Chip giant TSMC cuts capital spending 10% in warning for tech sector

TSMC said it expects to spend about US$36 billion (S$51.5 billion) in 2022 on capital equipment. PHOTO: REUTERS

TAIPEI - Taiwan Semiconductor Manufacturing Company (TSMC) slashed its 2022 capital spending target by roughly 10 per cent, a dramatic sign of trouble for the technology industry from the world's largest contract chipmaker.

TSMC said it expects to spend about US$36 billion (S$51.3 billion) in 2022 on capital equipment, down from at least US$40 billion previously. The sharp reduction in expenditure - an important indicator of its own expectations for growth across sectors from smartphones to servers and electric vehicles - suggests that the Taiwanese firm is bracing for a broader-than-anticipated downturn.

TSMC and its peers are grappling with Washington's sweeping restrictions, which are sending shock waves through the global semiconductor industry, on doing business with China. 

Applied Materials, a leading producer of chipmaking equipment, slashed its forecast for the fourth quarter, while Intel is said to be preparing to fire thousands of employees. Shares in European gear maker ASML Holding, whose top customer is TSMC, fell as much as 3 per cent on Thursday.

The moves unveiled last week are the Biden administration's most aggressive yet as it tries to stop China from developing technological capabilities it sees as a threat. The actions, which have incensed Beijing, threaten to disrupt a global economy already dealing with a potential global recession, soaring inflation and lingering supply snarls.

"The company's 10 per cent cut in full-year capital spending target implies prolonged weakness in smartphone and PC chip demand," Bloomberg Intelligence analyst Charles Shum said.

TSMC executives said they won a licence from the United States to continue operating and building 16-nanometre and 28-nanometre chip lines in Nanjing in China, joining rivals SK Hynix and Samsung Electronics in securing narrow exemptions to the chip curbs from Washington.

The grants allow Asia's three largest chipmakers to maintain their existing plants and operations in the world's biggest semiconductor market, for instance, by buying, importing and upgrading American 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 state-of-the-art. It is unclear, however, if foreign firms will be allowed to move up the technology ladder, or have American employees working on the lines in China.

TSMC's shares have tanked this week, taking its market capitalisation to about US$320 billion from more than US$550 billion in January.

The company, which reported better-than-estimated third-quarter net income of NT$280.9 billion (S$12.5 billion), is projecting a revenue of US$19.9 billion to US$20.7 billion in the December quarter, although that assumes certain US dollar expectations at a time when Asian currencies have weakened.

The Biden administration's measures limit the ability of companies that use US technology to sell products to China. They include restrictions on the export of some types of chips used in artificial intelligence and supercomputing, and also tighter rules on the sale of semiconductor equipment to any Chinese company.

The restrictions make it more difficult for chipmakers to move their inventories and hit TSMC more severely than previous actions by the US, Fubon Research analysts said in a note this week.

The curbs mean that about 5 per cent to 8 per cent of TSMC's total revenue will likely be restricted, they said.

Bloomberg Intelligence estimates that TSMC could lose more than 10 per cent of its annual sales because of the restrictions.

It is "too early" to provide a specific number, TSMC chief executive officer C.C. Wei told analysts on a conference call.

"However, the inventory correction will likely see its biggest impact some time in the first half of 2023," he said, adding that the impact of the US curbs will be manageable.

Still, Taiwan's largest company is betting on its massive size and industry-leading technology to navigate its biggest challenges in years. TSMC produces for the likes of Qualcomm, Apple and Nvidia, all of which sell a significant portion of their products in the Chinese market.

On Thursday, executives reaffirmed their long-term targets for revenue and declared 2023 a year of growth. TSMC also pledged to continue expanding around the globe as needed.

"TSMC's guidance of at least 43 per cent year-over-year sales growth and 59.5 per cent gross margin is above consensus estimates, and indicates very mild immediate impact from the new US restrictions," Mr Shum said.

The outlook for the electronics industry had begun to darken even before the upheaval engendered by US President Joe Biden's curbs.

Macroeconomic shocks have suppressed consumer demand and business spending, while unsold inventory among PC vendors have build up. Third-quarter shipments of desktop and laptop computers slumped 15 per cent, according to IDC data, and chip companies like Advanced Micro Devices have said they were surprised by the speed and sharpness of the downturn in demand. Memory makers Micron Technology and Kioxia Holdings have announced cutbacks in output of as much as 30 per cent to try to stabilise prices.

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

While Apple has launched new types of chips to boost the performance of its devices, it has recently backed off plans to increase production of its new iPhones, raising further questions about underlying electronics demand. BLOOMBERG

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