Sustaining Profitability: Taiwan Semiconductor's Gross Margin Challenge During Global Expansion

Taiwan Semiconductor Manufacturing Company (TSMC/TSM) faces a critical test of its operational efficiency as it scales production across new manufacturing hubs in the United States, Japan, and Germany. While the chipmaker’s latest results paint an optimistic picture, the question of whether it can maintain its industry-leading gross margin performance hinges on its ability to overcome mounting overseas production costs.

Financial Performance Holds Ground Amid Expansion

TSMC’s third quarter 2025 results reveal a gross margin of 59.5%, representing a 170 basis point year-over-year increase despite significant capital investments in international manufacturing. This margin expansion stands counterintuitive to management’s own warnings about near-term profitability pressures. The company has flagged potential margin compression of 2% in the near term, with the possibility of 3-4% deterioration as overseas facilities reach full operational capacity.

For the fourth quarter, TSMC’s guidance suggests gross margin between 59% and 61%, with the midpoint implying a 100 basis point year-over-year gain. Such resilience suggests the company’s cost structure remains robust despite geographical diversification.

Revenue growth tells a similar story of strength. TSMC’s top line reached $33.1 billion in Q3, marking a 40.8% year-over-year increase. Zacks consensus projections forecast revenue growth of 33.7% for full-year 2025 and 20.6% for 2026, underscoring sustained momentum driven by artificial intelligence and advanced computing demand.

The Cost Arithmetic of Going Global

Establishing semiconductor fabs outside Taiwan represents a strategic necessity but carries substantial financial trade-offs. Overseas facilities demand higher operating expenses due to labor costs, infrastructure investments, and regional supply chain inefficiencies. TSMC’s willingness to absorb near-term margin compression reflects confidence that automation, production scale, and government incentives will eventually narrow the cost differential.

The company is banking on two factors: first, that process maturation and yield improvements will drive down per-unit costs as volumes increase; second, that government subsidies—particularly from U.S. and German programs—will offset some structural cost disadvantages. Given that customers increasingly demand geographically diversified sourcing for critical chips like 2nm nodes and advanced A16 processes, TSMC’s expansion strategy addresses both market demand and supply chain resilience.

Competitive Positioning in Advanced Node Manufacturing

Intel and GlobalFoundries are pursuing parallel strategies but with different technical targets. Intel is concentrating resources on its 18A process (representing 1.8nm technology), which the company claims offers superior performance and efficiency compared to TSMC’s N2 node. This competition for advanced node leadership will likely intensify cost pressures across the industry.

GlobalFoundries has adopted a more conservative approach, focusing on mature nodes while capturing emerging demand from edge computing and embedded AI applications. The company is expanding U.S. and European production capacity to appeal to customers prioritizing supply chain diversification over cutting-edge performance.

Market Valuation and Investor Sentiment

TSM shares have appreciated 54.1% year-to-date, outpacing the broader Computer and Technology sector’s 28.9% gain. From a valuation perspective, TSM’s forward price-to-earnings ratio of 25.06 trades below the sector median of 29.03, suggesting the market has not fully priced in the company’s revenue growth potential.

Earnings estimates for 2025 and 2026 point to year-over-year increases of 43.9% and 20.2%, respectively. However, recent revisions have trended downward over the past month, potentially reflecting investor concerns about gross margin sustainability and overseas expansion costs.

TSMC carries a Zacks Rank of #2 (Buy), reflecting analyst confidence in the company’s long-term trajectory despite near-term headwinds.

The Sustainability Question

Whether TSMC can preserve its gross margin leadership while building a global manufacturing footprint remains the critical variable for investors. The company’s historical track record of operational excellence and process innovation provides confidence, yet the 2-4% margin compression warnings signal that profitability maintenance will require flawless execution. Success depends on achieving rapid scale, securing anticipated government support, and maintaining technological differentiation in advanced nodes—a combination that will define TSMC’s competitive position through the remainder of this decade.