AI Chip Shortage to Persist Until 2025-2026 Despite Doubling Production, Says TSMC

The global shortage of AI chips is expected to persist until 2025 or 2026 due to surging demand, according to Taiwan Semiconductor Manufacturing Company (TSMC). Despite doubling production, TSMC is struggling to keep pace with the high-performance computing chips now accounting for over half its business.

Unprecedented demand for AI chips: TSMC, the world’s largest contract chipmaker, has seen an explosion in orders for advanced processors used in AI applications:

• Much of the demand is driven by Nvidia, whose AI-focused GPUs are in high demand from companies like OpenAI, Meta, and Tesla for powering next-generation AI systems.
• TSMC originally hoped to meet the demand by the end of 2024, but now expects the shortage to persist through 2025 and potentially ease in 2026.

TSMC expanding capacity but supply remains tight: The Taiwanese chipmaker is working to aggressively boost production capacity, though supply continues to lag demand:

• TSMC has more than doubled its AI-related chip production over the past year in an effort to satisfy customer orders.
• The company is expanding some leading-edge chip production outside Taiwan, with new fabs planned in Japan, Arizona, and potentially Europe.
• However, TSMC’s CEO C.C. Wei admitted that despite their efforts, “supply continues to be very tight all the way through probably 2025.”

AI chips now dominate TSMC’s business: The surge in orders for high-performance AI processors has reshaped TSMC’s revenue mix:

• High-performance computing chips, which include AI processors, data center CPUs, and advanced graphics cards, accounted for 52% of TSMC’s revenue in Q2 2023, surpassing the 50% mark for the first time.
• This highlights the rapid growth and importance of the AI chip market for the semiconductor industry.

Geopolitical tensions adding uncertainty: Recent comments from U.S. presidential candidate Donald Trump accusing Taiwan of stealing chip business and suggesting they pay for military protection have raised concerns:

• When asked about Trump’s remarks, TSMC’s CEO reiterated plans to expand some leading-edge production outside Taiwan to diversify manufacturing.
• However, the incident underscores geopolitical risks that could disrupt the concentrated chip supply chain in Taiwan.

Looking ahead: The persistent shortage of AI chips has major implications for the rapidly growing artificial intelligence industry:

• Ongoing supply constraints could slow the pace of AI development and deployment over the next few years if key players cannot secure enough advanced silicon.
• However, the shortage also validates the explosive demand and long-term potential for AI applications, attracting massive investments into chip production.
• How quickly the industry can overcome the supply challenges will be crucial in determining the trajectory of AI progress in the coming years.

While TSMC is working furiously to address the supply imbalance, the sheer magnitude of AI chip demand is unprecedented. With the technology seen as critical for future advances in machine learning, the shortage has put a spotlight on the fragility of the semiconductor supply chain and its increasing importance to global innovation.