How does TSMC’s pricing power boost its gross profit percentage?

Taiwan Semiconductor Manufacturing Company (NYSE: TSM), known as TSMC, is the world’s largest contract manufacturer of advanced computer chips. When TSMC reported its Q1 2026 results in April, two numbers stood out: first-quarter revenue of $35.7 billion (up 35% from a year earlier) and a gross margin of roughly 63% to 65%. For context, that gross margin is well above what most manufacturers ever achieve, and well above TSMC’s own historical averages. What is driving it? According to industry analysts, TSMC has raised prices on its most advanced chip manufacturing processes, including the 3-nanometer and newly ramping 2-nanometer nodes. Those processes now make up a larger share of the company’s revenue, and customers like Nvidia and Apple are paying a premium because there are very few alternative suppliers capable of producing chips at that level of precision.

The gross profit percentage (also called gross margin) is calculated as net sales minus cost of goods sold, divided by net sales. It tells financial statement users how many cents of every sales dollar are left after covering the direct cost of producing the goods sold. A company can improve its gross profit percentage in three main ways: by raising selling prices, by reducing the per-unit cost of producing its goods, or by shifting its product mix toward higher-margin products. TSMC appears to be doing all three at once. Its pricing power on advanced nodes shows up directly in the gross profit percentage, and because that percentage is calculated from numbers found on every income statement, students in introductory financial accounting can evaluate it for any public company using only the company’s income statement.

View a quick tutorial video at this [link] and then answer the following questions.  

Note to instructors: This post is assignable in Pearson’s MyLab and has questions that are auto-graded.

Discussion Questions

1. Explain in your own words what a gross profit percentage of 65% means for a company like TSMC. What does it tell you about the relationship between sales prices and the cost of producing the product?

2. Why does TSMC have the ability to raise prices on its advanced 3-nanometer and 2-nanometer chips? What features of its competitive position make this pricing power possible, and would the same strategy work for a company in a more competitive industry?

3. Suppose TSMC’s gross profit percentage rose from 60% to 65% over a single year. What are the possible explanations, and what additional information would you want in order to decide which explanation is most likely?

4. Gross profit percentage is useful for comparing companies within the same industry, but can be misleading when used to compare companies across industries. Why? Give an example of two industries where you would expect very different gross profit percentages and explain why.

5. A competitor announces that it will offer similar chip fabrication services at 20% lower prices. What would likely happen to TSMC’s gross profit percentage if it chose to match those prices, and what other financial statement items would you expect to be affected?