Even The World's Largest Chip Maker Bites The Economic Slowdown Dust Despite AI Hype

Taiwan Semiconductor Manufacturing Company Limited TSM who makes chips for Apple Inc AAPL iPhones, delivered disappointing quarterly results along with bad news of postponing production launch at its U.S. plant to 2025. TSMC CEO Dr. C.C. Wei noted that although the increase in AI-related demand was observed, it was not enough to offset the cyclicality of the chip business. 

Second Quarter Highlights

In the June quarter, revenue melted 10% to 480.84 billion New Taiwan dollars which equates to $15.68 billion, within the company’s forecasted range of $15.2 billion to $16 billion. The drop is a result of macroeconomic headwinds that damaged end market demand and resulted in ongoing inventory adjustments by consumers. 

Net income tanked 23.3% to NT$181.8 billion or $5.8 billion which is TSMC’s first quarterly net income decline since 2019’s Q2.

Third Quarter Guidance Is Mixed

Wendell Huang, TSMC CFO announced that third quarter revenue is expected in the range between $16.7 billion and $17.5 billion, fueled by a strong support of TSMC’s incoming 3-nanomenter technologies that are rumored to be powering the newest iPhone from Apple that is due in September, but this novelty will be partially offset by still ongoing inventory adjustments that will weigh down results. As for the year, TSMC is expecting a 10% revenue drop due to a slower demand. 

Recovery

TSMC remains the world’s greatest chip producer with most advanced processors that are powering products from Apple, among others. But, after the pandemic, the consumer electronics market has found itself in a demand slump with even Apple, TSMC’s largest client, reporting this year’s Q2 sales fell for the second quarter in the row. A report that was published on Tuesday by data insights provider Canalys showed that the global smartphone market tanked 11% YoY in the second quarter so no wonder that TSMC felt that. However, Le Xuan Chiew, analyst at Canalysbelieves that after six consecutive quarter of declines, the smartphone market is clearing up as vendors prioritize inventory clearance of old models to make room for new models. 

Delay

On Thursday, TSMC Chairman Mark Liu also delivered another piece of not good news, saying that the production of advanced microprocessors at the U.S. factory in Arizona won’t begin before 2025 due to shortage of highly skilled work force that is required to install the equipment. The facility that is under construction since April 2021 will be supported by experienced technicians from Taiwan who will be coming to train U.S. workers. 

Last December, TSMC announced it will be more than tripling its investment for the facility to $40 billion, making it one of the largest foreign investment in U.S. history. Also then, Mr. Liu promised the Arizona plant to be operational by 2024 with the second facility joining in 2026. The Arizona plant was projected to product 4nm chips next year while a second facility was planned to make smaller and more complex 4nm chips once open in 2026. 

TSMC’s Delay Is A Setback For The U.S.

Besides Apple who stated it intends to source chips for its devices from TMSC’s U.S. plant, along with Nvidia Corporation NVDA and Advanced Micro Devices AMD also committed to use its production, this is a setback for the Biden administration who has been trying to supercharge semiconductor manufacturing with the multibillion-dollar CHIPS and Science Act that aim to help the U.S. restore control of the supply chain. The Covid-19 pandemic has emphasized the dependence of the U.S. on Taiwan and other countries for semiconductors, creating a national security risk. The delay is certainly not good news as the U.S. and China technology dispute intensifies. 

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.