TSMC earned 358 million dollars a day in the first quarter, and spilled 100 billion US dollars to expand production. Will the semiconductor industry pattern be restructured?

Radar Financial Articles 丨 Edited by Liang Chunfu | Deep Sea

Recently, the quarterly report disclosed by TSMC, the world's largest chip foundry, showed that consolidated revenue for the first quarter of 2021 was NT$362.41 billion (approximately RMB 83.5 billion), up 16.7% year on year; net profit was NT$139.7 billion (approximately RMB 32.2 billion), up 19.4% year on year.

In addition, TSMC raised its capital expenditure for 2021, which is expected to be $30 billion, compared to the previous forecast of $25 billion to $28 billion. In early April, TSMC also stated that it will invest 100 billion US dollars over the next three years to expand semiconductor manufacturing and research and development capabilities for new technologies, and announced plans to build a factory in Arizona, USA.

Behind the increase in capital expenditure is the continued shortage and price increase of global semiconductor chips. TSMC expects the business growth rate to be around 20% in 2021.

Is the global core shortage a “litmus test” opportunity or a severe test for semiconductor companies in mainland China?

Earn 358 million yuan a day

TSMC announces sales for the previous month at the beginning of every month, and the financial data is relatively more open and transparent. Therefore, it is almost a clear sign that the results for the first quarter of 2021 exceeded market expectations.

According to financial reports, TSMC's consolidated revenue for the first quarter was about 83.5 billion yuan, up 16.7% year on year, up 0.2% month on month; net profit was about 32.2 billion yuan, up 19.4% year on year. According to this calculation, this is equivalent to TSMC's daily earnings of about 358 million yuan.

Since the global shortage of semiconductor chips began in the second half of last year, TSMC, the world's largest chip foundry, has received many orders, and recently the price of TSMC chips has increased several times. The most recent one was on April 1. TSMC announced to the outside world that it will cancel chip order discounts for major customers such as Qualcomm and Apple from December 31 this year. This means that TSMC's chip prices will rise by several percentage points in the future, and this move is also regarded by the industry as a disguised price increase.

Chip orders exploded and prices increased, and TSMC's performance also soared, but its gross margin and gross profit declined sequentially.

In terms of gross profit, the financial report showed a year-on-year increase of 6.767 billion US dollars (about 44 billion yuan), but the year-on-year decline was 2.8%, and the gross profit margin was 52.4%, up 1.4 percentage points from year to month, and down 1.6 percentage points from month to month. Regarding the decline in gross margin, TSMC said it was mainly due to relatively low utilization rates and exchange rates.

Although TSMC's gross profit and net profit for the first quarter fell short of the previous quarter, it still met the company's expectations. In the fourth quarter financial report of last year released on January 15, TSMC expects the gross profit margin for the first quarter to be 50.5%-52.5%, and 52.4% for the first quarter, which is ultimately close to the upper limit of expectations.

On the business side, TSMC's revenue growth in the first quarter was mainly driven by automotive chips and high-performance computers. According to financial reports, autonomous driving revenue during the period was about 520 million US dollars, a 31% month-on-month growth rate, which indicates an explosion in demand for automotive chips; high-performance computer revenue was about 4.52 billion yuan, a year-on-month growth rate of 14%. As Bitcoin prices repeatedly reached new highs, many people “dived for gold”, and high-performance video cards also became “hard currency”, which also led to the growth of the chip-related industry to a certain extent.

In addition, revenue from smartphones and other products declined by 11% and 13%, respectively. This is mainly due to the fact that the first quarter of every year is a low season for smartphone chip foundry. New mobile phones are often released less, and the revenue of its smartphone business also declines accordingly.

TSMC spokesman Huang Renzhao, deputy general manager, said, “TSMC's first quarter revenue benefited from factors such as demand for high-efficiency computing-related applications and a slight easing of the seasonal impact of smartphones.”

