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Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker, has issued a warning regarding a deepening semiconductor slump. Despite the boom in artificial intelligence (AI), the industry is unable to offset the global economic downturn and China’s slow recovery.
In a recent communication to investors, TSMC revised its 2023 revenue forecast to a 10% drop, a significant increase from the anticipated less than 5% decrease shared three months earlier. Additionally, the company expects a 15% decline in revenue during the second half of 2023 compared to the same period in 2022.
CC Wei, CEO of TSMC, attributes this pessimistic outlook to the weaker-than-expected recovery of the Chinese economy, resulting in lower end-market demand. Despite the strong demand for AI, particularly in large language models like ChatGPT, it is not sufficient to counterbalance the overall weakness.
TSMC has experienced a surge in demand for high-end processors used in data centers due to the growth of generative AI services. The company manufactures chips for Nvidia, whose AI processor business is thriving. However, this increased demand has caused a capacity shortage. TSMC plans to double its high-end packaging capacity to address this issue, but the shortage is expected to persist until the end of next year.
Despite the challenges, TSMC remains optimistic about the long-term growth of the AI-related processor business. They project an annual growth rate of close to 50% over the next few years, with the business segment’s share of TSMC revenue increasing from 6% to 10%.
On the other hand, TSMC anticipates a decrease in all other product segments this year, such as chips for smartphones, automotive, and industrial applications.
Given this bearish outlook, TSMC and the contract manufacturing sector are likely to underperform the broader semiconductor industry. TSMC management expects the industry to contract at half the pace of their own revenue decrease.
In the second quarter, TSMC reported a 23.4% YoY drop in net profit, amounting to NT$181.8bn (US$5.85bn). This decline was lower than analysts’ expectations, thanks to effective cost controls and a favorable exchange rate offsetting lower capacity utilization and higher electricity costs in Taiwan, where most of TSMC’s fabrication plants are located.
Looking ahead, TSMC anticipates further challenges later in the year. Factors such as high utility prices, the ongoing expansion of the newest process technology, and overseas expansion will impact profitability. TSMC’s gross margin is expected to decrease by an additional 3 to 4 percentage points later in the year, following a 2.2 percentage point sequential decline in the June quarter, according to TSMC chair Mark Liu.
The company is also facing obstacles with its US$40bn investment in manufacturing capacity in the US. The start of mass production in TSMC’s fab in Arizona will be delayed until 2025, a setback of up to a year. This delay hampers US President Joe Biden’s efforts to boost domestic chip production and enhance supply chain security. TSMC chair Mark Liu attributes the delay to a shortage of skilled workers and the challenges associated with handling advanced equipment. To address this, TSMC has sent more staff from Taiwan to train US technicians.
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