TSMC, 25% Sales Growth Next Year Despite US Factory Cost Bomb? Here's Why [Taiwan Chip News]

Semiconductor Expert: "Large-Scale Proactive Investment
Strategy to Ensure Stable Growth Next Year" Outlook

TSMC, facing margin pressure due to production costs up to 30% higher than in Taiwan and logistics issues at its U.S. semiconductor factory, is expected to continue stable growth next year through advanced process technology and proactive investment strategies. Macquarie Securities pointed out that operating the U.S. factory could burden profitability, but semiconductor experts forecast TSMC’s sales growth rate to reach 25% next year with a margin rate hitting 60%, maintaining its leadership in the global semiconductor market.

In a recent report titled "TSMC Overseas Supply Cost Inflation," Australian Macquarie Securities analyzed that "TSMC’s U.S. semiconductor factory production costs could be up to 30% higher than those of its Taiwan factories," adding that "this could reduce 4nm (nanometer, one billionth of a meter) process profits by 1-2%." Macquarie Securities also noted, "It is difficult to find suitable chemical suppliers in the U.S. factory, so TSMC relies on specialized chemical suppliers from Taiwan," and "logistics costs have increased to the point where transportation costs for some materials exceed the product price." TSMC responded by stating, "We will bear these additional costs to support the operation of the U.S. factory."

Macquarie Securities diagnosed that although TSMC plans to absorb the additional costs, this is likely to negatively impact margin rates. TSMC management stated in the Q2 earnings announcement last July that "margins are expected to decrease by about 2-3% over the next few years." Former TSMC Chairman Liu Deyin publicly stated at the end of last month that "the cost of operating advanced processes in the U.S. is about $10 billion (approximately 14 trillion KRW) higher than in Taiwan."

TSMC’s Japan factory focuses on legacy processes such as 22nm and 28nm and has established a stable procurement system through local chemical suppliers. Macquarie Securities analyzed, "Although production costs at the Japan factory are about 10% higher than in Taiwan, local procurement reduces import dependence and mitigates production interruption risks," adding, "This contrasts with the high logistics cost burden of the U.S. factory."

Macquarie Securities also analyzed, "Chemical suppliers in Taiwan and Japan are hesitant to establish operations for the U.S. factory," citing concerns that achieving economies of scale in advanced process production is difficult and that TSMC’s U.S. factory might eventually switch to local suppliers, potentially wasting capital expenditures."

Despite rising costs, TSMC is expected to continue growing next year based on its advanced process technology. Semiconductor expert Chen Huiming, a researcher at Hong Kong’s Guoxin Capital Management, said, "Global semiconductor industry production is expected to grow about 12% next year," and "Taiwan will grow 16% thanks to TSMC." The researcher predicted TSMC’s sales growth rate next year to reach 25%, margin rate 60%, earnings per share (EPS) between 54 and 56 Taiwan dollars, and net profit growth rate exceeding 35%.

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Another point of interest is the scale of investment. TSMC Chairman Wei Jea-ja recently announced at the ‘TSMC Supply Chain Management Forum’ a large-scale proactive investment plan to respond to increasing semiconductor demand, saying, "Prepare to double production capacity within three years." Researcher Chen Huiming expects TSMC’s capital expenditure next year to reach a record high of $38 billion (approximately 55 trillion KRW).

He analyzed, "TSMC’s capital expenditure in 2022 was about 50% of annual sales, but next year it is expected to fall below 40%," adding that cost efficiency and productivity improvements will strengthen cash flow and thereby expand shareholder dividend capacity. He further stated, "Although there may be some impact on initial margin rates, past cases suggest that within 7-8 quarters, yield normalization will occur and margins could surpass 60%."

TSMC’s pragmatic management style also draws attention. Researcher Chen Huiming said, "The current semiconductor law is the result of repeated discussions between the U.S. government and TSMC," and evaluated, "TSMC’s corporate culture is pragmatic, executing decisions with full effort after thorough prior discussions. While it may seem disadvantageous in the short term, it is advantageous in the long term."

Taiwan Economic Daily News = Jang Jingwon & Jin Zhoukan / Translation = Asia Economy