In spite of a successful vaccination schedule all over the world, the impact of the pandemic is still persistent across several industries, especially those that depend on semiconductors and chipsets. The intricacies of supply chain management are still rampant and extensive with the ongoing shortage of chips restraining production and preventing sales. The shortage is mostly due to no supply chain and massive demand for IT hardware products during the lockdown. According to various experts, the supply gap is mostly from the semiconductor node makers and not the FAB ones. But, amidst the several difficulties, various semiconductor manufacturing firms have now commenced investing billions of dollars to perk up the situation. In an exclusive interaction with Dr. Mark Liu, Chairman of Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) regarding the company's hard efforts in grabbing revenues and its further utilization in top-notch semiconductor products. Liu also highlighted how TSMC’s latest chipset would be a game-changer in the market and its current problem in inventory management.
Q. Amid the global slump in chipset production during the pandemic, mostly by the semiconductor nodes makers, what will be your business model for the year 2022? What’s in-store?
Undoubtedly COVID pandemic crippled the semiconductor industry both the node makers and FAB, but slowly things are improving. We have invested millions of dollars to perk up the industry. In that scenario, our business models for this year will be boosted by the sturdy demand for our sector’s improved and cutting-edge specialty technologies on which we observe a keen interest from the four biggest growth podiums such as automotive, smartphone, IoT, and HPC. As we have entered this year, we largely speculate improved inventory to balance the supply chain because there was a constant effort being undertaken by the industry to secure the supply. This year, we wish to see a structural escalation of demand in chipset in the long-term spearheaded by the industry’s latest trend of HPC and 5G-related applications. In fact, a huge volume of silicon content has been observed in numerous end devices like smartphones, PCs, networking, servers, and automotive. Hence, we wish to remain firm and solid all through 2022 as we think that our strong advanced technology leadership will assist TSMC to grab the augmented demand for our top-notch technologies.
Q. Can you please indicate just how much do you think your customers want to put in place for inventory? How big a component do you think that factor is?
First of all, the growth in 2022 is a share gain, it's the pricing, and also it's a unit growth. In 2022, we expect the HPC and automotive to grow faster than the corporate average. IoT, similar. Smartphones are close to the corporate average. That's the platform growth. We also expect the inventory level to remain high, higher than before for a longer period of time, but we're not able to quantify that factor. By the end of 2030, we are expecting a targeted turnover of $1 trillion. We believe the semiconductor industry growth will continue, fueled by the structural megatrend 5G and high-performance computing. And also, our leading-edge technology provides the most energy-efficient technology for computation and accelerates the digital transformation for the next several years.
8-inch Wafer Fab. Source: TSMC
Q. Can you please highlight your current market share? How much share you earned towards the end of Q4 2021 and which segment witnessed the most demand?
Our Fourth-quarter revenue increased 5.7 percent sequentially in NT dollars or 5.8 percent in U.S. dollars. In spite of a huge crunch in the production of semiconductors all over the world, our company’s business was mostly spearheaded by the massive demand for our industry’s top-notch 5-nanometer technology, which is mostly during the Q4. The gross margin increased 1.4 percentage points sequentially to 52.7 percent, mainly due to the continuous cost improvement efforts. The operating margin increased 0.5 percentage points sequentially to 41.7 percent, slightly ahead of our guidance as we enjoyed higher operating leverage and a portion of the vaccine donation expenses got pushed out to the first quarter. Overall, our fourth-quarter EPS was TWD 6.41 and ROE was 31.3 percent.
Now, the point is how technology has helped us in getting a good revenue amid the massive competition. Our 5-nanometer process technology contributed 23% percent of wafer revenue in the fourth quarter while 7-nanometer accounted for 27 percent. Advanced technology, which is defined as 7-nanometer and below, accounted for 50 percent of wafer revenue. On a full-year basis, 5-nanometer revenue contribution came in at 19 percent of 2021 wafer revenue. 7-nanometer was 31 percent. Advanced technologies accounted for 50 percent of total wafer revenue, up from 41 percent in 2020. Now, the point is also how the podium has aided us in getting a good return. All platforms increased in the fourth quarter. Smartphones increased 7 percent quarter-over-quarter to account for 44 percent of our fourth-quarter revenue. HPC increased 3 percent to account for 37 percent. IoT increased 3 percent to account for 9 percent. Automotive increased 10 percent to account for 4 percent. And digital consumer electronics increased 2 percent to account for 3 percent.
