Stronger Taiwan dollar to challenge IC, auto part exporters

Taipei, May 5 (CNA) Export-oriented semiconductor and auto part manufacturers are expecting their margins to be affected by large foreign exchange losses as the Taiwan dollar continued to appreciate sharply against the U.S. dollar on Monday morning.

Among major semiconductor manufacturers, ASE Technology Holding Co., the world's largest IC packaging and testing services provider, told CNA that whenever the Taiwan dollar rises NT$1 against the greenback, its gross margin is cut by about 1.5 percentage points.

The U.S. dollar closed the morning down NT$1.114, or 3.71 percent, at NT$29.950 Tuesday after falling 3.07 percent to end at NT$31.064 on Friday. The losses Friday were the steepest single-day decline of the American currency since 2002.

Dealers said the rapid appreciation of the Taiwan dollar reflected expectations that the United States will press Taiwan to boost its currency against the U.S. dollar in a bid to strengthen the competitive edge of goods made in the U.S.

The pressure was expected to emerge during negotiations between Taipei and Washington as they discuss a so-called "reciprocal" tariff of 32 percent the Trump administration threatened on April 2 to impose against goods from Taiwan.

ASE Technology's response to the exchange rate volatility echoed that of contract chipmaker Taiwan Semiconductor Manufacturing Co. (TSMC) and its smaller rival United Microelectronics Corp. (UMC), which also said they would be hurt by a stronger Taiwan dollar.

TSMC said that whenever the Taiwan dollar rises 1 percent, its operating margin -- -- the difference between sales and its operating expenses -- could move lower by 0.4 percentage points, while UMC said its gross margin -- the difference between revenue and cost of goods sold -- could also drop by 0.4 percentage points.

At an investor conference held in mid-April, TSMC forecast that its operating margin would range between 47 and 49 percent in the second quarter, compared with 48.5 percent in the first quarter, based on an assumption of an exchange rate of NT$32.5 to one U.S. dollar.

A source from the local semiconductor industry said that with the Taiwan dollar suddenly appreciating against the U.S. dollar, the local semiconductor and overall electronics sectors face challenges on how to effectively hedge against foreign exchange risks.

Taiwanese tech exporters will also see their bargaining power tested as the value of the Taiwan dollar rises because their clients will likely request that they adjust their prices accordingly, the source said.

Semiconductor suppliers in the upstream part of the supply chain, such as TSMC, could have greater bargaining power in pricing negotiations, the source said.

Unlike IC makers, auto part manufacturers, who run relatively low profit margins, could see their profitability be more adversely affected by the rapidly appreciating Taiwan dollar.

The Tong Yang Group, an aftermarket (AM) replacement auto part supplier, said it was able to take on short-term volatility in the forex market but if the strong Taiwan dollar continued for longer, the impact on its bottom line would be big.

A source from the auto parts industry said the rapid appreciation of the Taiwan dollar is expected to affect the industry's profitability in the second quarter.

An investment consulting analyst said, meanwhile, that many Taiwanese exporters adopt the so-called natural hedging practice to ease forex impact.

Among common methods in natural hedging is to match revenues and expenses or invoice in the local currency, the analyst said, adding that the impact from a stronger Taiwan dollar will vary from industry to industry.