TSMC warns of deepening chip slump as AI boom fails to offset economic woes

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The world’s biggest contract chipmaker, Taiwan Semiconductor Manufacturing Company, has warned of a deepening semiconductor slump, as the boom in artificial intelligence fails to offset global economic woes and China’s delayed recovery.

TSMC now expects its 2023 revenue to drop by 10 per cent, rather than the less than 5 per cent it forecast three months ago, the Taiwanese company told investors on Thursday. This would translate into a 15 per cent revenue decrease in the second half of the year, compared with the same period in 2022.

“Three months ago we were probably more optimistic, but now [we are] not. The recovery of the Chinese economy is weaker than we thought, so end-market demand is not as we expected,” said CC Wei, chief executive. “Although we have very good AI end-market demand, it is not enough to offset [that weakness].”

The warning comes as the growth of large language models behind generative AI services such as ChatGPT is boosting the need for high-end processors for data centres, with TSMC making chips for Nvidia, whose AI processor business is booming.

TSMC said the sharp rise in demand for AI-related processors had led to a capacity shortage. While it would address this by doubling its high-end packaging capacity, the problem would probably persist until the end of next year, it added.

The strong demand from generative AI “only reinforces our belief in long-term growth”, Wei said, adding that the AI-related processor business would grow at close to 50 per cent annually over the next few years and extend its share from a current 6 per cent of TSMC revenue to 10 per cent.

However, this year the company expects all other product segments — such as chips for smartphones, automotive and industrial applications — to shrink.

The bearish outlook suggests TSMC and the contract manufacturing sector would underperform the broader semiconductor industry. TSMC management expects the wider industry to contract at only half its pace of revenue decrease. In most years in the past, the company has beaten industry growth.

In the second quarter, TSMC’s net profit dropped 23.4 per cent year on year to NT$181.8bn (US$5.85bn). The fall was less than analysts expected as cost controls and a favourable exchange rate partially offset lower capacity utilisation and higher electricity costs in Taiwan, where TSMC has most of its fabrication plants, or fabs.

However, high utility prices, the continuing ramp-up of the newest process technology and overseas expansion will be eating into profitability more markedly later in the year. TSMC’s gross margin, which was down 2.2 percentage points sequentially in the June quarter, is expected to be diluted by 3 to 4 percentage points later in the year, said TSMC chair Mark Liu.

The company is also facing headwinds with its US$40bn investment in manufacturing capacity in the US. The start of mass production in the fab TSMC is building in Arizona would be pushed back to 2025, Liu said — a delay of up to a year that would hamper US president Joe Biden’s efforts to boost domestic chip production and make supply chains more secure.

“We are entering a critical phase of handling the most advanced equipment,” Liu said. “However, we are encountering challenges because of a shortage of skilled workers.” The company has sent more staff from Taiwan to train US technicians.