AI boom reshapes the wafer foundry landscape! UBS: Explosive demand accelerates advanced process expansion, mature process enters upward cycle

According to Smart Finance APP, a recent research report published by UBS indicates that in the foundry market, the Total Addressable Market (TAM) for the N2 (2nm) node far exceeds expectations, A14 (1.4nm) capacity expansion is accelerating, and the upcycle for mature manufacturing processes has already begun.

N2 Demand Inflection Point Exceeds Expectations

UBS’s proprietary bottom-up analysis of the N2 foundry TAM shows that by 2028, demand is expected to soar to 320,000 wafers per month, significantly higher than the approximately 230,000 wafers per month forecast a year ago.

UBS states that the increase in demand is mainly driven by stronger server CPU requirements and the accelerated deployment of AI computing. In the coming years, more ASIC projects will enter mass production in sync with GPU production. At the same time, as execution improves, UBS expects Intel will shift a greater share of PC CPU production to the 18A process.

Therefore, UBS expects that by 2028, server CPUs and accelerators will account for 54% of N2 foundry demand, up from the previous forecast of 44%; PCs are expected to contribute 19%, while smartphones/tablets will contribute 26%.

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

N3/N2, A14 Accelerate Capacity Expansion

To meet heightened N2 demand expectations, UBS has raised its global N2 capacity forecast for the end of 2028 from the previous 230,000 wafers per month to 312,000 wafers per month. The firm estimates TSMC’s N2 capacity will reach 210,000 wafers per month in 2028, up from a prior forecast of 160,000 wafers per month. Intel is also expected to be more aggressive in expanding capacity, with its internal CPU production capacity surpassing 60,000 wafers per month by 2028, compared with the previous forecast of 40,000 wafers per month.

Meanwhile, enhanced cloud AI demand in 2027-2028 has prompted UBS to raise its 2028 global N3 (3nm) capacity forecast from 270,000 wafers per month to 290,000–300,000 wafers per month, with this increase entirely driven by TSMC’s accelerated expansion.

TSMC’s A14 node is still on track for mass production in 2028 as planned, supported by steady R&D progress and increasing customer participation. Industry feedback suggests TSMC is advancing its expansion schedule. According to UBS estimates, when the A14 node enters mass production, TSMC plans for approximately 60,000 wafers per month of A14 capacity by 2028.

Given the more aggressive capacity expansion plans for advanced nodes, UBS has raised TSMC’s capex forecast from $63 billion this year to $90 billion in 2027 and $105 billion in 2028.

Mature Node Foundry: Positive Supply-Demand and Pricing Outlook for 2027-2028

UBS was early in expressing a contrarian view to the market consensus, forecasting a coming upcycle for mature node foundry, driven by industry-wide supply and resource reallocation.

Since 2026, capacity utilization and pricing trends have consistently improved. UBS expects even greater earnings upside in 2027-2028. The latest analysis shows that, with the support of rising server PMIC demand, 8-inch foundry capacity utilization could reach 95% in 2027, up from 85% in 2026.

Although short-term demand for 12-inch 28/40nm nodes may be hampered by weak demand for smartphones and consumer electronics, UBS expects capacity utilization to improve from 84% in 2026 to 88% in 2027, supported by moderate capacity growth. The firm also believes that competitive behavior among Chinese foundries is likely to remain rational in 2027, as major players increasingly shift capital allocation focus to advanced technology nodes.

Stock Recommendations

UBS reiterates its “Buy” rating on TSMC, expecting consensus forecasts for 2027-2028 revenue, EPS, and capex to be revised higher. In the mature node foundry segment, UMC (UMC.US) remains their top pick, as UMC is expected to be a primary beneficiary of capacity overflow from large foundries. Additionally, its silicon photonics and advanced packaging businesses should provide further upside potential. UBS also favors PSMC and SMIC, while maintaining “Neutral” ratings on GlobalFoundries (GFS.US), VIS, and Huahong.

Risks

UBS adds that the semiconductor industry is highly sensitive to economic cycles; therefore, both upside and downside risks are associated with macroeconomic drivers. Other industry-specific downside risks related to semiconductor capital equipment include: rapid market share loss due to product launch timing, product performance, design or distribution. Companies in the mobile supply chain are also exposed to highly cyclical market environments, affected not only by macroeconomic factors but also by inventory cycles within the supply chain. These companies face a highly competitive environment where product innovation and R&D investment are key to success.