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Apple supplier TSMC cuts growth target again on trade worries

Cryptocurrency downturn adds to troubles for world's top chip foundry

TSMC, the world's biggest contract chipmaker, supplies advanced processors for iPhones.   © Courtesy of TSMC

TAIPEI -- The world's biggest contract chipmaker, Taiwan Semiconductor Manufacturing Co., has cut its annual revenue growth target for the third time this year as concerns mount over the impact of the bitter trade battle between Washington and Beijing.

The Taiwanese company, which is a bellwether for the chip industry, said it had not yet felt the impact of the tariffs imposed last month by the U.S. on $200 billion worth of Chinese goods. However, the weaker than expected forecast for annual growth raised fears that this could be about to change.

"We estimate our 2018 growth rate will be about 6.5% in U.S. dollar terms, which is close to the foundry industry growth, but slightly below the 7% to 9% we gave in the last conference," TSMC Chief Executive C.C. Wei said on Oct. 18.

Lora Ho, the company's chief financial officer, said that continued trade tensions could impact the electronics market. "But it's difficult for us to make the judgment about the level of impact," Ho said. She also confirmed that there were "uncertainties" in the market.

Mark Li, an analyst at Bernstein Research, said the lower guidance for the current quarter could reflect the unpredictable economic conditions that lie ahead as a result of the trade war.

"The company hopes to keep some buffer for itself as it faces the mounting uncertainties in the market," Li said.

TSMC supplies almost all the key chip designers worldwide including Apple, Qualcomm, Nvidia, Broadcom, AMD, MediaTek, NXP Semiconductors and Huawei's semiconductor arm Hisilicon Technologies. The Taiwanese company also serves as a major buyer of semiconductor equipment and represents a key barometer of global electronics demand.

Following recent warnings about the impact of the trade war elsewhere in the industry, the group signaled that revenue in the final three months of the year would fall below expectations. It now forecasts revenue of $9.35 billion to $9.45 billion in the fourth quarter. While this remains 10.7% higher quarter-over-quarter and up 2% on the same period last year, it falls short of the $9.55 billion in revenue needed to meet the previous 7% to 9% annual growth target.

TSMC at the start of the year predicted "10% to 15%" growth in annual revenue, but cut that forecast in April to "about 10%" due to slack mobile demand and high volatility in the market. The company cut the target again in July, citing continuous weakness in the cryptocurrency market.

In the third quarter, the group appeared to shrug off any impact from tariffs imposed by the U.S. in two waves since June. Revenue was up more than 3% on the year to 260.35 billion New Taiwan dollars ($8.49 billion), better than its renewed forecast of $8.28 billion to $8.38 billion. Net income, however, fell by 0.9% over last year to NT$89.1 billion due to additional costs from a computer virus.

The revision of the annual growth target follows warnings from camera lens maker Largan Precision and electronic components provider Lite-On Technology earlier in October. Both are key smartphone suppliers to Apple, Samsung Electronics and Huawei. They signaled expectations for a lackluster holiday season -- traditionally a boom time for smartphone sales -- due to the trade war.

Nanya Technology, the world's fourth-biggest chipmaker for dynamic random access memory after Samsung, SK Hynix and Micron, also on Oct. 16 flagged a slowdown in the last quarter of 2018 due to the snowballing trade tensions.

But Wei remained confident that TSMC would be cushioned from the worst consequences of the trade war, although it would continue to suffer from weakness in cryptocurrency mining chip demand. TSMC's revenue for the fourth quarter would be boosted by several high-end smartphone launches such as Apple's iPhone and Huawei's Mate 20 series. But the company said the mid- to low-end smartphone market is on the decline.

Wei added that TSMC's diversified customer base would help minimize the impact of trade tensions.

Meanwhile, the smartphone market is maturing, according to experts. The market ceased growing for the first time in 2017 and will continue to decline this year, research company IDC says.

"So far, we haven't seen Apple cutting chip orders with TSMC, and Huawei's orders are fine, too," Li of Bernstein Research said. "But we do find chip demand for industrial and automotive uses slowing quite a bit as the whole industry turns cautious because of the trade war."

"There are risks for the first quarter of 2019 if iPhone demand proves to be weaker than expected," Li added. "Then we might see some adjustment by that time."

However, Credit Suisse analyst Randy Abrams said that despite "some slowdown" across various applications, no major downturn appears to be on the horizon.

"The trade tension could still go on for a while but may not escalate to the worst-case scenario," Abrams said. "The base case is both countries would try to avoid too much escalation that really kills their companies and supply chain. But in the next one to two quarters, we may see some pause or slowdown in orders as companies evaluate shifts in production outside of China and also some inventory correction as supply tightness is now less a concern for companies than a demand slowdown from the trade war."

TSMC's shares edged 0.84% lower to close at NT$236.5 on Oct. 18 ahead of the earnings numbers and outlook. They have declined 10.75% from its recent peak of NT$265 a share on Sept. 27.

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