Taiwan Semiconductor Manufacturing Co., better known as TSMC, held its investor conference on April 20th. Things got off to a rocky start even before the meeting, as rumors swirled about the chip giant postponing expansions in Kaohsiung, the Southern Taiwan Science Park (STSP), and Baoshan in Hsinchu; as well as scaling back its orders to equipment provider ASML. The unspoken fear was that the industry-wide slowdown was not letting up.

“The second half of 2023 will be better than the first,” said TSMC CEO C.C. Wei (魏哲家) attempting to find a silver lining. After all, customers are lining up to announce their new products, all of which run on chips manufactured by TSMC’s groundbreaking 3nm process.

Wei went on to reveal that TSMC’s 3nm production was speeding ahead at full tilt. There’s even talk that 5nm equipment at STSP will be brought in as backup. By the third quarter, these efforts are expected to give earnings a shot in the arm.

TSMC is betting that the first half of the year will be remembered as the darkness before the dawn. Revenue will bottom out during the second quarter, but the semiconductor industry will then begin to rebound.

However, the forecast for TSMC’s revenue in 2023 is expected to reflect negative growth in the single digits, which is somewhat less stellar than what was predicted at the start of the year.

Wei explained that this is due to flagging customer demand, a higher-than-expected inventory during the fourth quarter of last year, and China’s economic recovery taking longer than expected.

As for TSMC’s capital expenditure (CapEx) for 2023, the semiconductor juggernaut maintained that it will be between NT$32 and 36 billion, just as what was announced during the previous investor conference. There will be no downsizing in this regard.

Advanced manufacturing is underperforming

The culprit of TSMC’s disappointing first quarter is its 7nm manufacturing process.

A look at the briefing from the TSMC investor conference shows that 7nm products made up 26% of the company’s revenue in Q3 of last year. It’s now down to 20%, a new low. The main buyers of these products are smartphone chip manufacturers.

First of all, the slump in the global smartphone market has induced TSMC customers, such as Qualcomm and MediaTek, to scale down their orders.

“Chinese smartphones have not been doing well for more than a year,” observes a semiconductor industry analyst. Both MediaTek and Qualcomm initiated inventory adjustment last year.

The analyst says that TSMC’s capacity utilization on the 7nm line has dropped to 40%. There might not be a return to glory.

In addition, even the 5nm production line, which is the bedrock of TSMC’s impressive revenue, is on the decline. Primary clients include Apple, AMD, and Nvidia. 

Apple’s financial statement from Q4 of 2022 painted a grim picture. Revenue and profit fell short of expectations, and quarterly growth was 5% in the negative. This was because neither the new iPhone 14 nor the MacBook sold as well as expected. To top it off, the first quarter of the year is generally known as the “slack season”.

Besides Apple, AMD and Nvidia’s high-performance computing (HPC) chips are also based on TSMC’s 5nm products. 

“But starting in the first half of this year, server sales have reflected an unmistakable downturn, which has caused AMD and Nvidia to cut orders,” says the analyst.

Smartphone-related products sold 27% less than last quarter. Even HPC products, which make up 44% of all of TSMC’s revenue, declined by 14%.

The brand-new 3nm manufacturing process, which began mass production at the end of 2022, will only start contributing to TSMC’s bottom line later this year. When Wei talked brightly about TSMC’s clients rolling out new products, he was likely referring to the new Apple iPhone 15, which will launch during the second half of 2023.

In other words, the truism that IC products renew a cycle every 18 months must now be revised to three years. Customers can use products from the same manufacturing process for longer than before.

Why are equipment orders being cut if CapEx stays the same?

When faced with questions about 2024 and beyond, TSMC declined to comment.

Its suppliers, however, have been more forthcoming. There is a rumor that TSMC has cut procurement. Word on the grapevine is that TSMC is scaling back its orders for equipment from ASML by as much as 40%.

A senior semiconductor analyst says that, “While there’s no way to verify the figure, it is true that ASML is losing orders.” He adds that these orders were for equipment to be delivered to TSMC after 2024.

ASML held its investor conference a day before TSMC. Although its earnings for the first quarter surpassed expectations, its stock price fell 3% in the following days.

In his report, Morgan Stanley analyst Lee Simpson muses that although ASML posted a better-than-expected statement, the loss of orders is indicative of the fact that some of its customers are ready to prune their CapEx.

Sebastian Hou (侯明孝), Managing Director at Neuberger Berman, observes that many world-class companies like Intel, Samsung, and Micron are scaling back their CapEx. “Since the second half of 2022, the number of companies lining up to procure equipment has dwindled. The way things are now, TSMC is in no hurry to get in line; they will buy when they really have the need,” he says.

Both the macro-environment and the adjustment of customer orders show that capacity utilization is not what it used to be. Hou predicts that procurement of new equipment will trend toward conservative. 

Intel may give a jolt to TSMC’s future business

Even though TSMC has not fared well in the smartphone and HPC markets this quarter, Intel, (which is not doing so well itself), may provide the shot in the arm that TSMC needs.

In its March report, AllianceBernstein floated the idea that in Q3 of 2023, Intel may outsource the production of its new PC processor, code-named Meteor Lake, to TSMC.

Despite the expectation that Intel was to have placed its orders a little earlier, it may end up contributing as much as 1% of TSMC’s revenue in 2023. “These orders will grow with time. By 2025, they may make up 10% of TSMC’s revenue,” the report predicts.

“Currently, the math has not taken Intel into account. By the next cycle, TSMC may have a new customer. That is a good thing,” says Hou.

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Have you read?

• Does TSMC need more financial discipline? 
• TSMC founder: “In the chip sector, globalization is dead.” 
• TSMC founder Morris Chang: Taiwan is indispensable in global chip industry

Translated by Jack Chou
Edited by TC Lin
Uploaded by Ian Huang