TSMC posted record fourth quarter 2025 results driven by strong demand for its 3nm and 5nm process families, with a gross margin of 62.3%, surpassing prior guidance of 59-61%. The better-than-expected profitability was attributed to cost improvements, favorable exchange rates, and high capacity utilization.
Addressing market concerns about recent memory price hikes affecting customer orders, CEO C.C. Wei explained that TSMC's customers focus on high-end product applications with low price sensitivity. Despite rising prices, customers maintain solid forecasts and robust demand, leaving TSMC unaffected.
2026 outlook: Cautious planning to strengthen competitiveness
Wei noted AI-related demand remained strong throughout 2025, while non-AI end markets have bottomed out and are showing moderate recovery. The foundry industry under the "Foundry 2.0" segment grew 16% year-over-year in 2025, but TSMC's revenue rose 35.9% in US dollars, outperforming the broader sector.
Looking ahead to 2026, uncertainties persist from tariff policies and rising component costs, especially impacting consumer and price-sensitive end markets. TSMC plans to cautiously manage business strategies to reinforce its competitive position.
Benefiting from strong AI demand, TSMC projects Foundry 2.0 industry growth of 14% in 2026, with company revenue expected to increase nearly 30% in US dollar terms.
AI trend drives capacity expansion and higher capital investment
Wei emphasized the positive momentum in the AI market and confidence that AI remains a long-term megatrend fueling semiconductor demand. AI accelerators accounted for a high-teens percentage share of TSMC's 2025 revenue.
The growing adoption of AI models across consumer, enterprise, and sovereign sectors is driving increased compute needs, supporting advanced semiconductor demand. Customers and their clients, such as cloud service providers (CSPs), signal a strong interest and are directly contacting TSMC for capacity.
Due to increasing process complexity, project lead times now require engagement with customers at least 2-3 years in advance. Internally, TSMC rigorously evaluates market demand before committing to capacity build-out.
TSMC is preparing to accelerate capacity additions and boost capital expenditure, aiming to expedite existing fabs in Taiwan and Arizona. Production efficiency will be enhanced to raise output, including the potential conversion of 5nm capacity to support 3nm, alongside cross-node capacity optimization.
Gross margin expected to rise further in early 2026
Compared to the third quarter of 2025, TSMC's fourth-quarter gross margin improved by 2.8pp to 62.3%, mainly due to cost optimizations, favorable forex rates, and higher overall capacity utilization. Actual margins exceeded guidance thanks to successful cost control measures.
For the first quarter of 2026, TSMC estimates a median gross margin of 64%, supported by ongoing cost efficiencies, production improvements, and elevated capacity use. However, some margin dilution is anticipated from overseas fabs.
Overall capacity utilization is expected to moderately increase in 2026. The 3nm process gross margin is forecast to surpass the company average sometime during the year. Cross-node capacity support among 7nm, 5nm, and 3nm processes will continue to enhance profitability.
As overseas operations scale up, TSMC maintains previous projections that margin dilution from foreign fabs will initially impact profits by 2-3%, expanding to 3-4% later.
Additionally, volume ramp-up of 2nm technology starting in the second quarter of 2026 is expected to dilute gross margin by 2-3% over the full year. Exchange rate fluctuations may also affect 2026 results.
Capital spending rises amid cost challenges and growth opportunities
TSMC faces escalating manufacturing costs driven by more expensive equipment and greater process complexity. Capex for building a monthly 1,000-wafer capacity using 2nm technology significantly exceeds that of 3nm, with A14 process capex even higher per thousand wafers.
Additional cost pressures stem from global footprint expansion, investments in specialized process technologies, and inflation. Over the past three years, TSMC's total capex reached US$101 billion and is expected to grow substantially over the next three years.
TSMC intends to remain strategically focused rather than opportunistic, collaborating with suppliers on cost improvements. Confidence remains high in sustaining above 56% gross margin through chip volume growth and cross-node capacity optimization despite market cycles.
Higher capex levels align with anticipated growth opportunities over the coming years. For 2026, TSMC plans capex between US$52-56 billion.
Advanced process updates: 2nm and A16 progress
TSMC confirmed 2nm began mass production on schedule in the fourth quarter of 2025 at Hsinchu and Kaohsiung fabs, fueled by strong smartphone, HPC, and AI demand. Rapid growth of 2nm is expected in 2026.
N2P, an extension of the 2nm family, is planned for mass production in the second half of 2026. The A16 chip, featuring Super Power Rail (SPR) technology, is also slated for mass production in the second half of 2026.
Taiwan and overseas fab status and future plans
All overseas decisions are based on customer demand and necessary government support, TSMC said.
In Arizona, the first fab started mass production in the fourth quarter of 2024. The second fab construction is complete, with equipment installation planned for 2026 and mass production targeted for the second half of 2027. Groundbreaking has begun on the third fab, with permits sought for a fourth fab and the first advanced packaging facility. Additional land adjacent to the current sites was acquired to develop a standalone gigafab campus.
In Japan, Kumamoto's first specialty process fab began mass production at the end of 2024; construction of the second fab is underway. Technology and production schedules depend on customer demand and market conditions. In Dresden, Germany, the specialty process fab is progressing as planned, with mass production similarly contingent on market factors.
Supported by government backing, TSMC is preparing multiple phases of 2nm fabs in Taiwan's Hsinchu and Kaohsiung science parks and will continue investing in advanced process and packaging facilities domestically over the coming years.
Article edited by Jack Wu
