During an extraordinary board meeting on April 22, top semiconductor chip manufacturer Taiwan Semiconductor Corporation (TSMC) announced the approval of a US$2.887 billion capital budget to build mature process production capacity.

TSMC noted that these funds would be earmarked for its manufacturing complex in Nanjing, China, to establish a monthly manufacturing capacity of 40,000 28nm process chips. Full production is expected to begin in the second half of 2022, reaching the full capacity of 40,000 wafers in mid-2023 to meet the urgent demands of customers worldwide for 28nm production capacity in the quickest fashion.

The news rocked the industry. First was the timing of the move, set to double the capacity of TSMC’s Nanjing plant, at a sensitive time under the tense atmosphere of the U.S.-China technology cold war.

(Source: TSMC)

Moreover, the company is expanding the capacity of 28nm mature process production, which has been the subject of some controversy recently. During media interviews following the Taiwan Semiconductor Industry Association membership congress, TSMC chairman Mark Liu expressed concerns over double booking on 28nm orders. Word of his remarks got out quickly, and the next day the company’s stock took a big hit. 

In order to understand the workings behind TSMC’s unexpected decision, as well as the truth behind the puzzling “double bookings” that have set the industry abuzz, it is necessary to examine Liu’s entire statement.

Pandemic + trade war, China’s high-value stockpiling increases 20x

In his remarks, Liu gave the media his analysis of the global semiconductor shortage, outlining three key contributors:

The first factor is that, when the coronavirus pandemic began to disrupt the global supply chain in early 2020, businesses started increasing their inventory in order to control the risks of a broken supply chain.

The second contributing factor involves the uncertainty wrought by the market shift and supply chain changes due to the U.S.-China trade war.

Businesses were “uncertain when (the U.S.) would start banning shipping, so they went ahead and double booked,” Liu said.

As Macronix International company president Chih-Yuan Lu related to CommonWealth magazine, Taiwan’s IC design vendors normally have from three to six months’ of inventory on hand. However, since the onset of the trade war through the present, due to fears of heightened trade war tensions and the implementation of further restrictions by the incoming Biden administration, Chinese vendors have even stockpiled in excess of six months’ worth, and are “continuing with panic buying” on the market.

Figures released by the PRC’s Customs Administration on April 13 confirm this assertion, indicating that China imported US$35.9 billion worth of integrated circuits this March, setting a new monthly record. Cumulatively, China imported US$93.6 billion of integrated circuits over the first quarter, an increase of 29.9 percent over the same period last year.

A report in the PRC-based First Financial magazine frankly stated that “panic stockpiling has already emerged across the (PRC) semiconductor industry.”

The third reason, according to Liu’s analysis, is that pandemics are temporary, while the U.S.-China trade war requires the observation of ongoing developments. Still, the coronavirus pandemic drove a digital transformation, accelerating the pace of changes in the way people live, like working from home and remote learning. And these developments sped up the development of 5G and artificial intelligence (AI).

“This represents growth in the fundamentals,” Liu stressed. TSMC has sufficient time and the financial might to support such demands.

At the same time, Liu also hinted that TSMC does not necessarily fully support the first and second demands. stating, “When there wasn’t this sort of situation in the past, TSMC took a first come, first serve approach. And now there are new additional considerations.” According to Liu, TSMC would undertake analysis of overall market demands “to get as much clarity as possible to determine which are real demands, which are urgent needs, and which are just stockpiling.”

Foreign investors: Taiwan is starting to push clients away, discerning actual needs

Using the example of 28nm chips, Liu explained that uncertain factors have led customers to double book.

Liu related that, although current 28nm process “TSMC’s 28nm production capacity utilization rate was only 80 percent over the past two years, so it was actually vacant for a long time,” says one foreign investment analyst. Accordingly, TSMC asked customers to shift demand to 28nm process chips, getting many small home electronics, security, and set-top box companies to help boost capacity. Production appears insufficient at this time, “the reality is that, if you look at worldwide production capacity, the supply exceeds the demand.”

Despite this, TSMC will still move to boost production capacity.

What is more, it is not responding to structural demand; rather, “current capacity expansion is about customer management,” Liu said.

Big customers behind the scenes: Sony orders trigger iPhone shipments

The 28nm process can be credited with establishing some of the most outstanding records in TSMC’s history: During the 2009 financial crisis, former TSMC CEO Morris Chang, sanguine about the prospects for smartphones, moved to greatly expand 28nm production capacity in spite of considerable opposition, setting the stage for TSMC’s rapid growth over the subsequent years.

However, too much expansion of 28nm production lines was undertaken, leading to a low production capacity utilization rate in recent years, which has been the main culprit dragging TSMC’s gross margins down in recent years.

During TSMC’s 3Q shareholders meeting of 2019, it was resolved to greatly increase capital expenditure by 40 percent to the US$14-15 billion range. Liu stressed that the company conducted a “very thorough analysis, so we’re confident that we won’t be going down the same (28nm) road again.”

“Much to their surprise, the customers came, and then this year the big customers suddenly demanded 28nm!” exclaimed the analyst. The key was Sony’s decision to incorporate the 28nm process to produce image signal processors (ISP) for inclusion in Sony’s in-house image sensors for use in iPhones. Not only that, but Sony’s appetite reached 40,000 wafers.

Apparently, “customer management” turned out to be Sony, and Apple behind them.

The sudden influx of big orders caused a rapid supply shortage for the formerly “empty” 28nm process chips. “Since they can’t just chase away the little companies they already committed to, TSMC just has to grit its teeth and expand,” remarked the analyst.
 

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Translated by David Toman
Edited by TC Lin
Uploaded by Penny Chiang