The decline in demand for chips in the smartphone business also prevented TSMC's most advanced 5 nm process from exploding. The revenue share in the first quarter was only 14%, down from 20% in the fourth quarter of last year.

High-end smartphones commonly use 5 nm and 7 nm process technology. TSMC has already achieved mass production, including Apple's A14 and M1, Qualcomm Snapdragon 888, and Huawei's Kirin 9000 series all using 5nm process technology.

Prior to the “chip ban,” Huawei was TSMC's second-largest customer. According to TSMC data, in 2019, Huawei's contribution to TSMC's revenue reached 14%, and fell to 12% in 2020.

However, the loss of orders from Huawei did not cause TSMC's 5 nm and 7 nm production capacity to be digested. Currently, chips for high-end smartphones such as the domestic mobile phone manufacturer Mi OV are mainly used in the Qualcomm Snapdragon series, and Qualcomm's chips have always been mainly manufactured by TSMC.

Other chips are mostly in demand for mature processes above 7 nm. Currently, TSMC's 7 nm process accounts for the largest revenue source, contributing 35% of revenue in the first quarter. Overall, 7nm and more advanced processes together contributed 49% of revenue.

In terms of the new process, TSMC originally planned to conduct risky trial production in the second half of this year and mass production in the second half of 2022. However, TSMC Chairman Liu Deyin said at the International Solid-State Circuit Conference (ISSCC) a few days ago that the development progress of TSMC's 3-nanometer process is ahead of schedule and has already begun to pull goods from equipment manufacturers.

In the process of producing chips, the finer the integrated circuit, the finer the connection, the higher the precision, and the lower the power consumption. The main difference between a 3 nm chip and a 5 nm chip is that a 3 nm chip can put down more transistors. The more transistors, the faster the floating point calculation and the stronger the performance. However, the industry now agrees that under Moore's Law, it is no longer possible to achieve a greater breakthrough in chip technology, up to 2 nm or 1 nm.

This probably means that TSMC's advanced technology is almost reaching the ceiling of chip technology.

It is worth mentioning that globally, only TSMC and Samsung can achieve stable mass production at 5 nm. SMIC, which represents the most advanced chip process in China, has now mastered 14 nm process technology, but 7 nm process technology is still being developed.

TSMC: Chip shortage may continue until 2022

Beginning in the second half of last year, the price of computer graphics cards increased, smartphone prices increased, automobile manufacturers stopped production... various industries were caught in the neck by a small chip. A number of institutions have investigated and determined that the core shortage situation may continue for more than a year, and the domestic semiconductor industry pattern may usher in a restructuring.

In the automotive sector, the shortage of chips is the most serious. On the afternoon of March 26, NIO Auto, a new car builder, announced that due to a shortage of semiconductors, the company decided to temporarily stop production for 5 working days from March 29. Prior to that, car companies such as Ford, GM, Honda, and Volkswagen were all forced to stop or cut production due to chip issues.

TSMC CEO Wei Zhejia said in a recent conference call that the shortage of some “key semiconductors” will continue until at least the end of the year or even 2022, and it is expected that more production capacity will be provided in 2023.

The main reason for the chip shortage is a combination of long-term demand growth and short-term supply chain imbalances. In addition to being affected by the pandemic, it also includes an overall recovery in consumer demand, temporary customer orders, and the expansion of production capacity by smartphone manufacturers.

Under this, automobile manufacturers and PC suppliers are all vying for chip production capacity, and the boom in the industry has pushed TSMC to the forefront. Recently, TSMC also announced an increase in capital expenditure for this year, from the previously announced 250-28 billion US dollars to 30 billion US dollars, a significant increase of 74% over last year. 80% of the capital will be used for manufacturing advanced chips such as 3 nm, 5 nm, and 7 nm.

