TINA stands for There Is No Alternative, and Taiwan Semiconductor Company (TSMC) is one of the best examples we can think of in the technology industry. The company reported Q4 earnings this week and finished a strong 2021. There are so many things worth talking about, but we want to focus on the company's pricing power and gross margin today.

Last summer, Morgan Stanley downgraded its rating on TSMC, arguing that as semiconductor manufacturing gets increasingly more complicated, capital intensity for TSMC measured by Capex/Revenue will keep increasing, and so will depreciation cost. The second argument is that TSMC will have a hard time passing on the incremental cost to customers due to lack of pricing power and can't maintain the 50% level gross margin in the future.

The latest earnings proved the first argument accurate: the company plans to spend a monstrous $40 to $44 billion on Capex in 2022, 40% higher than 2021 at the mid-point. But the second argument couldn't have been more wrong. Instead of deteriorating gross margin as Morgan Stanley predicted, TSMC improved the gross margin by 140 basis points quarter-over-quarter, reaching 52.7%, the 4th highest quarterly level in its 35-year history. More importantly, the company did this WITHOUT raising the price to customers in Q4 2021. Due to TSMC's strong position and the ongoing chip shortage, the management effectively confirmed the widely speculated price hike in 2022. As a result, the management raised its long-term gross margin target from 50%+ to 53%+.

• "We believe our long-term gross margin of 53% and higher is achievable, and we can earn a sustainable and proper return of greater than 25% ROE through that cycle. Thus, even as we showed a greater burden of CapEx investment for the industry, we can continue to invest to support our customers' growth and deliver the long-term profitable growth for our shareholders."

Another critical point we want to bring up is that the pricing power isn't only on the customer side but also on the supplier side, which may not be a meaningful driver in the near term, especially during the chip and equipment shortage. Still, the impact may emerge in the future.

• "We will also work diligently in our own operation and with our suppliers to deliver on cost improvement."

• "We are working closely with our customers and suppliers to both sell our value and drive our costs improvement."

TSMC's mission statement is "to be the trusted technology and capacity provider of the global logic IC industry for years to come." It has four core values: Integrity, Commitment, Innovation, and Customer Trust. While competitors like Samsung and Intel are all spending a fortune trying to catch up, there is no alternative for customers looking for a trusted partner.

TSMC Vision, Mission & Core Values

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TSMC Vision, Mission & Core Values