As demand for AI surges, costs soar! Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) is reportedly considering raising prices by up to 10% in 2027 due to concerns of "chip inflation" escalating.

According to media reports citing informed sources, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) has been in discussions with customers and plans to raise chip manufacturing prices by up to 10% in 2027 to cover the rising production costs. The report stated that as a major chip outsourcing supplier to NVIDIA Corporation (NVDA.US) and Apple Inc. (AAPL.US), Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR initiated negotiations in June and finalized a plan to increase prices between 5% and 10% this month. These price adjustments are expected to take effect next year and will cover advanced process chips and mature process chips. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is a chip outsourcing company for many global technology giants, including NVIDIA Corporation and Apple Inc. mentioned above, as well as clients such as Alphabet Inc. Class C (GOOGL.US), Amazon.com, Inc. (AMZN.US), and others. For a long time, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has resisted drastic price fluctuations in the memory chip industry and has always emphasized establishing long-term partnerships with customers to deal with the industry's cyclical fluctuations. Meanwhile, global supply chain disruptions due to conflicts in the Middle East and the increasing demand in the AI industry are driving up production costs and increasing pressure on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR to accelerate capacity expansion globally. Clients, including NVIDIA Corporation, have been urging Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR to accelerate expansion due to concerns about bottlenecks in the supply of AI accelerators and other critical components needed in data centers. In response, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has launched a major investment plan, including projects in Arizona, which is described as the largest foreign direct investment project in US history. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR and other chip manufacturers are facing pressure from soaring production costs, including materials, equipment, and electricity costs. This month, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR raised its capital expenditure forecast for 2026, with expected capital expenditures reaching $60 billion to $64 billion in 2026, higher than the previous forecast of $52 billion to $56 billion. The company anticipates that growth in AI demand and rising costs of expanding capacity will drive increased investment, particularly in advancing the $265 billion expansion plan in Arizona, USA. Reportedly, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's decision to delay the price increase until 2027 is to give customers time to adjust. After announcing better-than-expected financial results in July, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR CEO C.C. Wei said in response to analysts' questions, "We won't suddenly raise prices. We obtain reasonable returns through our own value and ensure that our profits and gross margins are sufficient to support long-term sustainable expansion. This is not only beneficial to customers but also to Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR; this is our business philosophy." Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR said in a statement on Tuesday, "Our pricing strategy is strategic, not opportunistic. We will continue to closely cooperate with customers and demonstrate our value to them." It is worth noting that the reports of Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's price hike next year come amid growing concerns about "chipflation." According to reports, Susquehanna investment firm stated in a recent report that in June, the global semiconductor industry's delivery lead times further extended, with this trend remaining significant despite rising prices. Analyst Christopher Rolland noted that in June, the semiconductor industry's delivery lead time saw the largest monthly increase in this cycle, rising by 5 days to 19.4 weeks. More notably, industry pricing saw the "largest monthly increase" in June, with a 5% expansion compared to the previous month. The acceleration in delivery lead times and rising prices highlights the continued tightening supply-demand situation in the chip industry. Additionally, the delivery lead time growth in June was "broad-based," with about 81% of the companies covered experiencing unchanged or increased lead times, and all distributors showing growth. Lead times for all product categories increased compared to the previous month, leading analysts to believe that this "indicates that the upturn cycle is now expanding beyond analog parts." Contrasting against the backdrop of ongoing structural tension in the chip industry, US chip stocks experienced significant volatility in July. The Philadelphia Semiconductor Index dropped by about 17% in July, despite having a year-to-date increase of 65%. The index fell by about 10% last week, marking its largest weekly decline in over a year, retracing more than 20% from its June highs and officially entering a technical bear market. The simultaneous occurrence of delivery lead time acceleration and price escalation behind the volatility in chip stocks seems to indicate a deeper structural contradiction surfacing "chipflation." Julia Hermann, Global Market Strategist at New York Life Investment Management, recently warned that "chipflation" the soaring prices of AI-related logic chips and memory chips will be the next test of resilience for AI trading. Julia Hermann mentioned in an interview, "Big cloud service providers are now in a quandary. On one hand, there are rising input costs chip prices are increasing, coupled with the rise in energy and utilities expenses; on the other hand, realizing investment returns will still take several years. We believe that this environment will truly test the market's belief as long as investors still believe in the long-term potential of AI trading, they may be able to tolerate the short-term fluctuations and the slowdown in realization pace." Julia Hermann pointed out that one of the best indicators of memory chip inflation to watch is the South Korean DRAM export price index. In past cycles, the year-on-year growth rate of memory chip prices peaked around 100%, but now, the year-on-year price increase for Korean-produced DRAMs is as high as 370%. She views the soaring chip prices as a sign of strong demand, but also a double-edged sword sustained price increases will significantly raise the costs of building AI infrastructure, which could in turn dampen or even end the current AI capital spending boom. Therefore, she currently focuses on "quality" in the AI supply chain, with robust profitability, moderate levels of profit volatility, and adequate interest coverage capacity. SK Hynix, a major South Korean memory chip manufacturer, Chairman Chey Tae-won recently also issued a warning about chip inflation, stating that the long-term maintenance of high prices in the memory market is not normal. He predicts that global semiconductor demand will significantly expand next year (2027), with AI sector demand growing by 60% to 100% compared to this year, and overall semiconductor demand increasing by at least 50% to 60%. However, the addition of new supply next year would be "almost zero," potentially widening the supply-demand gap. In response to concerns about the possibility of expanding production prematurely ending this current "super cycle," Chey Tae-won gave an intriguing response. He stated that current chip prices are already at abnormally high levels and should naturally fall. If prices continue to rise and further intensify "chipflation," the semiconductor industry will eventually face a backlash. However, he emphasized that increasing supply, pushing prices down, does not mean that companies are unable to make profits.