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TSMC says US clients will suffer if it makes chips there

Largest contract chipmaker sees weak iPhone 7 demand in first half

TSMC Chairman Morris Chang, middle, does not rule out moving some production to the U.S. but warns that American clients may have to make some "sacrifices". He is flanked by the company's two Co-CEOs Mark Liu, left, and C.C. Wei. (photo by Cheng Ting-Fang)

TAIPEI -- Chairman Morris Chang of Taiwan Semiconductor Manufacturing Co. on Thursday said he would not rule out the possibility of building a new facility in the U.S. although its American customers including Apple, Qualcomm and Nvidia could suffer if its chips were produced there.

"I will not rule out [the possibility of build a factory in the U.S.] but I see a lot of sacrifices that we and our customers will have to make," Chang told investors and reporters. However, he added that he felt no pressure from customers to move production to the U.S., despite incoming President Donald Trump's pledge to move jobs home. TSMC is the world's largest contract chipmaker.

After his election in early November, Trump asked Apple CEO Tim Cook to make iPhones in the U.S., saying that he would offer American corporations tax benefits to move production home.

Apple is TSMC's no.1 customer and the Taiwanese tech giant enjoys a monopoly in the production of iPhone 7 and iPhone 7-plus chips, which are among the most expensive components used in the handsets. TSMC also supplies to Qualcomm, Intel, AMD, Nvidia, Marvell, among some 470 others across the globe. U.S. customers make up 66% of the company's record revenue of 947.93 billion New Taiwan dollars ($30.12 billion) in 2016.

Chang says TSMC leads the industry with 55% of market share not because it uses cheaper labor, but because it has built an ecosystem of semiconductor suppliers in Taiwan. TSMC infrastructure and facilities allow thousands of the company's engineers to commute from one manufacturing site to another frequently in a very short time. Such advantages allow TSMC to produce efficiently and solve problems quickly to maintain a competitive edge, Chang says.

"If we lose these advantages, our customers will lose too," said Chang, adding that his company did consider making chips in the U.S. from time to time but could not see enough benefit.

It has only a small manufacturing subsidiary, WaferTech, that hires around 1,500 employees in Camas, Washington in the U.S. In Taiwan, it employs more than 40,000 staff.

Slower first-half

A barometer of the global chip industry and electronics demand, TSMC sees a slowdown in the first half of 2017 and warns of a minor inventory correction, says Mark Liu, TSMC co-chief executive. 

For the January-March period, TSMC forecast sales of NT$236 billion to NT$239 billion, representing a rise of 15.9 % to 17.4% from a year ago, but down 8.8% to 10% sequentially.

"The guidance for the current quarter is weaker than the market consensus, which was that the chip titan's sales would only go down 7%, sequentially from the previous quarter, which indeed says a lot about the lukewarm demand for the iPhone 7 range," said Mark Li, an analyst at Sanford C. Bernstein.

"We do see Apple scaling back orders a bit in the first quarter and we think the U.S. tech titan has moved on to their new products this year rather than pin its hopes on iPhone 7."

Li says TSMC will most likely continue to be the main supplier of processor chips to Apple's next iPhone model to be released in the second half of 2017. Demand for the new model is seen to be healthier. Rick Hsu, an analyst at Daiwa Capital Markets says that iPhone shipments are expected to expand by at least 5% to 10% this year from some 210 million in 2016.

For 2016, TSMC's revenue rose more than 12% while net profit grew 9% from a year ago to NT$334.25 billion. During the October to December quarter alone, its revenue advanced 28.8% to NT$262.23 billion year-over-year, exceeding the previous guidance of up to NT$258 billion, while net profit surged 37.6% on the year to NT$100.2 billion.

Chairman Chang says he sees revenue growing 5% to 10% in U.S. dollar terms for 2017, while the overall semiconductor industry is expected to report a sales growth of 4% from a year ago. TSMC will allocate around $10 billion in capital expenditure for all 2017, according to the company.

It also sees smartphone shipments rising 6% to around 1.55 billion in 2017, and the growth momentum will come more from mid- to low-end models. PC and tablet shipments will continue to fall roughly 5% and 7% year-on-year, but connected devices exports will rise by 34% in 2017, according to Chang.

Shares of TSMC closed 1.37% higher at NT$184.5 ahead of the earnings announcement. It has risen almost 40% over the past 12 months.

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