TSMC expects that as more advanced processes are put into use, there may still be room for improvement in its profitability. For the second quarter of 2021, TSMC's projected gross margin ranged from 49.5% to 51.5%, higher than the gross profit margin for the same period in 2018 and 2019.

Recently, however, TSMC also had some “water reversals”: on April 14, TSMC Nanke Wafer 14 P7 plant experienced an unexpected power outage at noon today. More than 30,000 wafers may be damaged, with an overall loss of up to NT$1 billion (approximately RMB 230 million). This power outage may increase the risk of a global “shortage of cores.” Furthermore, not long ago, TSMC also saw a sharp rise in production costs due to a shortage of industrial water.

Regarding the water shortage and power outages that the market is concerned about, TSMC said in a conference call that it has not had much impact on production. Regarding the water shortage issue, Wei Zhejia said that TSMC has plans to deal with the different stages of water restrictions, and it is expected that the water shortage problem will not have any real impact on operations.

Production expansion competition

With a global shortage of cores, TSMC's plans to expand production capacity have attracted particular attention from the outside world.

Financial reports show that in the first quarter of this year, TSMC's capital expenditure was 8.84 billion US dollars, a sharp increase of 180% over the previous month. At the same time, capital expenditure for 2021 was raised to $30 billion.

At the beginning of April, TSMC also stated that it will invest 100 billion US dollars over the next three years to expand semiconductor manufacturing and research and development capabilities in new technologies, and announced plans to build a factory in Arizona, USA.

Regarding the progress of the Arizona plant in the US, Wei Zhejia said in a conference call that construction will begin this year, and the next stage expansion plan will be decided based on factors such as market demand and production efficiency. As for the new expansion plan, he responded that no expansion plans in other regions have yet been announced, and emphasized that Taiwan is still the main manufacturing center, and production capacity will still be concentrated in Taiwan.

Meanwhile, South Korea's Samsung also announced that it will invest 100 billion US dollars in the next ten years to expand its semiconductor business.

Prior to that, Intel, the world's largest semiconductor company, announced that it would spend 20 billion US dollars to build two new chip factories in Arizona, USA. At the same time, Intel also announced the opening of the wafer foundry business to external customers.

A month ago, SMIC, a leading semiconductor manufacturer in mainland China, announced that the company will cooperate with the Shenzhen government to develop SMIC Shenzhen, focusing on the production of new products at 28 nm and above, and production is expected to begin in 2022. The estimated investment amount for the project is US$2.35 billion, equivalent to approximately RMB 15.3 billion.

Up to now, among the top ten global foundry companies, TSMC, SMIC, etc. have all recently launched plans to expand production.

The chip industry chain is highly divided. No matter how advanced the chip design technology of Apple, Qualcomm, Nvidia, and AMD is, chips still need to be manufactured in the end. Currently, companies capable of manufacturing high-end chips are almost already dominated by TSMC and Samsung, with a total market share of 71%, and other companies share the remaining share.

It is worth mentioning that on March 31, Chen Yue, the director of China's semiconductor company Silanwei, was retweeted by a screenshot of a netizen and uploaded to the Internet. The text immediately attracted attention. The text said, “This time the chip shortage is a magic mirror and a litmus test. The 2020 reports and 2021 first quarter reports of major electronic listed companies are about to be released. There is no need to take a close look at the reports this time; just look at how much share of the goods this company has grabbed. Don't ask messy questions during research; just ask how many items you can grab. In the context of the chip shortage, all of a company's comprehensive capabilities are reflected in this single indicator.”

Industry insiders have analyzed that in the global chip shortage, competition among foundry giants in terms of production capacity and advanced technology will continue, and the semiconductor market may usher in changes. In particular, due to the gradual failure of Moore's Law, the cost investment for continuous technology improvement will increase dramatically, and the development of cutting-edge technology will become more and more challenging, but this also gives mainland Chinese semiconductor companies that started late a window to catch up, giving them an opportunity to keep up with technology and even rank first in the world.

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