TSMC cuts capex by 10% in a warning to the tech sector

(Bloomberg) — Taiwan Semiconductor Manufacturing Co. cut its 2022 capex target by about 10%, a dramatic sign of trouble for the tech industry from the world’s most valuable chip company.

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TSMC said it expects to spend about $36 billion in 2022 on capital equipment, down from at least $40 billion previously. The sharp reduction in spending, a leading indicator of its own growth expectations in everything from smartphones to servers to electric vehicles, suggests the Taiwanese company is bracing for a broader-than-expected recession.

TSMC and its peers are grappling with Washington’s sweeping restrictions on doing business with China, which are sending shockwaves through the global semiconductor industry. Applied Materials Inc., a leading maker of chipmaking equipment, cut its forecast for the fourth quarter, while Intel Corp. is said to be preparing to lay off thousands. Shares in European equipment maker ASML Holding NV, whose main customer is TSMC, fell as much as 3% on Thursday.

The moves revealed last week are the most aggressive by the Biden administration yet as it tries to prevent China from developing technological capabilities it sees as a threat. The actions, which have angered Beijing, threaten to disrupt a global economy already facing a possible global recession, runaway inflation and persistent supply snarls.

“The company’s 10% cut in full-year capex target implies prolonged weakness in demand for chips for PCs and smartphones,” said Charles Shum, an analyst at Bloomberg Intelligence.

The executives said they obtained a license from the US to continue operating and building their 16-nanometer and 28-nanometer lines in Nanjing in China, joining companies from SK Hynix Inc. to Samsung Electronics Co. in securing limited exemptions to the Washington chip restrictions. .

The subsidies allow Asia’s three largest chipmakers to maintain their existing plants and operations in the world’s largest semiconductor market, for example by buying, importing and upgrading US tools. They may also be allowed to expand existing facilities covered by the licences, which in TSMC’s case involves more mature nodes that are several generations behind the latest technology. However, it is unclear whether foreign companies will be able to move up the technology ladder or have American employees working the lines in China.

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TSMC shares tumbled this week, raising its market capitalization to about $320 billion from more than $550 billion in January.

The company, which reported better-than-estimated third-quarter net income of NT$280.9 billion ($8.8 billion), projects revenue of $19.9 billion to $20.7 billion in the December quarter, though that assumes some expectations in US dollars at a time when Asian currencies have weakened.

The Biden administration’s measures limit the ability of companies using American technology to sell products to China. They include restrictions on the export of some types of chips used in artificial intelligence and supercomputing, as well as stricter rules on the sale of semiconductor equipment to any Chinese company.

The restrictions make it difficult for chipmakers to move their inventories and hit TSMC more severely than previous US stocks, analysts at Fubon Research led by Sherman Shang said in a note this week. The restrictions mean that 5% to 8% of TSMC’s total revenue will likely be restricted, they said. Bloomberg Intelligence estimates that TSMC could lose more than 10% of its annual sales due to the restrictions.

It is “too early to provide a specific number, however the inventory correction will likely see its biggest impact sometime in the first half of 2023,” CEO CC Wei told analysts on a conference call. The impact of the US restrictions will be manageable, he said.

Still, Taiwan’s largest company is banking on its massive size and industry-leading technology to meet its biggest challenges in years. Headquartered in Hsinchu, Taiwan, TSMC is the world’s largest contract chipmaker, producing for companies including Qualcomm Inc., Apple Inc. and Nvidia Corp., all of which sell a significant portion of their products on the market. Chinese.

On Thursday, executives reaffirmed their long-term revenue goals and declared 2023 a growth year. TSMC is also committed to continuing to expand around the world as needed.

“TSMC’s guidance of at least 43% year-over-year sales growth and 59.5% gross margin is above consensus estimates and indicates very little immediate impact from new US restrictions. USA,” Shum said.

The outlook for the electronics industry had begun to darken even before the turmoil generated by Biden’s restrictions.

Macroeconomic shocks have suppressed consumer demand and business spending, while unsold inventory among PC vendors has piled up. Third-quarter shipments of desktop and laptop computers fell 15%, according to IDC data, and chip companies such as Advanced Micro Devices Inc. said they were surprised by the speed and sharpness of the drop in demand. Memory makers Micron Technology Inc. and Kioxia Holdings Corp. have announced production cuts of up to 30% to try to stabilize prices.

TSMC may not be able to rely on sustained demand for products from Apple, its biggest customer, whose growth has benefited the Taiwanese maker for years.

While the California company has released new types of chips to improve the performance of its devices, it recently backed away from plans to ramp up production of its new iPhones, raising more questions about underlying demand for electronics.

(Updates with the ASML actions from the third paragraph)

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