Taiwan Semiconductor Manufacturing Co. (TSMC) (https://www.tsmc.com/english/default.htm) is another great example of the type of companies we are looking for in our emerging markets universe. This time, we will be highlighting a company that has long ago already evolved from a “Global Challenger” into a “Global Leader”. TSMC in fact pioneered the dedicated foundry industry and today still has the largest market share worldwide by far.

A foundry is a facility dedicated solely to chip manufacturing - from PC semiconductors to memory chips to digital signal processors - as opposed to a fabless semiconductor company, which focuses on chip design and does no manufacturing. The company has consistently captured 100% of industry profits. This is mainly due to better execution of a highly complex manufacturing process. TSMC has been able to patent its manufacturing processes, limiting the ability of competitors to copy its success. Semiconductors have continued to proliferate well beyond the realm of PC to where most manufactured goods now contain some silicon. Volume growth has been in the 15% range and will likely continue on this path in the future. The cost of building a fabrication plant continues to increase as chip manufacturing scales down to smaller geometries. As a result of the rising capital intensity of the business, as well as the increasing execution risks associated with manufacturing at the nanoscale level, barriers to entry continue to increase. At the same time, this implies that TSMC as well will need to do substantial investments in the years ahead to prepare for growth in the years ahead. Most of its investments will be aimed at adding capacity for its 7nm and 5nm technologies.

After three years of lackluster earnings growth, TSMC should see a rebound to double-digit earnings growth in the next two years, driven by: (1) faster growth from high-performance computing (ex-cryptocurrency mining); (2) stronger growth in smartphone $ content due to rising 5G adoption; and (3) better gross margins as utilizations pick up and 7nm process yields normalize. TSMC’s technology leadership is likely to solidify further as we move to 5nm and 3nm process nodes in the next three years, while its 7nm market share is likely to remain at 90%+, even in 2020. Risks inherent to TSCM’s business model and activities are global semiconductor demand weakness, sharper competition in the foundry business, supply chain inventory digestion and geopolitics.

TSMC is also strongly committed to sustainability, an important feature Econopolis looks at when investing in emerging markets. In the face of a changing global climate, TSMC strives to fulfill its responsibilities as declared in the Corporate Social Responsibility Policy and Environmental Protection Policy. TSMC establishes a Carbon Management Platform, tracks and examines energy carbon emission index performances resulted from operations, and continuously proposes more aggressive improvement plans through the Corporate Social Responsibility Committee and the Energy and Carbon Reduction Committee. In 2018, TSMC invested significant resources into 524 energy-saving measures to save 300GWh in electricity, purchased 880GWh renewable energy globally, renewable energy certificates (REC), as well as carbon rights to reduce greenhouse gas emissions. TSMC endeavors to be a practitioner of green power and fulfills its unwavering promise to building a sustainable society through many waves of green action in the future.

In conclusion, TSMC is an attractive play on the evolution of computing power and the secular information technology themes that will be adopted in emerging markets and beyond. We particularly think of smartphones, internet of things, 5G, high performance computing and autonomous driving as the five key growth platforms. TSMC is clearly preparing for another era of strong revenue growth and should be well positioned to continue to dominate the industry.

ABOUT GLOBAL CHALLENGERS

A revolution in global business is under way. Companies based in emerging markets, boasting ambitious leaders, appealing products or services and state-of-the-art facilities and systems are expanding overseas and transforming industries and markets across the globe. The few emerging markets companies that have captured media attention only represent a small fraction of a larger phenomenon of the many emerging markets companies that are actively expanding beyond their domestic markets, or are planning to do so. As corporate governance has always been a key risk of emerging market investing, Econopolis opened up a Singapore research hub in 2013 to increase proximity to the companies we invest in and observe and listen to the signals you cannot get by just doing desktop research.

Our experienced investment team applies a disciplined, bottom-up fundamental investment approach. We believe in a ‘boots on the ground approach’, visiting and talking to companies. A high-conviction investment approach translates into a willingness to take active positions regardless of benchmarks. This results in a select number of strong franchises with clear competitive advantages and trustworthy management.

The Global Challengers we are looking for, are set to grow into global powerhouses with credible aspirations to build global footprints. The capabilities of these Global Challengers go beyond mere cost advantages. They have been building new capabilities, such as manufacturing higher-quality products, harnessing their cash resources, and investing in R&D. These Global Challengers can be divided into three groups:

• early movers (that started to globalise early on);
• fast followers (making rapid progress); and
• up-and-comers (whose ambitions have until recently been more regional than global).

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