TSMC cuts capital expenditures by 10% in warning for the technology sector

(Bloomberg) – Taiwan Semiconductor Manufacturing Co. cut its 2022 investment target by around 10%, a dramatic sign of trouble for the tech arm of the world’s most valuable chip company.

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TSMC expects to spend approximately $36 billion on capital goods in 2022, up from at least $40 billion previously. The sharp cut in spending — a key indicator of its own growth expectations across sectors from smartphones to servers to electric vehicles — suggests the Taiwanese company is bracing for a broader-than-anticipated downturn.

TSMC and its competitors are struggling with Washington’s sweeping restrictions on doing business with China, which is sending shockwaves through the global semiconductor industry. Applied Materials Inc., a leading maker of chipmaking equipment, lowered its fourth-quarter guidance, while Intel Corp. should prepare to fire thousands. Shares in European gear maker ASML Holding NV, whose main customer is TSMC, fell as much as 3% on Thursday.

The moves unveiled last week are the Biden administration’s most aggressive yet as it seeks to prevent China from developing technological capabilities it sees as a threat. The measures, which have outraged Beijing, threaten to disrupt a world economy already grappling with a potential global recession, rising inflation and ongoing supply shortages.

“The company’s 10% cut in its full-year investment target suggests continued weakness in demand for smartphones and PC chips,” said Charles Shum, an analyst at Bloomberg Intelligence.

Executives said they have been licensed by the US to continue operating and expanding their 16-nanometer and 28-nanometer lines in Nanjing, China, and have been joined by companies from SK Hynix Inc. to Samsung Electronics Co to secure narrow exemptions from Washington chip restrictions .

The grants allow Asia’s three largest chipmakers to maintain their existing facilities and operations in the world’s largest semiconductor market, for example by buying, importing and upgrading American tooling. They may also be allowed to expand existing facilities covered by the licenses – which in the case of TSMC affects more mature nodes that are several generations behind the state of the art. However, it is unclear whether foreign companies will be allowed to climb the technology ladder or whether American employees will work on the lines in China.

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Shares of TSMC have plummeted this week, taking the market cap to about $320 billion from more than $550 billion in January.

The company, which reported better-than-expected net income of NT$280.9 billion (US$8.8 billion) for the third quarter, is forecasting revenue of between US$19.9 billion and US$20.7 billion for the December quarter , although this assumes certain US dollar expectations at a time Asian currencies have weakened.

The Biden administration’s actions limit the ability of companies using US technology to sell products to China. These include restrictions on the export of some types of chips used in artificial intelligence and supercomputing, as well as stricter rules on the sale of semiconductor equipment to Chinese companies.

The restrictions make it harder for chipmakers to move inventory and hit TSMC harder than previous U.S. measures, analysts at Fubon Research led by Sherman Shang said in a note this week. The restrictions mean that about 5% to 8% of TSMC’s overall revenue is likely to be curtailed, they said. Bloomberg Intelligence estimates that TSMC could lose more than 10% of its annual revenue due to the restrictions.

It’s “too early to give an exact figure, but the inventory correction is likely to have its greatest impact sometime in the first half of 2023,” Chief Executive Officer CC Wei told analysts on a conference call. The impact of the US curbs will be manageable, he said.

Still, Taiwan’s largest company relies on its massive scale and industry-leading technology to overcome its biggest challenges in years. Headquartered in Hsinchu, Taiwan, TSMC is the world’s largest contract chip manufacturer, manufacturing for companies such as Qualcomm Inc., Apple Inc. and Nvidia Corp., all of which sell a significant portion of their products in the Chinese market.

On Thursday, executives reiterated their long-term revenue goals and declared 2023 to be a year of growth. TSMC also promised to continue expanding globally if needed.

“TSMC’s guidance of at least 43% year-over-year revenue growth and 59.5% gross margin is ahead of consensus estimates and indicates very little immediate impact from the new US restrictions,” Shum said.

The outlook for the electronics industry had already clouded over before the upheaval caused by Biden’s curbs.

Macroeconomic shocks have depressed consumer demand and business spending, while unsold inventory has built up at PC vendors. In the third quarter, shipments of desktop and laptop computers fell 15%, according to IDC data, and chip companies like Advanced Micro Devices Inc. said they were surprised by the speed and sharpness of the demand drop. Memory makers Micron Technology Inc. and Kioxia Holdings Corp. have announced production cuts of up to 30% to stabilize prices.

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

While the California-based company has rolled out new types of chips to boost the performance of its devices, it recently withdrew plans to ramp up production of its new iPhones, raising further questions about underlying electronics demand.

(Updates with ASML stocks from third paragraph)

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