U.S. primarily depends on customer demand and shareholder value, rather than to assist its American competitor Intel.

Morgan Stanley pointed out that it is noteworthy that the only significant management meeting TSMC held recently was a board meeting in the U.S. on February 12, during which the company did not comment on tariffs or geopolitical issues.

In the earnings call for the second and third quarters of 2024, Morgan Stanley raised similar questions to TSMC's management regarding this issue. For example, during the July 2024 (2Q24) earnings call, Morgan Stanley asked management whether they would consider a joint venture model in the U.S. similar to those in Japan and Europe TSMC's response at the time was: "The company will continue to adhere to its existing expansion plan for U.S. fabs, but will not consider establishing joint ventures in the United States."

Morgan Stanley believes that TSMC's joint venture partners in Japan and Europe (such as Sony and Bosch) can bring in mature process foundry orders, which aligns with TSMC's business development strategy. However, in the United States, TSMC's fabs focus on advanced process businesses such as 4nm/3nm, which are markets that TSMC can obtain business from due to its technological advantages, thus the value of the joint venture model is relatively small.

During the earnings call for the third quarter of 2024 (3Q24), Morgan Stanley asked management if there was interest in acquiring some of Intel's fabs in the United States, to which TSMC responded: "TSMC is not interested in acquiring Intel's U.S. fabs. Intel, as a vertically integrated device manufacturer (IDM), has always been an important customer for TSMC, and we believe we may still obtain a significant amount of business from this customer in the future."

Additionally, TSMC has previously emphasized that it can maintain certain growth in the CPU foundry market by providing foundry services for AMD and Arm architecture-based CPUs. Furthermore, adjusting the processes of other fabs to TSMC's standards is extremely costly, not to mention the challenges of integrating human resources. Therefore, Morgan Stanley believes that TSMC will not adopt this strategy