Source: TSMC
Q. In regards to your turnover, what are you planning to build for 2022 or what are your expectations for this year?
Compared to the past one and a half pandemic boiled year, this year’s Q1 we wish our business to be assisted by HPC-based demand, a placid growth and sensation in the smartphone segment, and constant recuperation in the automobile sector. We also expect our first-quarter revenue to be between USD 16.6 billion and USD 17.2 billion, which represents a 7.4 percent sequential increase at the midpoint. We have speculated or rather calculated a rate of exchange of USD 1 to TWD 27.6 and depending on that calculation, we are speculating our gross margin to be boosted by between 53 percent and 55 percent, while at the same time, 42 percent and 44 percent of operating margin. Lastly, our 2022 effective tax rate is between 10 percent to 11 percent.
Each year, we spent our CapEx based on the prediction of the growth, which would follow the following years. We are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrends of 5G-related and HPC applications. Our capital budget at the end of 2022 is predicted to be between USD 40 billion to USD 44 billion. The strong demand and support for our customers' growth. Our total budget or spending for the year 2022 is speculated to be between USD 40 billion to USD 44 billion and out of this budget, 70 to 80 percent of funds will be spend for the allocation of top-notch process technologies such as 2-nanometer, 3-nanometer, 5-nanometer, and 7-nanometer. About 10 percent will be spent on advanced packaging and mask making and 10 percent to 20 percent will be spent on specialty technologies.
Q. Kindly explain the long-term benefits you are going to provide to your clients and how some of your chipset products proved to be a game-changer recently thwarting the competition?
As we embark upon the 5G era, an intelligent and more connected world will fuel massive requirements for computation power and prepare a greater need for energy-efficient computing, which demands greater use of leading-edge technologies. In order to fill the gap of structural augmentation of long-term demand in the market, the massive multiyear trend of HPC and 5G-based applications will uplift substantial growth in volume and also increase considerable semiconductor content enhancement in IoT, smartphone, automotive, and HPC applications. With the ever-growing requirement of computation, HPC will turn out to be the biggest booster of TSMC’s future growth and the biggest donor of incremental profit growth with the AI, CPU, and GPU applications as the imperative growth center for the company’s HPC podium.
TSMC's 5nm (N5) Fin Field-Effect Transistor (FinFET) technology has proved to be the sector's most important top-notch technology. To perk up the performance, density, and power of the N5 group for the upcoming 5-nanometer products, TSMC has also unleashed N4X and N4P technologies. N4P offers 11 percent performance boost as compared to the N5 with 22 percent improvement in power efficiency and 6 percent density gain. N4P is designed for easy migration from N5 with its products tape-out schedule for the second half of 2022. In fact, TSMC has also unveiled N4X to ease the hectic workload of HPC application because the chipset technology is specially optimized. Compared to its predecessor N5, the latest N4X would provide much more performance chunks and we have predicted that the technology would enter the market in Q1 of 2023. Other than that, the all-new N3 technology will utilize the FinFET transistor structure to offer state-of-the-art technology maturity, cost-effectiveness, and enhancement in performance for the customers. The development of this latest technology is in the experiment stage, but its production would commence in the Q2 of 2022.
Q. What’s stored in your roadmap for the year 2022 both in terms of revenue generation and implementation of new technologies?
Our depreciation expense is expected to increase by low to mid-teens percentage year-over-year in 2022 as newly incurred depreciation will be partially offset by other nodes rolling off depreciation. With this level of CapEx spending in 2022, we reiterate that TSMC remains committed to a sustainable cash dividend on both an annual and quarterly basis. In terms of TSMC's long-term growth outlook and profitability, we are entering a period of higher structural growth. As technology turns out to be part and parcel of the daily lives of citizens and the digital transformation is gaining momentum, the value of the semiconductor industry in the supply chain is escalating.
