When TSMC held its latest investor conference on July 14, Chairman Mark Liu (劉德音), President C.C. Wei (魏哲家), and Chief Financial Officer Wendell Huang (黃仁昭) stood ready to give assurances of TSMC’s short- and long-term strength despite economic headwinds.

They all stressed that TSMC had a very “healthy” capacity utilization rate, and high-performance computing (HPC) and automotive semiconductor demand had good long-term outlooks. Wei even went so far as to say he was “very, very confident” in the future.

“Customer demand still exceeds TSMC’s capability to [supply] for this year,” Wei said, dispelling concerns that companies in the smartphone, PC and consumer end markets will draw down inventories and cut orders as demand sags, hurting TSMC revenues.

TSMC expected its capacity to remain tight throughout 2022, Wei said, and he predicted that full-year revenue growth would be “mid-30% in U.S. dollar terms.”

Over the longer term, Wei said, HPC, automotive, and Internet of Things applications would drive double-digit revenue growth.

At the heart of that optimism amid rather gloomy narratives of economic recession are three positive factors supporting the continued growth of the world’s largest semiconductor contractor.

Positive factor no. 1:
Strength of automotive demand driving higher growth

In recent months, major stock indices in the United States have plummeted, the U.S. Federal Reserve has raised interest rates to combat inflationary pressures weighing down global economies, and demand for consumer electronic products has started to slide. These many negative events have sent TSMC’s stock price plunging, from an intraday high of NT$688 on Jan. 17, 2022 to a low of NT$433 in July, reducing the company’s marketing capitalization by more than NT$6 trillion. 

At the July 14 investor conference, several analysts peppered the TSMC executives on hand with questions about the semiconductor market, focusing in particular on how extensively clients were drawing down inventories and how TSMC was coping with a potential fall in orders because of that.

They also asked how TSMC was coping with inflation, and the possibility of semiconductor supply exceeding demand as countries encourage putting mature semiconductor production processes on home soil.

Wei acknowledged the potential for inventory adjustments by clients into the first half of 2023, but felt that would be more than offset by TSMC’s leadership in advanced and specialized technologies, keeping its business resilient and demand stronger than TSMC’s ability to supply. 

He also pointed to the ongoing strength in demand for chips for automotive and HPC applications, and expected the advanced 3-nanometer process to begin contributing to TSMC’s revenue in the first half of 2023 as reasons for his bullish outlook.

Positive factor no. 2: 
Beating second quarter EPS expectations

TSMC’s second quarter financials presented at the event supported Wei’s optimism.

Second quarter revenue was up 43.5 percent from the same period a year earlier at NT$534.14 billion, translating to 76.4 percent year-on-year growth in after-tax net profit and earnings per share (EPS) to NT$237.03 billion and NT$9.14, respectively. Both figures set new TSMC highs for a single quarter and beat analyst expectations.

More important was the company’s sales guidance for the current quarter, with analysts closely watching for any clues suggesting that the clouds hanging over the electronics sector might derail TSMC’s growth projections.

Instead, Wei insisted that, “our technology leadership will continue to advance and support our growth” as TSMC makes available advanced technologies to all product innovators.

“Macroeconomic uncertainty may persist into 2023,” Wei said, but “we expect our business to be supported by continued demand for our industry-leading 5-nanometer and 7-nanometer technologies.”

In a research report in late June, Goldman Sachs research analyst Bruce Lu predicted that TSMC’s utilization rates for its 8-inch and 12-inch wafer capacity would fall in 2023, hurting revenue and profit. 

Wei argued, however, that three major TSMC advantages – technology leadership, an extensive product portfolio and its ability to adjust the utilization of its capacity – would prevent major revenue volatility.

With the successful rollout of the company’s 5-nanometer and 4-nanometer processes and the upcoming ramp-up of the 3nm process, TSMC will “expand our customer product portfolio and increase our addressable market” and maintain a “healthy” utilization rate, Wei contended.

(Source: TSMC)

Positive factor no. 3: 
HPC a major long-term engine of TSMC growth

In a recent report, Morgan Stanley described the semiconductor cycle TSMC is facing as a “soft landing,” noting that while some TSMC customers are whittling down their inventories and ordering less, there would not be a bear market risk as long as the weakness did not spread to data centers and automotive semiconductors.

Wei said at the event that HPC has emerged as the company’s main growth engine because of the greater use of semiconductors in computing equipment, pointing to the increase in the number of CPUs (central processing units), GPUs (graphics processing unit) and AI accelerators used in data centers and the amount of silicon used in today’s cars. 

Because of those trends, TSMC expects its revenue to grow at a compound annual growth rate of 15-20 percent over the next several years in U.S. dollar terms, according to Wei.

Potential pitfalls: Capacity expansion, U.S. plant

Though TSMC’s capacity expansion plan for 2022 has remained unchanged despite the global electronics slowdown, its capital expenditure could end up at US$40 billion rather than the US$44 billion previously expected. Wei attributed the downward revision to the challenges TSMC’s tool suppliers were facing in their supply chains and said some of the capex could be pushed into 2023.

TSMC also decided after speaking with customers to devote more of its capacity to mature and special processes that are in greater demand over the long haul, such as those used to make automotive semiconductors, micro-electromechanical systems (MEMs), and CMOS image sensors (CIS). 

If there is one potential vulnerability, it may be the new foundry TSMC is building in Arizona. TSMC executives have been more reserved about its prospects because of the facility’s higher costs and the need for ongoing consultations with government authorities there.

But while the company’s chairman, Mark Liu, acknowledged that the cost of the fab in the U.S. was higher than expected and that labor costs were higher than TSMC planned, he said every company has different ways of reducing costs and that cost reduction was a work in progress.

Even with TSMC’s optimism, analysts generally believe a global economic winter is on its way, and the flood of inventory adjustments in the consumer electronics supply chain may just be beginning. An analyst with a foreign brokerage recently warned that TSMC’s stock price could remain volatile for the next six months.

A US$52 billion bill pending in the U.S. Congress to subsidize semiconductor investment and manufacturing has yet to be passed, leaving companies in limbo. TSMC, which is building a semiconductor plant in the United States, must still carefully assess its U.S. capacity, costs, and customer attitudes to ensure that it continues the company’s long string of success.

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Translated by Luke Sabatier
Uploaded by Penny Chiang