TSMC Chairman Cautions Towards “Quick Time period Frenzy” Surrounding AI Demand 

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The Taiwan Semiconductor Manufacturing Firm’s (TSMC) earnings name for its second quarter of 2023 got here with a bombshell announcement because the agency’s chairman, Dr. Mark Liu, introduced that its new chip manufacturing facility within the U.S. will delay manufacturing by a 12 months. TSMC is constructing a brand new facility in Arizona, and the agency had beforehand introduced that it could start producing 4-nanometer (N4) merchandise on the web site subsequent 12 months. Nevertheless, in response to Dr. Liu, N4 manufacturing shall be delayed till 2025 as his agency is dealing with problem discovering staff accountable for putting in the machines for superior semiconductor fabrication.

TSMC Asserts 2023 Income Will Beat Total Market Slowdown As Stock Correction Continues

The important thing takeaways from TSMC’s earnings coated the agency’s expectations for efficiency this 12 months and the long term progress price. On the previous entrance, the agency’s CEO Dr. Wei was forthcoming in stating that his agency had underestimated worsening macroeconomic circumstances. He believes that the broader downturn within the chip sector will scale back 2023’s income by 10% – and the present hype surrounding elevated demand for synthetic intelligence merchandise will show inadequate to counteract the slowdown.

His remarks have been backed up by TSMC’s administration report for the second quarter, which included particulars about income progress or slowdown for the assorted know-how platforms which are powered by its merchandise. TSMC categorizes these platforms into six classes, specifically high-performance computing (HPC), smartphones, web of issues (IoT) devices, automotive, digital shopper electronics (DCE) and others. Solely DCE and automotive noticed income progress at 25% and three%, respectively. Nevertheless, the 2 segments cumulatively represented 11% of TSMC’s income in Q2, whereas HPC is the most important with a 44% share.

TSMC’s income by phase progress or deceleration charges within the second quarter of 2023. Picture: TSMC

The downturn within the business is coming proper at a time when TSMC is dealing with excessive depreciation bills for its N3 chip know-how. The primary couple of years of a brand new course of know-how see fabs take up greater prices for organising machines for manufacturing, and TSMC kicked off N3 chip manufacturing late final 12 months.

TSMC CEO Dr. Wei was fairly clear in his outlook on the macroeconomic state of affairs, as he defined:

First, the macro is weaker than we thought. You already know, three months in the past, we [were] most likely extra optimistic, however now it is not. For instance, China economic system’s restoration is definitely additionally weaker than what we thought. So the top market demand didn’t develop as we anticipated. So put all collectively, even [when] we have now excellent AI’s processor demand, it is nonetheless not sufficient to offset all these form of macro impression. So now we count on the entire 12 months will grow to be minus ten %.

He added that each one market segments have been being affected and that:

‘[i]t’s all in regards to the macro. The macroeconomics has grow to be weaker than we thought. In truth, excessive inflation and rate of interest impression find yourself in all market phase[s] in each area on the earth. Beneath such [a] state of affairs, our clients are extra cautious of their stock management within the second half of this 12 months.

Nevertheless, the manager remained optimistic that the fabless semiconductor business will exit December with more healthy and decrease inventories than TSMC had anticipated in Q1. Moreover, TSMc expects the broader semiconductor business to say no within the mid-teens whereas the agency’s income will fall slower at roughly 10% in 2023.

Earnings tax funds gutted TSMC’s free money move in Q2 2023 proper when the market had slowed down.. Picture: TSMC

As a part of his ready remarks, TSMC chairman Dr. Mark Liu introduced proper off the bat that the Arizona fab’s N4 manufacturing schedule is pushed a 12 months again to 2025. A key problem is discovering the correct staff to put in chip manufacturing tools on the plant, and TSMC plans to usher in staff from Taiwan to coach these within the U.S. These plans have brought about some fear amongst staff that they may see pay cuts or job losses – claims that TSMC has denied.

Price gaps in organising the Arizona fab are as a lot as 50% greater in comparison with different amenities, and Dr. Liu answered in response to a query:

Nevertheless, we attempt to work with the U.S. administration. Initially, on the subsidy, money subsidy and tax — funding tax credit score, that’s to cowl the hole within the first 5 years roughly. When the instrument is depreciated, then the ecosystem turns into distinguished. That’s, what’s that, materials prices, chemical prices and the labor value. And we’re working with our provider to arrange a number of the extra environment friendly provide websites to be decrease, however they — and the U.S. administration has determined additionally to subsidize the availability — our suppliers.

So that’s nonetheless within the work. How a lot it may possibly additional lower, I do not know. However I feel both manner, we’ll strengthen our pricing values and be capable to hold the company profitability as we forecasted now.

TSMC’s chairman Dr. Mark Liu in Tainan, Taiwan in November 2022 as a part of a beam lifting ceremony for a 3-nanometer manufacturing extension. Picture: Liu Xuesheng/UDN

The TSMC chair additionally urged warning in regards to the short-term traits in demand for AI merchandise and any conclusions about greater demand in Q3 2023 sustaining within the later quarters. Dr. Wei added that AI merchandise have already began to make use of TSMC’s newest N3 course of know-how node, and total, these merchandise at the moment symbolize 6% of TSMC’s income.

Over the subsequent 5 years, the TSMC CEO expects AI chips, together with GPUs, CPUs, and accelerators, to develop at a compounded annual progress price (CAGR) of fifty% and symbolize a “low teenagers %” of its income. TSMC’s capability to fabricate high-end chips is at the moment blended; whereas the agency can ship front-end merchandise, it’s dealing with a capability constraint on the again finish, which it believes ought to be resolved by the top of 2024.

Commenting on AI demand and the extent to which it overlaps with the demand for knowledge heart merchandise, Dr. Liu commented:

In fact, we have now a mannequin, mainly. The short-term frenzy in regards to the AI demand undoubtedly can’t extrapolate for the long run. And neither can we predict the close to future, which means subsequent 12 months, how the sudden demand will proceed or will flatten out.

Nevertheless, our mannequin relies on the information heart construction. We assume a sure share of the information heart processor are AI processors, and primarily based on that, we calculate the AI processor demand. And this mannequin is but to be fitted to the sensible knowledge afterward. However usually, I feel the — our development of an enormous portion of information heart processor shall be AI processor is a positive factor.

And can it cannibalize the information heart processors? Within the quick time period, when the CapEx of the cloud service suppliers are fastened, sure, it should. It’s. However as for the long run, when their knowledge service — when the cloud service is having the generative AI service income, I feel they’ll enhance the CapEx. That ought to be in line with the long-term AI processor demand. And I imply the CapEx will enhance due to the generative AI companies. Something extra for you?

TSMC expects a hefty drop in its Q3 2023 income in U.S. greenback phrases, with its steering outlining a minimal of $16.7 billion in income and a most of $17.5 billion. Evaluating ith 2022,  the lower-end steering would result in a $3.5 billion annual drop in income from Q3 2022’s $20.23 billion.

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