Summary
TSMC has lowered its sales outlook for 2023, expecting a decline in sales in the low to mid-single digits due to a softening market.
TSMC will continue to dominate cutting-edge node IC manufacturing despite challenges from Samsung and Intel.
TSMC's N4 technology is expected to become the mainstream products' main process in 2023.
The company sees strong growth drivers for high-performance computing and smartphones in 2024.
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Introduction
As new narrative environments take shape with global shifts, due to strategic concerns, companies are now focusing more on regionalization than globalization. Governments around the globe, including the U.S., Japan, Europe, and China, are encouraging companies to build plants in their respective regions, indicating that a globalized economy with efficient international supply systems is becoming a thing of the past.
This shift towards regionalization has made supply chain management critical, which can increase costs rapidly. However, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) plans to work closely with its clients to reduce risks in this changing landscape, and despite geopolitical uncertainty, TSMC remains an undisputed leader in the game.
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TSMC Is Expanding Global Production
The demand for advanced node chipsets, specifically 3-nm and 5-nm processing, is expected to grow rapidly over the next decade. This demand will be driven by the increasing silicon content in automobiles and the higher computing demand in 5G smartphones and data centers. According to Gartner, the demand for these advanced node processing technologies could see an average annual growth of 20% through 2026.
On the other hand, demand for less sophisticated 28-nm or larger nodes is expected to grow by only 4% during the same period. As a result, TSMC looks set to continue to dominate cutting-edge node I.C. manufacturing despite challenges from Samsung Electronics Co., Ltd. (OTCPK:SSNLF) and Intel Corporation (INTC).
TSMC plans to build five new fabs in 2023, with the phase-I facility in the U.S. already underway. Equipment installation began in the fourth quarter of 2022, and mass production via the N4 process with a monthly capacity of 20K wafers is expected to begin in the first half of 2024. The total investment for the two-phase construction amounts to approximately $40 billion, making it the largest foreign direct investment in Arizona and one of the largest in the U.S.
Arizona's two fabs are expected to start production via the N3 process in the fiscal year 2026, potentially increasing the investment by more than 2.3 times the original amount. As a result, TSMC will begin mass production of the most advanced semiconductor technologies in the U.S., with each fab's cleanroom being twice the size of a standard logic fab. The two Arizona fabs are expected to produce over 600k wafers per year (50k wafers per month) following the completion of the two-phase construction.
Furthermore, TSMC plans to build N28/22 fabs in Germany or other European countries. In addition, the company is assessing the possibility of building an automotive-related specialty technologies fab based on clients' demand and local government support. Although the initial investment cost of an overseas fab is higher than that of a fab in Taiwan, the company aims to minimize the cost gap through management, flexible pricing/production in different locations, and cooperation with local governments.
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Notable N3 Revenue Contribution In H2 2023
TSMC's N4 technology is expected to become the main process for mainstream products in 2023. The company plans to use high-end processes for high-end products such as flagship smartphones, data center servers, AI accelerators, and high-end game consoles while using N12/N16 technologies for mainstream applications such as mid/low-end handsets, consumer electronics, handset base stations, and networking products.
In addition to N5, TSMC's N3 process meets the company's R&D roadmap. The gate density of N3 is 1.7x that of N5, providing 15% faster speed and 30% less power consumption compared to N5. TSMC also aims to migrate toward the 1nm process and has already started risk production of chips using the N3 process in FY21, with related mass production taking place in 4Q22 at Fab 18. In the beginning, smartphone-related chips may take up a higher proportion of TSMC's N3 capacity, but HPC chips may also be made via the N3 process in the future.
TSMC's N3 and N3E processes feature the company's FinFlexTM structure, and both processes may start generating revenue in 2H23. In addition, the company's capacity via the N3 process may become fully loaded in FY23, with the number of tape-outs expected to be more than twice that of N5 in its first and second years.
TSMC's mass production of chips via the next-generation N3E process may commence in 2H23, a year later than the N3 technology. The development of TSMC's N3 process and its migration toward the 1nm process will help the company meet the demands of its customers and the market for faster and more efficient chips. TSMC's advanced process roadmap by 2023 shows its commitment to offering high-end and mainstream products that meet the needs of its customers while keeping costs under control.
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TSMC
A Strong Rebound In The Second Half Of 2023
TSMC has lowered its sales outlook for 2023 due to a softening market. As a result, the company now guides for a decline in sales in the low to mid-single digits, whereas previously, it expected a slight increase. However, TSMC's capital expenditure guidance of $32-$36 billion remains unchanged, despite a decrease in spending after an outsized Q1 spending of $10 billion.
The inventory correction affecting the industry, particularly in consumer domains, is believed to be the reason for the decline, with Apple's 23% of sales having a significant impact. TSMC expects a sharp decline of -7% QoQ in Q2-23 before a quick recovery in H2, mainly due to higher-than-normal destocking of the iPhone 14 before the ramp-up of the iPhone 15 series.
The economic future is still cloudy, and China's opening up after the pandemic isn't progressing as fast as TSMC had expected. As a result, at the end of 2022, the company already had high inventory levels, but because demand has recovered more slowly than anticipated, inventory changes will take longer to normalize. As a result, TSMC's days of inventory have increased to the highest level in at least 12 years. However, it is reasonable to expect that inventories might have peaked and normalization is underway in the year's second half.
Additionally, TSMC's CEO, in the latest earnings call, noted:
We believe we are passing through the bottom of the cycle of TSMC business in the second quarter.
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Bloomberg
The Upside In AI Remains Promising
TSMC has reported increased demand from customers for CoWoS capacity, likely from Nvidia, indicating increased demand for AI computing. Although AI contribution currently only accounts for 2-3% of TSMC's revenue, AI server consumption is expected to grow by 3.5x in the next few years with the increasing investment in machine learning and mature monetization in inference applications.
TSMC's technology leadership, strong ecosystem, and superior production yields make it the key enabler for AI processors. Hence, AI-related processors, such as GPU, ASIC, and FPGA, will become a significant growth pillar for TSMC in the next several years once the AI inference demand broadens.
Looking ahead to 2024, TSMC sees strong growth drivers for high-performance computing and smartphones, driving revenue growth above trend. This is due to increased AI accelerators, AMD Zen4/Zen5 ramp up, Apple M3 in HPC, and more share gains in Qualcomm for slim modem and Apple A17/A18 ramp up in smartphones.
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Takeaway
Despite TSMC's lowered sales outlook for 2023 due to a softening market, we might have approached the bottom of the cycle, and with several strong growth drivers for high-performance computing and smartphones, TSM remains a strong buy amidst the current uncertain environment.
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