Why can TSMC's revenue reach a new high amid the chip shortage?

On April 15, TSMC, the world's largest chip foundry that manufactures chips for Apple, AMD and many other manufacturers, released its first-quarter financial report. Its revenue met expectations and set a new record, and its net profit was close to US$5 billion, a significant year-on-year increase.

However, while the financial reports exceeded expectations, TSMC has been having a "tough" time recently: just yesterday, TSMC's wafer factory lost NT$1 billion due to an unexpected power outage; and not long ago, TSMC's production costs also rose sharply due to a lack of industrial water.

What is more noteworthy is that on Monday, the White House convened a chip summit with international chip manufacturers including TSMC to "listen to opinions on how to solve the global semiconductor shortage problem" and planned to allocate $50 billion of the $2 trillion infrastructure investment to invest in chips. For a time, TSMC was at the center of controversy - TSMC Chairman Liu Deyin previously stated that TSMC is confident that it will complete the 5nm wafer factory plan to be built in Phoenix, Arizona, which will also be one of the largest foreign direct investment cases in the history of the United States.

Amid the controversy, is TSMC facing a once-in-a-lifetime opportunity or a test of ice and fire? Against the backdrop of the global chip shortage and the big cycle, TSMC has come under the spotlight.

Image source: TSMC

TSMC's first-quarter revenue and net profit both exceeded analysts' expectations, and profits also increased significantly year-on-year and month-on-month - this was naturally expected.

The financial report shows that TSMC's revenue in the first quarter was NT$362.41 billion, a month-on-month increase of 0.2% and a year-on-year increase of 16.7%; net profit was NT$139.69 billion, and earnings per share were NT$5.39, both up 19.4% year-on-year; gross profit margin was 52.4%, and net profit margin was 38.6%.

Due to the global chip shortage that began in the second half of last year, TSMC's orders surged, driving up its performance. However, TSMC's gross profit margin declined in the first quarter, which it said was mainly due to relatively low utilization and exchange rates.

In terms of business, in the first quarter, TSMC's 5nm process shipments accounted for 14% of wafer sales, and 7nm process shipments accounted for 35%. Overall, advanced processes (including more advanced technologies including 7nm) accounted for 49% of total wafer revenue for the quarter.

Looking at last year, in 2020, 5nm process revenue accounted for 8%, 7nm accounted for 33%, and 16nm accounted for 17%; in 2019, 7nm accounted for 27%, 10nm accounted for 3%, and 16nm accounted for 20%. This means that TSMC's advanced process technology has significantly improved its production capacity.

In fact, the process share reveals the technological progress of the downstream mobile phone industry. For example, in the second half of 2020, due to Apple's shift to 5nm process, chipmaker AMD will become TSMC's largest 7nm customer. Also in the second half of 2020, Qualcomm's 5nm orders also poured in.

TSMC will also continue to move towards more advanced processes. Luo Zhenqiu, general manager of TSMC (Nanjing) Co., Ltd., said at the 2020 World Semiconductor Conference that its 3nm products will be available in 2021 and will enter mass production in 2022.

Chip process distribution Source: TSMC Q1 financial report

From the perspective of major platform applications, since the fourth quarter of last year, revenue from smartphones and other products has dropped by 11% and 13% respectively, while high-performance computers, the Internet of Things, automobiles and consumer electronics have increased by 14%, 10%, 31% and 11% respectively. In the first quarter of this year, TSMC's growth mainly came from smartphones and high-performance computers, accounting for 45% and 35% of total revenue respectively.

TSMC spokesman Huang Renzhao, deputy general manager, said: "TSMC's first-quarter revenue benefited from demand for high-performance computing-related applications and slightly moderate seasonal impact of smartphones."

Chip application platform share Source: TSMC Q1 financial report

Currently, TSMC's major customers are Apple, Qualcomm, AMD, Nvidia, Intel, etc. Its revenue from North American customers accounts for 67% of its total revenue, while revenue from Asia Pacific, EMEA (Europe, Middle East and Africa), China and Japan account for 17%, 6%, 6% and 4% of its total revenue respectively.

Before the chip ban, Huawei had always been TSMC's second largest customer and the only manufacturer that could share Apple's initial 5nm production capacity. According to TSMC data, Huawei's contribution to TSMC's revenue reached 14% in 2019, but dropped to 12% in 2020.

