TSMC's Not-New Management Presents New Challenges for Investors
(Bloomberg Opinion) -- A seemingly minor incident at Taiwan Semiconductor Manufacturing Co. last month should serve as a warning sign for management and investors in the world’s most ubiquitous chip company.
An “abnormally treated” component in a key chemical at just one fabrication plant forced TSMC to scrap a bunch of wafers – the round slices of silicon upon which chips are made.
TSMC was quite open about the issue in a statement late Friday. At the top line, $550 million in revenue will shift from the first to the second quarter, with gross and operating profits also moving from one to the other. For the full-year, operating margin will be cut by 0.2 percentage points -- which I estimate to be around $70 million, based on its previous revenue guidance.
This culture of IR transparency, which continues to win plaudits from shareholders, helps explain why its New York-listed ADRs barely reacted on Friday while its Taipei-listed stock climbed early Monday.
Yet investors should be careful not to be too smitten with their favorite blue chip.
Just five months prior, another supplier mishap brought some TSMC production lines to a halt when new equipment came replete with an installation of the WannaCry virus. The company got over it, with investors more than happy to dismiss the incident as a one-off, even being so generous as to label it a teachable moment.
It’s an unhappy coincidence that these two incidents happened within the first year of founder Morris Chang retiring from the company. Indeed, CEO C.C. Wei bristled last month at the suggestion that he and his chairman, Mark Liu, were new to the job: “Why do you say this is a new management? We have been here for more than 20 years at least.”
That’s technically true. Liu and Wei – themselves TSMC veterans – shadowed Chang during the latter’s final years on the job, sharing the role of co-CEO while the founder held onto the position of chairman. It’s also true that this old-new management oversaw three downgrades in revenue forecast within a year, a sign that its once-stellar ability to predict the future is waning. Now, there are sell-side analysts openly saying that its current revenue forecast (for only slight growth in the year through December 2019) doesn’t hold water and will have to be cut.
TSMC may not be under new management. Yet two embarrassing problems within its supply chain, and is facing continued uncertainty about the broader economic environment, ought to give pause.
If the company can no longer be so certain about its destiny, or the products it puts into its multi-billion-dollar factories, investors need to ask whether they can remain so certain of their love for Taiwan’s favorite company.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.
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