TSMC's $37 billion spending blitz ignites global chip share rally

TSMC expects revenue of US$12.7 billion to US$13 billion this quarter. PHOTO: REUTERS

TAIPEI (BLOOMBERG) - Taiwan Semiconductor Manufacturing Co (TSMC) triggered a global chip stock rally after outlining plans to after outlining plans to pour as much as US$28 billion (S$37 billion) into capital spending this year, a staggering sum aimed at expanding its technological lead and constructing a plant in Arizona to serve key American customers.

The envisioned spending spree sent chipmaking gear manufacturers surging from New York to Tokyo. Capital spending for 2021 is targeted at US$25 billion to US$28 billion, compared with US$17.2 billion the previous year. About 80 per cent of the outlay will be devoted to advanced processor technologies, suggesting TSMC anticipates a surge in business for cutting-edge chipmaking. Analysts expect Intel, the world's best-known chipmaker, to outsource manufacture to the likes of TSMC after a series of inhouse technology slip-ups.

Even as TSMC grows, foundries such as TSMC, UMC and Globalfoundries aren't expanding fast enough to meet the pandemic-induced spike in demand for gadgets. Those bottlenecks snarled the flow of chips not just to cars, but also Xboxes and PlayStations and even certain iPhones. TSMC is by far the most advanced of the foundries responsible for making a significant portion of the world's semiconductors, serving the likes of Qualcomm and NXP Semiconductors, which also supply the mobile and auto industries.

The sheer scale of TSMC's envisioned budget - more than half its projected revenue for the year - underscores TSMC's determination to maintain its dominance and supply its biggest American clients from Apple to Qualcomm. At 52 per cent of projected 2021 revenue, the chipmaker's planned spending would be the sixth-highest among all companies with a value of more than US$10 billion, according to data compiled by Bloomberg. The outlay may also ramp up pressure on Intel, whose budget for 2020 was roughly US$14.5 billion.

"The high capex guide is indicative of TSMC's confidence in Intel's outsourcing business," Bernstein analysts led by Mark Li wrote in a note. "TSMC's track record also shows high capex always subsequently led to high growth."

The world's largest contract chipmaker expects revenue of US$12.7 billion to US$13 billion this quarter, ahead of the US$12.4 billion average of analyst estimates. That will power mid-teens sales growth this year, though that's roughly half the pace of the increase in 2020.

TSMC's net income in the quarter ended December climbed 23 per cent to NT$142.8 billion (S$6.75 billion), compared with the NT$137.2 billion average of analyst estimates, the chipmaker said on Thursday (Jan 14). That contributed to a 50 per cent increase in full-year profit, the speediest rate of expansion since 2010. Sales in the December quarter climbed 14 per cent to a record NT$361.5 billion, according to previously disclosed monthly numbers, helped in part by robust demand for Apple's new 5G iPhones.

TSMC shares jumped as much as 5.6 per cent, the most since July, to an all-time high in early Friday trade, extending a rally of more than 70 per cent over the past year. Supplier Tokyo Electron climbed more than 4 per cent, while ASML Holding rose 5.9 per cent on Thursday. Other semiconductor companies in the US rallied on Thursday, with Applied Materials gaining almost 8 per cent and Lam Research Corp up 6 per cent in New York. Intel gained 4 per cent.

The fourth-quarter results revealed increasing contributions from TSMC's most-advanced 5-nanometer process technology - used to make Apple's A14 chips. That accounted for about 20 per cent of total revenue during the quarter, more than doubling its share from the previous three months, while 7nm represented 29 per cent. By business segment, TSMC's smartphone business contributed about 51 per cent to revenue, while high-performance computing (HPC) was at 31 per cent.

As rivals like United Microelectronics fall behind and Semiconductor Manufacturing International struggles with American sanctions, TSMC's pivotal role is likely to expand in 2021. The company has been racing to meet demand from larger-volume electronics clients, exacerbating a severe shortage of automotive chips that's forcing firms like Honda Motor and Volkswagen to curtail production.

TSMC said the automotive industry had been "soft" since 2018 and demand only started to recover in the fourth quarter. The company is working with its automotive customers to address the capacity supply issues, chief executive officer C.C. Wei said, though he didn't elaborate when the bottlenecks that forced carmakers to cut production could be resolved.

Executives didn't address reports about potential orders from Intel on Thursday, saying that they don't discuss specific customers. Intel held talks with TSMC about making some of its best chips, people familiar have said, though it's unclear whether the company may pivot after the appointment of Pat Gelsinger as its new CEO.

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