The loss of Huawei's orders did not leave TSMC with a capacity gap. Most of Huawei's old rivals Xiaomi, OPPO, and other domestic mobile phone manufacturers' 5nm and 7nm chips come from Qualcomm's Snapdragon series and MediaTek's Dimensity series. However, due to the failure of Samsung's 5nm process, Qualcomm and MediaTek still need to rely on TSMC to complete their orders.

Regional customer distribution Source: TSMC Q1 financial report

Amid the chip shortage, TSMC's capacity expansion plan has attracted special attention from the outside world.

The chip shortage started in the automotive industry. From December 2020, when Volkswagen announced a shortage of semiconductors, to the first half of this year, new and old car companies such as NIO, Ford, and Honda have successively stated that they need to suspend production in some factories due to chip shortages. The chip shortage problem in the automotive field seems to be getting worse. Soon after, the chip shortage spread to consumer electronics industries such as mobile phones. In February of this year, Xiaomi Vice President Lu Weibing wrote on his Weibo, "There is a huge shortage of chips this year. It's not just a shortage, it's an extreme shortage."

While chip orders are being sent to TSMC and other wafer foundries at a rapid pace, TSMC recently stated that the market may not be so short of chips.

First, on April 1, TSMC Chairman Liu Deyin said that the current capacity shortage was due to changes and uncertainties in the chip supply chain and market share, resulting in a considerable number of chips being in short supply. The global supply of 28nm capacity, which is in short supply for automakers, is actually higher than the demand. The misjudgment of automakers during the epidemic led to a mismatch in market production. When uncertainty and market share change, there will definitely be over-ordering.

Then, at the first quarter earnings conference this year, TSMC CEO Wei Zhejia said that the company's customers are currently experiencing capacity shortages across the entire industry, mainly caused by long-term demand growth and short-term supply chain imbalances. When talking about the supply of automotive chips, he also said that the shortage situation of TSMC users is expected to improve significantly in the next quarter, and TSMC estimates that the chip shortage may continue until 2022.

However, in actual actions, TSMC has been somewhat inconsistent.

TSMC previously stated that it will invest $100 billion in the next three years to expand its semiconductor manufacturing and new technology research and development capabilities, and increase its capital expenditure in 2021 from more than $20 billion to $30 billion. Among them, the investment in the wafer fab to be built in the United States alone is about $12 billion.

TSMC CEO Wei Zhejia once said that in order to cope with the chip shortage, TSMC's capacity utilization rate has been over 100% over the past year. At present, the global advanced chips are in short supply, and the automotive, mobile phone and other industries are facing chip shortages. Judging from the first quarter financial report this year, TSMC's capital expenditure continues to increase, which is used to purchase chip production equipment such as lithography machines to expand production.

The financial report shows that in the first quarter of this year, TSMC's capital expenditure was US$8.84 billion, a surge of 180% from the previous quarter, resulting in negative free cash flow. TSMC CFO Huang Renzhao said that of the US$30 billion capital investment planned for fiscal year 2021, about 80% will be used for advanced processes of 3, 5, and 7nm process.

Free cash flow Source: TSMC Q1 financial report

Expanding production capacity is not a simple decision for TSMC, and no one can guarantee the release of production capacity after expansion, although TSMC has made the right bets in history.

Interestingly, while TSMC was expanding, Samsung Electronics also announced that it would invest $100 billion in the next decade to expand its semiconductor business; Intel was also opening up its factory foundry business and planned to build two new wafer fabs.

In its 2020 financial report, SMIC clearly stated that the company's production capacity will continue to be fully loaded in 2021, and it will invest $4.3 billion in the production of mature processes. Mainly used to produce 28nm and above mature process wafers, the factory is scheduled to be put into operation in 2022.

TrendForce research shows that some manufacturers will gradually expand new production capacity in 2021, and it is expected that the overall wafer foundry industry output value will hit a new record high of US$94.5 billion this year. Perhaps the era of the global chip leap forward has arrived.

复盘全球科技龙头台积电二十年成长，每一轮资本开支大幅上调后均有 2~3 年的显著高增长，在此次芯片缺货潮的东风下，台积电继续扩大产量，但其是否能如过去一般迎来又一轮增长，还需时日验证。