TSMC's Expansion Challenge Told in 10 Timely Charts
(Bloomberg Opinion) -- Taiwan Semiconductor Manufacturing Co. has quietly grown to a place of global prominence by being the outright leader in chip manufacturing technology. Last week, the company doubled down by announcing a record $30 billion spending plan with even bigger checks to be written next year for the equipment required to make the world’s most-advanced chips. Demand for electronic components is entering a sustained growth phase as more people stream content online, companies let staff work from home, and fifth-generation mobile devices and networks are rolled out.
In 10 charts, we outline some of the key metrics at the Hsinchu-based supplier to Apple Inc., Qualcomm Inc., Nvidia Corp. and dozens more. The data show that while spending and average prices are on the rise, TSMC — and its shareholders — carry a greater short-term burden. The company is betting on large rewards at the end of the spending spree, but there are plenty of risks to contend with, too.
Continued expansion isn’t the rule for TSMC. In fact, when looking at actual output — measured in wafers — there have been been numerous periods of stagnation, and even decline, as the global economy waxes and wanes. This can happen despite advances in technology hitting new levels.
Technology supremacy is what keeps revenue climbing. By always offering the best manufacturing capacity in the world, the company can keep prices buoyant even as rivals lag. Fellow Taiwanese foundry United Microelectronics Corp., by comparison, has barely managed to raise prices over the past five years as competitive pressure and inferior technology give it less room to maneuver.
Internet-connected gadgets, and the servers that manage them, are big growth areas. Despite the auto industry’s recent complaints about component shortages hurting carmakers’ output, that sector simply hasn’t kept up.
Smartphones continue to dominate revenue and growth at TSMC’s top line, with high-performance computing such as servers and cellphone base stations contributing strongly. Autos barely appear on the radar. Digital consumer electronics, which include TVs and digital cameras, have dropped off in recent years.
Capital expenditure comes in peaks and troughs lasting around five years. We’re now into the third year of what’s likely to be another such cycle at TSMC. Previous upticks coincided with booms in laptop computing and smartphones, both of which were major drivers of semiconductor demand. This time, we'll probably see a lot of the chips tucked away in server farms and cellphone base stations.
More money, in the form of debt, will be needed to fund the current expansion as the huge spending bill soaks up operating cash flow. With less than $10 billion in bonds payable at the end of March, and a long-term debt-to-equity ratio of just 14.3, the company has plenty of room to borrow. By comparison, U.S. rival Intel Corp. — which just announced a move into the foundry business — has $34 billion in long-term debt and a ratio three times higher, at 42.3.
High costs will hurt margins because depreciation is a major component of expenses. It’s likely that we’ve hit a near-term peak with a few quarters of erosion ahead as the sudden uptick in spending results in higher costs. That may be mitigated by the stronger long-term revenue predicted by the company.
Foreign currency swings can hurt or help earnings. TSMC has previously stated that every 1% appreciation in the Taiwan dollar hurts gross margin by around 40 basis points. This could get worse after a U.S. Treasury report hinted last week that it may pressure Taiwan’s central bank to allow its currency to rise.
TSMC’s share price rise is squeezing its dividend yield. This may end up being an important issue because the company’s steady and lucrative dividends have been a draw for some fund managers.
Mother Nature is more powerful than even the mightiest company. Chip manufacturing requires a lot of water, and Taiwan is facing a severe drought after a lack of typhoons last year meant the island’s reservoirs didn’t get topped up.
As TSMC enjoys the global spotlight and renewed confidence that its technology and services will be keenly sought after for many years, investors will need to keep a close eye on all the moving parts that underscore the company’s strengths and expose its weaknesses. There's a good chance this spending spree won't be as profitable as the last few.
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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