TAIPEI -- Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker, downgraded earnings forecasts on Friday owing to a defective chemical that disrupted an advanced production site for Nvidia, Huawei Technologies and other big semiconductor companies.
TSMC said the production problems will cut revenue by as much as $550 million for the quarter ending in March. The company now expects revenue of $7 billion to $7.1 billion -- the lowest since the first quarter of 2016 -- compared with the previous projection of up to $7.4 billion.
"To ensure the quality of our wafers delivered to customers, we have decided to scrap a higher number of wafers than our earlier estimate ... and that resulted in our revision of the financial projection," Elizabeth Sun, TSMC's senior director of corporate communications, told the Nikkei Asian Review. When the production troubles were revealed in late January, the company said its earnings forecast likely would be unaffected.
The trouble discovered by TSMC on Jan. 19 involves a photoresist chemical -- a crucial material for etching circuits onto silicon wafers. The defective material caused a deviation from the normal yield rate in wafer production.
Shin-Etsu Chemical and JSR of Japan supply the material to TSMC, as does U.S.-based Dow Chemical. The chipmaker remains silent about the source of the defective chemical. Industry sources told the Nikkei Asian Review that the batch came from Dow Chemical, but TSMC declined to comment.
TSMC's quarterly gross margin is expected to fall by 2.6 percentage points to between 41% and 43%, while its operating margin dips by 3.2 points to as low as 29%, the worst since July-September 2011.
The incident was the second production disruption linked to suppliers in less than six months for the key provider of Apple core processor chips. TSMC already suffers from weak demand as iPhone sales slow.
The production site in the southern Taiwanese city of Tainan, dubbed Fab 14B, mainly supplies chips to customers including Apple, Huawei semiconductor arm HiSilicon Technologies, Nvidia, MediaTek, Xilinx, Broadcom and AMD.
"Apple, MediaTek, Nvidia and many other customers may see delivery delays, but inventories and soft seasonality should make the impact manageable," said Mark Li, an analyst at Sanford C. Bernstein. "The financial impact is manageable, too."
"We think TSMC will talk to the chemical supplier about some compensation," Li said. "TSMC is still a definite market leader, but the incident could affect its longtime good reputation for quality control a little bit and some investors' perception when evaluating the company."
TSMC's Sun said her company will adopt a stricter review process when qualifying each batch of production materials and will ask suppliers to adopt the same procedure to ensure quality.
Though TSMC will lose revenue from the incident, it has moved up the start of some production planned for the next quarter, which will contribute around $230 million in additional revenue for the January-March period, the company said.
For the full year, TSMC estimates the incident will reduce its gross margin by 0.2 percentage point and operating margin by 0.2 point as well. Earnings per share would be lower by 34 New Taiwan cents, the company said.
