Slowdown in smartphone sales tests TSMC

Reuters, HSINCHU

Mon, Sep 10, 2018 - Page 15

Late last month, the new chairman of chipmaking titan Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), Mark Liu (劉德音), got the sort of news that would make any boss smile: His biggest competitor was throwing in the towel.

Fewer than three months into Liu’s tenure, rival GlobalFoundries Inc had announced that it would not compete in the latest generation of chipmaking technology. It was a reminder of just how dominant TSMC has become in manufacturing chips for other companies, a business it all but invented.

TSMC stock quickly hit an all-time high.

However, Liu’s job seems likely to get tougher, not easier.

In an interview at the company’s newly christened headquarters, named after company founder Morris Chang (張忠謀), Liu said global politics were his biggest worry.

“The worst you can imagine can be very bad,” Liu said, referring to geopolitical developments such as the US-China trade war and tensions between Taiwan and China.

The thoughtful, soft-spoken engineer took over from the ebullient and outspoken Chang at a tricky time.

Emerging competition from China casts an ominous shadow and the intricate network of relationships that have enabled TSMC and its peers in the global technology supply chain to thrive are under threat amid the trade dispute.

Worse, global smartphone sales have flattened. Purchases of smartphone chips by the likes of Apple Inc and Qualcomm Inc have powered TSMC for a decade.

However, Liu remains optimistic about that business.

“Smartphone units have plateaued, but the silicon content of each smartphone on average is still increasing,” he said, projecting growth in the high single-digit percentages over the next couple of years.

He said smartphones would continue to account for 40 to 50 percent of TSMC’s revenue.

A slowing smartphone market was one of the reasons that the company cut revenue targets this year. It also reduced capital spending for the year from US$11.5 billion-US$12 billion to US$10 billion-US$10.5 billion, a move it attributed at the time partly to more efficient equipment delivery and currency adjustments, but which Liu said was also influenced by softer demand.

Meanwhile, new markets such as autonomous vehicles and the Internet of Things — interconnected consumer and industrial devices — have been slow to arrive.

Liu chuckled as he predicted self-driving cars would come “within our lifetime,” but said little about when they might benefit TSMC.

“The issue is that these new areas are not going to be big enough in the foreseeable horizon to offset the slowing growth of smartphones,” Sanford C. Bernstein analyst Mark Li said.

Liu was more optimistic about the sophisticated chips that power data centers.

The boost TSMC and others enjoyed from the sale of such advanced processors for mining cryptocurrencies has largely dissipated, but Liu said the sector had made a lasting impact on high-performance computing (HPC).

“They have an amazing architecture innovation and it will carry onto other areas of HPC, including blockchain and artificial intelligence applications,” he said.

Moves by consumer tech giants such as Google to design their own chips could also be a boon for a company that vows to be “everyone’s foundry.”

Liu, who worked at Intel Corp and AT&T Inc’s Bell Laboratories before joining TSMC in 1993, shares the job of running the company with chief executive C.C. Wei (魏哲家), another industry veteran.

One major investor, speaking on condition of anonymity because he was not authorized to discuss individual companies, said he was cautiously optimistic that they could adequately replace “hero” Chang, who ran TSMC for 30 years.

Analysts say the company has some fresh opportunities with the pull-back of GlobalFoundries and could win more business from top chip vendors, including Advanced Micro Devices Inc and Qualcomm.

Still, Liu said that global overcapacity in an older production technology, stemming in part from new investment by Chinese firms, “gives you headaches.”

The company said that category accounted for 23 percent of revenue.

Questions about long-term growth loom large.

Liu expressed optimism that the “cooling down” in smartphones would last only a couple of years before 5G technology drives a new round of growth.

However, it is far from a sure thing.

“What they are doing right now is moderating their spending and returning extra cash back to investors,” Li said.

The big test for Liu is to prepare “for something new, some growth in the next era,” Li said.

Liu is confident that will happen, and said the company might increase spending on advanced production techniques in light of the GlobalFoundries retreat.

In China, where TSMC has pledged to invest US$3 billion on its latest factory, Liu said the firm would stay on the offensive.

“We will [invest more] to make sure we have a local position to compete,” Liu said.