TSMC Launches Counteroffensive by Seizing Generative AI Demand
-
TSMC's performance forecast shows a 20% growth in sales for the 2024 fiscal year, setting a new historical record. About 70% of its clients are major U.S. IT companies such as Apple and Nvidia, with robust demand for advanced semiconductors in generative AI-related servers and iPhones. The key challenges ahead include maintaining profit margins and the smooth establishment of factories in Japan and the U.S.
TSMC (Taiwan Semiconductor Manufacturing Company) aims to capitalize on generative AI (Artificial Intelligence) demand to launch a counteroffensive. According to the performance forecast released on January 18, the company's sales for the 2024 fiscal year (ending December 2024) are expected to grow by 20% year-on-year, achieving a record high. Amid its expansion strategy, TSMC faces challenges in ensuring profitability and the successful setup of its factories in Japan and the United States. "Supported by strong demand in AI-related fields, 2024 will be a year of healthy growth for our company," said TSMC CEO C.C. Wei with a bright expression during a press conference on January 18.
The financial results for October-December 2023, announced on the 18th, showed a slight year-on-year decrease in revenue to NT$625.5 billion, with net profit declining by 19.3% to NT$238.7 billion. Although this marks the third consecutive quarter of declining revenue and profits, quarterly sales have essentially recovered to levels comparable to the record highs of the same period last year.
Approximately 70% of TSMC's clients are major U.S. IT companies such as Apple and Nvidia. Demand remains strong for cutting-edge semiconductors used in generative AI-related servers and Apple's iPhone smartphones. The outlook for 2024 appears brighter. While smartphone demand is expected to remain sluggish from January to March, full-year sales are projected to grow "approximately 21-25%" in US dollar terms. After experiencing a revenue decline in fiscal year 2023 for the first time in 14 years, fiscal year 2024 is anticipated to set a new historical record.
With market conditions recovering, the global semiconductor market (excluding memory) is also forecast to achieve over 10% growth in 2024.
The driving force behind this reversal is the widespread adoption of generative AI. According to Taiwan-based research firm TrendForce, the global AI server market (measured by unit shipments) is predicted to grow 40% year-over-year in 2024, exceeding 1.6 million units, as major cloud service providers expand their investments. TSMC is poised to receive significant orders from key clients, including NVIDIA, the global leader in AI semiconductors. During a press conference, CEO C.C. Wei emphasized that 'TSMC is in a favorable position to capture AI demand.'
Previously, generative AI primarily operated on data center servers, but there is now a growing trend to offload some processing to edge devices to accelerate performance. This shift is expected to help revive the sluggish PC and smartphone markets.
Supply constraints that were prominent in 2023 are also easing. TSMC plans to double its production capacity for 'advanced packaging'—a specialized assembly process critical for AI chips—in 2024 compared to the previous year. The median equipment investment plan for 2024 is set at $28-32 billion, remaining flat compared to the previous year.
TSMC is pursuing an expansion strategy with generative AI as a catalyst, but faces multiple challenges.
The first challenge is ensuring profitability. TSMC's operating gross margin, which it prioritizes, was 53% in October-December 2023. While this level aligns with the company's long-term goals, it is significantly lower than the 62.2% recorded in the same period the previous year, due to increased costs associated with cutting-edge semiconductor development. One of the key challenges is the smooth operation of overseas factories being advanced at the invitation of the Japanese and U.S. governments. Regarding the Kumamoto plant, a joint venture with Sony Group and others, TSMC announced that the opening ceremony will be held on February 24. Mass production is planned to begin between October and December 2024.
For the second plant in Japan currently under discussion in Kumamoto, TSMC Chairman Mark Liu stated, "We are in discussions with the Japanese government. They are cooperative."
On the other hand, the Arizona plant in the U.S., which plans to start mass production in 2025, is facing operational difficulties due to labor shortages. The second U.S. plant is scheduled for mass production between 2027 and 2028, and the product categories may need to be adjusted based on customer requirements. Additionally, geopolitical risks must be taken into account. In the January 13th election, Lai Ching-te of the pro-US ruling Democratic Progressive Party was elected. Depending on future developments, tensions between the US, Taiwan, and mainland China could further intensify.
The Biden administration has strengthened export controls on AI semiconductors to China, significantly impacting major TSMC clients like Nvidia.
Liu Pei-chen, an analyst at the Taiwan Institute of Economic Research, noted, 'In the US-China high-tech war, Taiwan is part of the "US alliance." Cooperation with Japan is also crucial.' It's necessary to flexibly address demand while responding to these controls. Mark Liu, who has been leading TSMC's overseas strategy, will step down in June, with C.C. Wei, responsible for internal operations, being promoted to chairman. This represents another update to the management system since the retirement of charismatic founder Morris Chang in 2018.
Can TSMC navigate internal and external challenges while capitalizing on the generative AI wave? 2024 will be a year of testing for the new leadership.
TSMC announced on the 18th that its fiscal year 2023 (ending December 2023) revenue decreased by 4.5% year-on-year to NT$2.1617 trillion. Affected by the semiconductor market downturn, revenue declined for the first time in 14 years. Net profit fell by 17.5% to NT$838.4 billion.