semiconductor slump
Adobe Stock / BINGJHEN

Taiwan Semiconductor Manufacturing Company (TSMC), the global leader in chip making, is bracing for harsher market conditions than initially projected. According to TSMC’s Quarterly Management Report released on Thursday, the company predicts a substantial 10% decrease in its 2023 revenue, a figure far more significant than its earlier forecast of less than 5%.

As the leading manufacturer of the world’s most sophisticated processors, TSMC is responsible for the chips that power the newest iPhones, iPads, and Macs. However, post-pandemic demand for these consumer electronics has experienced a sharp decline.

During the Covid-19 lockdowns, the global need for laptops and smartphones surged, prompting tech companies to amass substantial chip inventories. Currently, these companies face an excess inventory issue as consumers, faced with escalating inflation, are pulling back on their purchases of these products. Consequently, this changing consumer behavior has driven down chip prices.

AI Rising But TSMC Revenue Drops

On the other hand, the AI processor business is booming, and TSMC projects growth close to 50% per annum over the coming years, a significant upsurge from its current 6% contribution to TSMC revenue.

TSMC’s manufacture of high-end processors crucial for data centers gives it a major role in AI development. The surging demand for AI-related processors, resulting in capacity shortage, has pushed TSMC to plan to double its high-end packaging capacity. Yet, the shortage is predicted to linger until the close of 2023.

TSMC’s profitability has endured multiple blows. The list includes weak demand, rising utility prices, continuous new process technology advancements, overseas expansion costs, and a sluggish domestic industry. These conditions have led to a staggering 23.4% YoY drop in net profit for Q2, falling to NT$181.8bn (US$5.85bn). Although the company has implemented cost control measures and taken advantage of a favorable exchange rate, the hurdles continue to cast a shadow over TSMC’s earnings.

Additionally, the company’s operations are strained by its ambitious US$40 billion investment to augment manufacturing capacity in the United States. The Arizona plant initially planned for completion before 2025, now faces delays due to a lack of skilled US workers needed for complex fabrication facilities construction.

‘Chips’ Down for TSMC But Potential Silver Linings

While the current scenario reveals a worrying picture of TSMC revenue, there are potential silver linings. An expected recovery in the smartphone market after six consecutive quarters of decline since 2022 could boost demand for chips.

“Moving into third quarter 2023, we expect our business to be supported by the strong ramp of our 3-nanometer technologies, partially offset by customers’ continued inventory adjustment,” Wendell Huang, CFO of TSMC said.

Rumors suggest that Apple’s next-generation iPhone processor might be based on the 3-nanometer process technology. Considering Apple’s traditional September release schedule for its latest iPhones, it’s reasonable to assume orders for these advanced chips might land on TSMC’s desk in the third quarter.

TSMC hopes to improve operations and profits without job cuts, evidenced by its ongoing US expansion project. Despite the significant delays with their first factory, TSMC still plans to construct a second chip factory in Arizona by 2026. But, TSMC’s goal of securing up to $15 billion from the CHIPS and Science Act has encountered objections from the US government regarding profit sharing and operational transparency.

Despite the mixed market conditions resulting from macroeconomic forces and transitional technological changes, TSMC continues to hold a key position in the semiconductor industry. Its ability to capitalize on the growth potential of AI will largely determine future TSMC revenue, however.

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