World-leading semiconductor foundry TSMC is likely to build a second factory in Japan and is moving toward building one in Europe as well.
Like the US, Japan and the EU have both pursued investment from TSMC. Speaking on the company’s 2022 fourth-quarter earnings call for investors, held on January 12, CEO C C Wei said:
“Based on customers’ requests, we are increasing our capacity outside of Taiwan to continue to provide our customer the optimal solution they need to be successful.”
“In Japan, we are building a specialty technology fab [semiconductor fabrication plant, or factory], which will utilize 12- and 16-nanometer and 22-, 28-process technologies. Volume production is scheduled for late 2024.”
“We are also considering building a second fab in Japan as long as the demand from customers and the level of government support make sense.”
It will probably make commercial sense. Japan is short of foundry capacity and government subsidies will almost certainly be forthcoming – perhaps up to 60% of the value of the fab given how much more expensive it is to build in Japan compared with Taiwan.
That’s the approximate size of the grant the Japanese government has offered for the specialty technology fab that Wei mentioned. Called Japan Advanced Semiconductor Manufacturing, it is a joint venture between TSMC, Sony and Toyota affiliate Denso.
Its products will reportedly include image sensor data signal processors, automotive ICs and other logic devices, with priority on supply to Sony, Denso and other customers in Japan. Sony is the world’s top maker of image sensors.
The size of the Japanese subsidy is in line with statements made by TSMC executives regarding the cost of production in the US. In April 2022, TSMC founder Morris Chang said that “manufacturing chips in the US is 50% more expensive than in Taiwan.”
Speaking on the fourth quarter earnings call, TSMC CFO Wendell Huang said, “…the major reason for the cost gap is the construction cost of building and facilities, which can be 4 to 5 times greater for US fab versus a fab in Taiwan… The high cost of construction includes labor cost, cost of permits, cost of occupational safety and health regulations, inflationary costs in recent years and people and learning curve costs.”
Construction and other costs in Japan are also high, and despite concerns about return on investment, attracting TSMC’s expertise and building new and more advanced semiconductor production capacity are top national priorities.
According to a Semiconductor Industry Association report issued in September 2020, “Depending on the type of fab, a new fab in the US costs approximately 30% more to build and operate over 10 years than one in Taiwan, South Korea, or Singapore, and 37-50% more than one in China. As much as 40-70% of that cost differential is directly attributed to government incentives.”
Japan is also in the process of building up its own semiconductor foundry industry. Last August, Sony, Denso and six other Japanese companies established a joint venture called Rapidus to build advanced logic foundry capacity in Japan.
Another, smaller Japanese contract manufacturer called JS Foundry is also being established through the purchase and upgrading of older fabs in Japan, of which there are many.
A second TSMC fab would provide significant additional capacity, spur Rapidus and JS Foundry to meet their targets, and help TSMC avoid losing market share to Japanese reshoring of production now outsourced to Taiwan.
If a decision to build is made this year, it might come online as early as 2025. Rapidus is targeting production at the 2-nanometer node in 2027, two years after TSMC.
In Europe, TSMC is “engaging with customers and partners to evaluate the possibility of building a specialty fab focusing on automotive-specific technologies based on the demand from customers and level of government support.”
To build this fab, TSMC will probably require a subsidy similar to those it has been offered in Japan and the US.
In the meantime, TSMC is reducing its capital spending budget in response to a cyclical downturn in semiconductor demand. Management now expects investment in new plant and equipment in 2023 to be between US$32 billion and $36 billion – a decline of 1% to 12% from the $36.3 billion spent last year. That would be the first reduction in the company’s capital spending budget in five years.
A year ago, management expected 2022 capital spending to be between $40 billion and $44 billion, but actual spending fell short of this range by 9% to 17.5%. In 2021, TSMC’s capital spending was $30 billion.
Last January, CFO Huang told investors “Every year, our CapEx [capital expenditure] is spent in anticipation of the growth that will follow in the future years. We are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrends of 5G-related [smart phones, etc.] and HPC [high-performance computing] applications.”
This January, he added that “… given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate.”
The megatrends have been interrupted. High energy prices and rising interest rates have hit consumer spending and corporate investment plans, and the boom in purchases for remote work has ended. This has resulted in sudden and sharp declines in demand for PCs, servers used in data centers, consumer electronics and smartphones.
According to market research organization Gartner, worldwide unit shipments of PCs dropped 28.5% year-on-year in the fourth quarter of 2022. It was the largest decline since the mid-1990s. “Total PC shipments in 2022 were close to pre-Covid levels,” noted Gartner analyst Mikako Kitagawa, adding that “The enterprise PC market is also being impacted by a slowing economy.”
The semiconductor shortage has given way to oversupply, resulting in excess inventory, falling prices and production cuts. TSMC and other semiconductor makers are suffering from a decline in capacity utilization, which has a direct and highly geared impact on profit margins.
After record sales and profits in the fourth quarter of 2022, TSMC is preparing for a 12% to 16% sequential decline in revenues in the first quarter of 2023, with operating margins dropping from 52% to between 41.5% and 43.5%.
According to CEO Wei, “Entering 2023, we continue to observe softness in the consumer electronics end-market segment, while other segments like data center-related softened as well. As customers and supply chains continue to take actions, we forecast semiconductor inventory will reduce sharply through the first half of 2023.”
On a year-on-year basis, TSMC is guiding for a mid-to-high single-digit decline in revenues in the first half of 2023, followed by a return to growth in the second half. This makes sense if, as seems likely, inventories have been brought under control by mid-year.
Semiconductor inventories peaked in the third quarter of 2022 and have been declining since as companies race to salvage their profitability.
Wei added that “…we also start to observe some initial signs of demand stabilization, and we will watch closely for more signals.”
A 20% planned increase in R&D spending this year demonstrates TSMC’s fundamentally optimistic outlook and commitment to maintaining its technological leadership.
Last November, industry organization World Semiconductor Trade Statistics (WSTS) forecasted a 4.1% decline in worldwide semiconductor sales in 2023 after growth dropped from 26.2% in 2021 to 4.4% in 2022. That forecast now appears to be behind the curve.
TSMC expects the non-memory semiconductor market to shrink by 4% this year and the foundry market to shrink by 3%, while its own sales increase slightly as the inventory adjustment is followed by a pick-up in demand and gains from rising production at its industry-leading 3-nanometer node.
But TSMC is not a significant producer of memory ICs, for which demand has collapsed. In the estimation of market research company Objective Analysis, the total semiconductor market is likely to decline by close to 20% this year before rebounding in 2024.
Gartner’s Kitagawa is also pessimistic: “PC demand among enterprises began declining in the third quarter of 2022, but the market has now shifted from softness to deterioration. Enterprise buyers are extending PC lifecycles and delaying purchases, meaning the business market will likely not return to growth until 2024.”
Cell phone shipments declined by about 9% in 2022, according to International Data Corporation (IDC), but should rise by about 3% in 2023 due to recovery in the second half of the year. This forecast could be right, but it also leaves room for downward revision if demand does not pick up over the next two quarters.
In this uncertain environment, TSMC began installing equipment at its new fab in Arizona in December. Investments in Japan and Europe will probably follow, but TSMC is likely to be cautious about the timing.
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