Weak Demand Sparking ‘Reasonable’ Inventory Reductions: TSMC CEO

Due to the “softening device momentum” in demand for smartphones, PCs and other consumer “end-market” segments, “we observe the supply chain is already taking action and expect inventory levels to reduce throughout the second-half 2022,” said Taiwan Semiconductor Manufacturing Co. CEO C.C. Wei on a Q2 earnings call Thursday. TSMC, the world’s largest foundry, reported a 36.6% year-over-year Q2 revenue increase in U.S. dollar terms to $18.16 billion on strong demand in high-performance computing, IoT and automotive.

After two years of COVID-19 pandemic-driven stay-at-home demand, the type of inventory “adjustment” TSMC is observing in the supply chain “is reasonable, in our view,” said Wei. “Our expectation is for the excess inventory in the semiconductor supply chain to take a few quarters to rebalance to a healthier level,” he said. “We believe the current semiconductor cycle will be more similar to a typical cycle, with a few quarters of inventory adjustment likely through first half 2023.”

Amid the softness in consumer end-markets, demand in enterprise segments such as data center and automotive “remains steady,” said Wei, “and we are able to reallocate our capacity to support these areas.” Despite the ongoing “inventory correction,” TSMC customers' demand “continues to exceed our ability to supply,” he said. “We expect our capacity to remain tight throughout 2022.”

Though macroeconomic headwinds will bring near-term uncertainties that may persist, “we believe the fundamental structural growth trajectory in the long-term semiconductor demand remains firmly in place,” said Wei. “We continue to observe silicon content increase across many end devices, fueled by process technology migration and increased functionality.”

Smartphones that support 5G functionality carry “substantially higher silicon content” than 4G handsets, and the amount of silicon content in today's cars “continues to rise,” said Wei. Though the unit growth of many electronics devices may be “flattish” in the next several years, silicon content growth will be higher, and will support “long-term structural semiconductor demand and increase our addressable wafer demand,” he said.

TSMC’s development plans for 3-nanometer wafers -- codenamed N3 within the company -- are “on track for volume production in second half of this year,” said Wei. It expects the first “revenue contribution” from N3 in the first half of 2023, “with a smooth ramp in 2023,” driven by high-performance computing (HPC) and smartphone applications, he said.

There’s a “high level of customer engagement” for N3 wafers, said Wei. N3 will be the world’s “most advanced semiconductor technology” when it's introduced, he said. “We are confident that our N3 family will be another large and long-lasting node for TSMC.” Meanwhile, TSMC’s N2 technology development “is on track and progressing well to our expectation,” with volume production slated to begin in 2025, he said.

TSMC drew 51% of its Q2 revenue from wafers in advanced technology nodes, which the company defines as 7-nanometer nodes and below, said Chief Financial Officer Wendell Huang. Q2 smartphone sector revenue increased 3% sequentially from Q1 to account for 38% of the quarterly mix, said Huang. HPC increased 13% quarter on quarter for 43% share, he said, while IoT increased 14%, for 8% share, automotive increased 14% to account for 5%, and digital consumer electronics increased 5% to account for 3%.

TSMC expects its Q3 gross margin to decline by 60 basis points sequentially from Q2, said Huang. “We will face challenges from rising inflationary costs from raw materials, utilities and tools, increasing process complexity of leading nodes, new investments in mature nodes and overseas fab expansions,” he said. Foreign exchange rate fluctuations, over which "we have no control," will also factor into the lower Q3 gross margin, he said.