Being the world's largest contract chipmaker, TSMC is the largest beneficiary of the ongoing semiconductor boom. The company expects its sales to continue growing for many years to come, so it plans to raise its capital expenditures (CapEx) by 33% — 46% this year all the way to $40~$44 billion — to support continued growth. This level of spending will be particularly useful as the company prepares to start making chips using its N3 (3nm class) and N2 (2nm class) processes in the coming years.
Preparing N3 Ramp
TSMC's 2021 revenue reached an unprecedented $56.82 billion, up 24.1% year-over-year due to extraordinary demand for semiconductors in general, and chips made using leading-edge fabrication technologies in particular. In addition, TSMC projects demand for its services to accelerate going forward because the company is the largest foundry in the world, and it is the leading provider of mature, advanced (FinFET), and leading-edge (7 nm-class and below) nodes. Therefore, to boost its capacities for all types of manufacturing processes (including the upcoming N3), the company intends to increase its CapEx from $30 billion in 2021 to $40 – $44 billion in 2022. To put that number in perspective, TSMC's CapEx budget in 2019 totaled $14.9 billion.
Approximately 70% – 80% of TSMC's $40 to $44 billion CapEx will be allocated to building new fabs and expanding capacities for the latest and upcoming nodes, including N2, N3, N5, and N7. For example, TSMC spent quite a fortune building up capacity for its N5 nodes (including N5, N5P, N4, N4P, N4X) last year. This year it will spend billions on building N3 and N2-capable fab(s).
TSMC will also spend 10% to 20% on specialty technologies and another 10% on facilities for advanced packaging and mask making.
Since the industry is in the midst of several major megatrends (5G, AI, HPC, digitization, etc.), TSMC and other foundries are enthusiastic about future growth. Moreover, since TSMC is arguably the most competitive contract maker of semiconductors, it is not surprising that the company is particularly optimistic about landing orders both from existing and new customers with its N5 and N3 nodes.
Leading Nodes Account for 50% of Revenue
TSMC's N7 and N5 nodes accounted for about 50% of TSMC's $15.74 billion wafer revenue in Q4 2021 (a 24.1% increase year-over-year and up 5.8% sequentially), based on the numbers provided by the company. The two fabrication technologies also accounted for 50% of TSMC's $56.82 billion wafer revenue for the whole year. In 2020, they accounted for 41% of TSMC's $45.51 billion revenue.
As far as applications are concerned, sales of smartphone chips dropped from 51% of TSMC's revenue in Q4 2020 to 44% in Q4 2021. Meanwhile, revenue share of CPUs, GPUs, accelerators, and SoCs used in such applications as PCs, servers, supercomputers, and game consoles (which TSMC calls high-performance computing (HPC) applications) upticked from 31% in Q4 2020 to 37% in Q4 2021.
"Our fourth quarter business was supported by strong demand for our industry-leading 5-nanometer technology," said Wendell Huang, VP and Chief Financial Officer of TSMC. "Moving into first quarter 2022, we expect our business to be supported by HPC-related demand, continued recovery in the automotive segment, and a milder smartphone seasonality than in recent years."
TSMC charges a premium for its N7 and N5 production because these technologies require advanced tools and provide substantial transistor density, power, and performance benefits. As fabless designers of chips adopt the new nodes, it is not surprising that the revenue share contributed by these nodes increases, just like TSMC's earnings in general. Meanwhile, TSMC's revenue growth is also fueled by price increases for the production of trailing nodes.
TSMC expects its Q1 2022 revenue to be between $16.6 billion and $17.2 billion (up sequentially and year-over-year) and its gross profit margin to be between 53% and 55%.
More Orders for Leading-Edge Nodes Incoming
Last year, TSMC said it would spend $100 billion over the following three years on new manufacturing capacities and research and development (R & R&D). If the company keeps increasing its CapEx in 2023, then TSMC's investments in CapEx and R&D will exceed $100 billion in the 2021 – 2023 period quite significantly. But there are good reasons behind this move.
While the share of advanced and leading-edge nodes in TSMC's revenue has been increasing in recent years, it is noteworthy that two large customers — Nvidia and Qualcomm — began to outsource a significant portion of their sophisticated chips to Samsung Foundry in 2020. Yet it does not look like either are particularly happy with the outcome, which is why both are rumored to be returning to TSMC in 2022 with their upcoming designs.
Considering that Intel is also beginning to outsource some of its most advanced components to TSMC, it is evident that the foundry is on track to significantly increase production using its N5 fabrication process in 2022 and then N3 manufacturing technology in the 2023 – 2024 period. In addition, while there are rumors that AMD and MediaTek plan to adopt a multi-foundry/dual-source approach with some of their products going forward, both companies are already on long-term agreements (LTAs) with TSMC (with some prepayments made), so they are not reducing their orders to the No. 1 foundry in the foreseeable future.
N5 will be a very long-lived node for TSMC both because of decent yields and ample capacity as well as various performance and die size-optimized versions of the process. Industry observers believe that N3 will be another win for the contract manufacturer as Samsung Foundry's plan to adopt gate-all-around transistors for its 3GAE/3GAP nodes adds uncertainties. It also remains to be seen how competitive Intel Foundry Services will be in 2024 – 2025.
"The return of Nvidia Qualcomm to adopt N3 in 2023 – 2024 speaks volumes about TSMC as the only credible advanced node foundry, in our view," Szeho Ng, an analyst with China Renaissance, wrote in a note to clients. "We believe that Nvidia will start sole sourcing some of its N5 products (next-generation HPC server GPU – 'Hopper' H100 signifying its foray into MCM/multi-chip module design) from TSMC this year. […] The next generation gaming GPU (GeForce RTX 40-series) may, however, still be dual-sourced from TSMC and Samsung on N4/5 for diversification purposes, in our view."
While TSMC's plan to spend up to $44 billion on new capacities seems bold (since this is the largest sum ever spent on new fab capacity by one company in a year), TSMC has a lot of motivations to be optimistic about future demand to expand its capabilities.
The ongoing megatrends (5G, AI, HPC, digitization, etc.) will drive demand for all types of semiconductors quite significantly in the coming years. Furthermore, there are three major customers — Intel, Nvidia, and Qualcomm — that intend to adopt TSMC's advanced and leading-edge nodes for their high-volume products in the 2022 – 2024 timeframe. Finally, TSMC's existing top customers (Apple, AMD, MediaTek) that have been increasing their market shares quite steadily in recent years will require more capacity in 2022 – 2023 to support their growth.