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TSMC warns chip market will stagnate in 2020 after coronavirus

Supplier to Apple and Huawei confirms it is weighing construction of a new US plant

TSMC, the world's largest contract chipmaker, has forecast a 32% on-year rise in revenue for the April to June quarter, but foresees a sharp downturn in the second half of 2020. (Photo by Akira Kodaka)

TAIPEI -- The global semiconductor and smartphone markets are both at risk of contracting this year due to the coronavirus, one of the industry's leading manufacturers said Thursday.

Taiwan Semiconductor Manufacturing Co., the world's biggest contract chipmaker and a key supplier to electronics giants including Apple and Huawei Technologies, said it had significantly lowered its 2020 forecast for the semiconductor market, excluding memory, to zero growth or even a slight decline, compared with the 8% expansion it predicted in January.

TSMC, the sole supplier of processors for the iPhone, and provider of high-end mobile processors to Huawei, also expects the smartphone market to shrink by a "high single-digit" amount, CEO C.C. Wei said.

"We do see that the end market is slowing in consumer electronics, automotive [applications], and other connected devices. ... We have lowered our forecast for the smartphone market, too. But overall, 5G smartphones are still very popular," Wei said Thursday.

For April to June, TSMC expects revenue of between $10.1 billion and $10.4 billion, a 32% increase from the same period a year ago. But TSMC said that while revenue growth was robust in the current quarter, it faces a slowdown in the second half of the year.

"Our current forecast is based on the spread of the global pandemic [being] stabilized in June. ... If the situation does not stabilize by then, the macro global economy will be much worse and TSMC will brace for some further impacts, for sure," Wei said.

Chairman Mark Liu confirmed the company is "actively" considering construction of a new plant in the U.S, after the Nikkei Asian Review reported in March that TSMC is weighing a U.S. facility to ease political pressure from Washington.

"But as I told investors before, there's a cost gap that is hard to accept at this point. Of course, we are doing everything to reduce that cost gap," Liu said.

"TSMC is actively evaluating. ... Currently, we are surveying with our supply-chain partners whether they will be able to go along." Liu said other potential obstacles include higher manufacturing costs and whether the company can fill its recruitment needs in the U.S.

TSMC is wary of being caught in the crossfire between Huawei, its second-largest customer after Apple, and U.S. authorities. The Chinese tech company has been blacklisted by Washington over accusations that it spied for the Chinese government. Huawei denies the allegations.

The Trump administration is considering further restricting the use of U.S. technologies by Huawei's foreign suppliers, including TSMC.

Liu said he is aware that the U.S. could further tighten export control controls on Huawei. "While the draft is not finished, we have studied various scenarios. There might be near-term impact. We will work with customers dynamically to minimize impacts on TSMC. ... Having that rule changed will hurt the industry," Liu said.

The company said that if the coronavirus pandemic does stabilize in June, it could still increase sales more than 15% in 2020, which suggests revenue would be flat or decline slightly in the second half of the year. In January, it said revenue could grow more than 17% this year. But it said it still plans capital spending of $15 billion to $16 billion this year, a record, to ensure long-term growth.

In the January to March quarter, TSMC's net profit surged 90.6%, year on year, to 116.98 billion New Taiwan dollars ($3.89 billion) while its revenue of NT$310.59 billion jumped 42% from a year earlier.

In the same period in 2019, the tech industry suffered a sharp slowdown due to uncertainty over the U.S.-China trade dispute. TSMC's profit was also hit by a slowdown in production because of a defective chemical used in its chip production.

Analysts said the earnings result and outlook for the current quarter suggest that many companies are still building inventory out of concern for potential supply disruptions due to government trade restrictions around the world, or virus outbreaks among key suppliers. TSMC's healthy sales in the first quarter may also be due to orders from Apple for mobile processors for its low-end $399 iPhone SE, which was launched Wednesday.

"TSMC's current quarter is relatively healthy, thanks to many chip developers and device makers building some inventories for crucial components, such as chips, for safety purposes," said Mark Li, an analyst with Bernstein Research. "The second half of this year still poses big uncertainties, as the industry is still digesting how COVID-19 could impact the global economy."

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