The AI boom is reshaping the foundry landscape! UBS: Demand explosion pushes advanced processes to expand production and accelerate mature processes into an upward cycle

The Zhitong Finance App learned that in a research report released recently, UBS pointed out that in the foundry market, the N2 (2 nm) node can serve the market size (TAM) far exceeds expectations, A14 (1.4 nm) production expansion is accelerating, and the upward cycle of mature manufacturing processes has already begun.

N2 demand inflection point exceeded expectations

UBS's proprietary analysis of the bottom-up N2 foundry TAM shows that by 2028, demand is expected to rise sharply to 320 thousand tablets/month, which is significantly higher than the bank's forecast of about 230 thousand tablets/month a year ago.

UBS said that the increase in demand is mainly driven by stronger server CPU demand and accelerated AI computing deployment. In particular, in the next few years, more and more ASIC projects will enter mass production at the same time as GPUs. Meanwhile, as implementation improves, the bank expects Intel to move a larger proportion of PC CPU production to the 18A process.

As a result, UBS expects server CPUs and accelerators to account for 54% of N2 foundry demand by 2028, higher than the previous forecast of 44%; PCs are expected to contribute 19% and smartphones/tablets to contribute 26%.

N2's larger market opportunities will support TSM.US as the world's leading foundry supplier to maintain strong revenue growth in 2028-2029, even as competition from Samsung Foundry, Intel (INTC.US), and Tesla (TSLA.US)'s Terafab projects intensifies slightly.

Accelerate production expansion of N3/N2 and A14

In order to meet higher N2 demand expectations, UBS raised the global N2 production capacity forecast for the end of 2028 from 230 thousand tablets/month to 312 thousand tablets/month. The bank expects TSMC's N2 production capacity to reach 210 thousand pieces/month in 2028, higher than the previous forecast of 160 thousand pieces/month. Intel will also be more active in expanding production capacity. By 2028, its internal CPU production capacity is expected to exceed 60 thousand pieces/month, compared with the bank's previous forecast of 40 thousand pieces/month.

Meanwhile, demand for cloud computing AI increased in 2027-2028, driving UBS to raise the 2028 global N3 (3 nm) production capacity forecast from 270 thousand tablets/month to 290-300 thousand tablets/month. This increase is entirely driven by TSMC's faster expansion of production.

TSMC's A14 node is still expected to achieve mass production in 2028 as planned, and steady R&D progress and increasing customer participation will support this. Industry feedback shows that TSMC is advancing plans to expand production ahead of schedule. According to UBS estimates, when the A14 node enters mass production, TSMC plans to achieve an A14 production capacity of about 60 thousand pieces/month in 2028.

The bank raised TSMC's capital expenditure forecast from 63 billion US dollars this year to 90 billion US dollars in 2027 and 105 billion US dollars in 2028 in light of more aggressive plans to expand production of advanced manufacturing processes.

Mature process foundry: supply, demand and pricing prospects are improving in 2027-2028

Earlier, UBS put forward the opposite view from market consensus, that the mature process foundry industry will usher in an upward cycle, which is driven by the reallocation of supply and resources throughout the industry.

Since 2026, capacity utilization and pricing trends have continued to improve, and UBS anticipates that 2027-2028 earnings will show more obvious upside. The bank's latest analysis shows that, supported by growing demand for server PMICs, the 8-inch foundry capacity utilization rate may rise to 95% in 2027, up from 85% in 2026.

Although demand for the 12-inch 28/40nm process may be dragged down by weak demand for smartphones and consumer electronics in the short term, UBS still expects the capacity utilization rate to increase to 88% in 2027 from 84% in 2026, supported by moderate growth in production capacity. The bank also believes that the competitive behavior of Chinese wafer foundries should remain rational in 2027, as key players are increasingly shifting their focus on capital allocation to advanced process technology.

Stock recommendations

UBS reaffirmed TSMC's “buy” rating and expects the market's forecast for 2027-2028 revenue, earnings per share (EPS), and capital expenditure to rise further. In the field of mature process foundry, UMC.US (UMC.US) is still the bank's preferred target because as large-scale foundry capacity overflows, UMC should become one of the main beneficiaries, while silicon photonics and advanced packaging businesses will also bring additional upward space. UBS is also optimistic about LSMC and SMIC, maintaining “neutral” ratings for GlobalFoundries (GFS.US), World-Advanced, and Huahong.

risk

UBS added that the semiconductor industry is sensitive to economic cycles, so both upside and downside risks are related to macroeconomic drivers. Other specific downside risks associated with semiconductor capital equipment include rapid loss of market share due to factors such as product launch timing, product performance, design, or distribution. Supply chain companies facing the mobile phone industry are also in a highly cyclical market environment, which is affected not only by macroeconomic factors but also by the internal inventory cycle of the supply chain. These companies are still in a highly competitive environment, and investment in product innovation and research and development (R&D) is the key to success.