With Intel's "false competition," there is "only benefit" for Taiwan Semiconductor

The "revival" of Intel's foundry business may pose an exaggerated threat to TSMC in the market.

On August 21, according to news from the Wind Trading Platform, JP Morgan's Technology and Telecoms team stated in their latest research report that Intel's foundry's "false competition" is actually more beneficial to TSMC.

The analysts believe that the existence of Intel's foundry business can actually help TSMC avoid government regulatory pressure due to its monopoly position. JP Morgan also stated that customer participation in Intel's foundry "revival plan" is not purely negative, and the fundamental challenges faced by Intel's foundry far exceed financial issues.

The firm stated that TSMC will continue to maintain over 90% market share in advanced process technology, maintaining TSMC's "overweight" rating with a target price of NT$1,275.

The "selective" illusion is more valuable than absolute monopoly

JP Morgan analysts stated that aside from the initial frenzy (in the second half of 2020, when the market expected Intel to outsource manufacturing on a large scale, TSMC's stock price reached a price-to-earnings ratio of 25-30 times), the notion that TSMC could become a monopolist in the advanced process foundry sector has not significantly driven up its price-to-earnings ratio.

JP Morgan believes that this potential monopoly position would only invite more scrutiny (from government agencies), while also amplifying geopolitical risks—factors that typically depress price-to-earnings ratios.

The firm believes that if there is a slightly weaker competitor in the advanced process sector, creating an illusion of "choice" for customers, it may actually be more beneficial for TSMC. This could alleviate ongoing scrutiny from the government and reduce pressure from policy demands such as "reshoring manufacturing to the U.S."

Customer participation in Intel's foundry revival is not purely negative

The market may view the participation of TSMC's major customers, such as Apple or Nvidia, in Intel's foundry revival plan as a direct loss of market share for TSMC. However, JP Morgan believes this is not purely negative.

Analysts pointed out that Intel's foundry needs to execute perfectly on at least two to three advanced process nodes to gain credibility among fabless customers and achieve significant scale in the advanced process sector.

At the same time, product businesses may continue to face competitive pressure from AMD, ARM, Nvidia, and internal chips, forcing Intel to continue outsourcing more products to the most competitive foundry—TSMC.

Analysts believe that regardless of how many customers support it, it is unlikely to resolve the inherent conflict of interest between product and foundry businesses. Therefore, TSMC will continue to maintain over 90% market share in advanced process nodes for the foreseeable future.

Intel's foundry issues go beyond financial aspects

While most observers attribute Intel's foundry issues to financial problems, JP Morgan believes the fundamental challenges lie elsewhere. The research report states:

Due to the severe deterioration of cash flow in its product business, Intel may currently be unable to fund its foundry-related expansion. However, even when Intel is quite dominant in the CPU field and has a leading edge in process technology, its foundry strategy has not really worked.

Analysts point out that the foundry business requires a very different corporate culture, service mindset, focus on cost efficiency, and customer-centric innovation, which is difficult for a company that has focused almost entirely on products throughout its existence to cultivate in a short period of time.

Intel's best chance for success in foundry is to adopt the N-1 approach (considering that even N-2 or N-3 nodes lack a second supplier in the foundry field), which would reduce the risks for potential customers and may make it easier to increase capacity, rather than competing head-on with TSMC in advanced processes.

However, JP Morgan warns that as a leading domestic foundry that has received investment from the U.S. government, this cautious approach may not be a viable strategy