Clients to share U.S. costs, maintain TSMC's long-term margin

Taipei, April 18 (CNA) Taiwan Semiconductor Manufacturing Co. (TSMC) said on Thursday the company's long-term gross margin forecast remains unchanged as its clients will share costs at its wafer fabs in the U.S. state of Arizona, which will have higher costs than the company's other production sites.

While many market analysts have raised concerns that high production costs in its U.S. fabs will erode its profit margin, C.C. Wei (魏哲家), TSMC's CEO, admitted at an investor conference that costs in the Arizona plants will be higher, but emphasized clients have promised to share the heavier financial burden with the company so its long-term gross margin will still top 53 percent as previously forecast.

Wei reiterated TSMC's overseas investments have secured strong support from clients and foreign governments.

Before the investor conference opened Thursday afternoon, TSMC released its first quarter results, saying gross margin -- the difference between revenue and the cost of goods sold -- hit 53.1 percent, which came within the company's forecast of 52-54 percent.

In the January-March period, TSMC raked in NT$225.49 billion (US$6.96 billion), up 8.9 percent from a year earlier but down 5.5 percent from a quarter earlier with earnings per share at NT$8.70.

April 18: TSMC Q1 net profit up 8.9% year-on-year

In the U.S., TSMC's total investments are expected to pass US$65 billion. The Biden administration announced on April 8 that it expects to provide TSMC up to US$6.6 billion in direct funding under the CHIPS and Science Act.

Also on April 8, TSMC announced it is to build a third wafer fab in Arizona with production to begin by the end of 2030, using the advanced 2 nanometer process or more advanced technology.

TSMC is already building two fabs in Arizona. Wei said the first plant will start commercial production in the first half of 2025 as scheduled, using the 4nm process, and the second fab is scheduled to begin mass production in 2028, using 2nm process in addition to the 3nm process previously announced, due to strong demand from artificial intelligence applications.

April 8: TSMC to receive US$6.6 billion in U.S. subsidies for Arizona chip fabs 

April 13: U.S. advisor named TSMC new independent board director candidate

Elsewhere, TSMC opened its first fab in Kumamoto, Japan in February. Wei said the plant will start commercial production in the fourth quarter of this year and roll out chips made using the company's mature 12 nanometer, 16nm, 22nm and 28nm processes.

The chipmaker has decided to build a second fab in Kumamoto with construction to begin in the second half of this year to add the mature 40nm and advanced 6nm processes to its production portfolio.

April 7: TSMC confirms Kikuyo as site for 2nd Japanese fab

March 6: 1st group from TSMC-backed German talent initiative begins classes at NTU

In Germany, Wei said, construction of a fab planned in Dresden is expected to start operations in the fourth quarter of this year as scheduled.

As for 2024, Wei said the company has left unchanged a sales growth target of 21-26 percent in U.S. dollar terms, but downgraded its forecast of sales growth in the global pure play wafer foundry business to 14-19 percent from a previous estimate of 20 percent.

Wei said the smartphone market has been gradually recovering, and the PC market has been bottoming out, but demand remains fragile. In addition, he added, demand for traditional servers is also weak.

The silver lining is that demand for emerging technologies such as AI applications and data centers is solid, Wei said.

TSMC will work with other semiconductor back-end professional outsourced semiconductor assembly and test (OSAT) service providers to raise capacity of the sophisticated Chip on Wafer on Substrate (CoWoS) technology to meet demand from the increasing popularity of AI applications, Wei said.

Through this cooperation, TSMC will try to resolve a supply shortage of advanced CoWoS services in 2025, he added.

Q&A/Delving into TSMC's planned CoWoS packaging plants in Chiayi

Also at the investor conference, TSMC Chief Financial Officer Wendell Huang (黃仁昭) said the semiconductor industry is expected to leave first quarter slow season effects behind, and the chipmaker is forecast to see its sales hit US$19.6 billion-US$20.4 billion in the second quarter with the median figure expected to rise about 6 percent from a quarter earlier.

Demand for the 3nm and 5nm processes from emerging technologies stayed strong and offset the weakness of the smartphone market, Huang said.

According to Huang, the April-June period is likely to be the strongest-ever second quarter in TSMC's history.

Despite a 7.2 magnitude earthquake off the coast of Hualien on April 3, most of the equipment at its fabs in Taiwan was up and running in just three days after a brief suspension, Huang said,

There was no damage to critical equipment such as extreme ultraviolet (EUV) lithography machines, which manufacture advanced chips, Huang added.

He expected the earthquake to cut TSMC's gross margin by about 0.5 percentage points and a hike in electricity tariffs in April to lower the margin by an additional 0.7-0.8 percentage points in the second quarter.

As a result, TSMC's gross margin for the second quarter will range from 51-53 percent, compared with 53.1 percent in the first quarter, Huang said.

April 6: TSMC maintains sales guidance despite disrupted production caused by quake

April 4: More than 70% of TSMC equipment back online after major quake in Taiwan

TSMC is maintaining a capital expenditure target of US$28.0 billion to US$32.0 billion for 2024, he added.

The company will assign 70-80 percent of its 2024 capex to advanced process development, 10-20 percent to mature and specialty process development, and 10 percent for the development of advanced IC packaging and testing, as well as photomasking technologies, Huang said.

TSMC's capital spending budget is based on expected growth and client needs over the next few years, he noted.

In the first quarter, TSMC's capex hit US$5.77 billion, up 10.11 percent from a quarter earlier but down 42 percent from a year earlier, according to the company.