The world’s largest automaker, Toyota (TM-US), announced on Thursday, the 19th, that its North American division has reached an agreement with Tesla (TSLA-US). Starting in 2025, Toyota’s electric vehicles will adopt Tesla’s North American Charging Standard (NACS).

Prior to Toyota’s announcement, companies like Ford, General Motors, and BMW had already joined the Tesla NACS alliance, providing customers with access to Tesla’s extensive Supercharger network.

In 2025, Toyota will integrate the NACS interface into specific Toyota and Lexus BEVs, including a new three-row electric SUV produced at Toyota’s Kentucky plant.

Vehicle owners can connect to Tesla’s widespread North American charging infrastructure, comprising over 84,000 charging stations, including Level 2 and DC fast chargers, using Toyota and Lexus apps.

Owners or lessees of Toyota and Lexus vehicles using the Combined Charging System (CCS) specification will have the option to purchase NACS charging connectors starting in 2025.

Notably, we have anticipated that by 2026, the global tally of public charging stations will soar to 16 million, marking an impressive threefold increase from 2023 figures. As this unfolds, the global ownership of NEVs—which includes both PHEVs and BEVs—will surge to 96 million.

Amid increased U.S. restrictions on China’s semiconductor industry, Chinese chip equipment manufacturers are witnessing a notable uptick in domestic orders. Over the first eight months of this year, Chinese chip equipment managed to capture nearly half of all orders. This serves as a compelling sign that the fears expressed by companies such as NVIDIA, AMD, and Intel about losing ground to domestic rivals in the Chinese market are materializing.

On October 17th, the Biden administration tightened chip export rules, barring American companies, including NVIDIA, from selling AI chips to China. At the same time, the U.S. Commerce Department’s Bureau of Industry and Security (BIS) placed 13 Chinese GPU firms on its Entity List, further unsettling global semiconductor and AI supply chains. Ironically, these moves could expedite China’s domestic AI chip industry’s advancement amid the pressure.

Huatai Securities’ analysis reveals that Chinese chip foundries have been winning an increasing number of bids for machinery equipment this year. In the first eight months of this year, they secured 47.25% of these bids, with the percentage soaring to 62% in August. In comparison, during March and April, the rate was only 36.3%. This trend reflects a turning point for China’s chip equipment industry and showcases its rapid transition towards self-sufficiency.

As per Reuters, insiders disclosed that prior to the U.S. export bans, China’s advanced chip foundries rarely utilized domestic equipment, reserving it for expanding production. Yet, in reaction to the ongoing restrictions, they’ve proactively started testing homegrown equipment on all foreign devices and plan to fully replace foreign gear with domestic alternatives. This transition has greatly boosted local firms such as AMEC and NAURA.

Analysts observe that China’s local equipment makers have notably enhanced their production capacity, especially in wet etching and cleaning, positioning them for global competition with U.S. counterparts. What’s more, the quality of Chinese-made equipment has surpassed expectations, often advancing by up to two years. The substantial revenue growth in the sector attests to China’s remarkable progress in the semiconductor equipment industry.

Nonetheless, photolithography equipment remains a field where China’s domestic equipment struggles to break through due to its demanding requirements for optical and process precision. China has faced challenges in procuring extreme ultraviolet (EUV) lithography machines crucial for manufacturing cutting-edge chips. The situation is further complicated by the joint efforts of the United States, the Netherlands, Japan, and other allies to restrict the export of advanced deep ultraviolet (DUV) lithography machines to China.
(Image: AMEC)

Infineon, Hyundai, and Kia announced on October 18 that they have signed a multi-year agreement for the supply of SiC (Silicon Carbide) and Si (Silicon) power semiconductor modules and chips.

Under this agreement, Infineon will supply SiC and Si power components to Hyundai and Kia until 2030, and in return, Hyundai and Kia will support Infineon’s production capacity and reserves.

The demand for SiC power devices has surged with the growing popularity of new energy vehicles, and as a prominent industry leader, Infineon has embarked on numerous collaborations this year.

• Infineon and Resonac

In January, Infineon declared a new multi-year supply and cooperation agreement with Resonac Co., Ltd. (formerly Showa Denko K.K.). According to this agreement, Resonac will provide Infineon with SiC materials for producing SiC semiconductor components, including 6-inch and 8-inch wafers. Initially focused on 6-inch wafers, Resonac will later supply 8-inch SiC wafers to support Infineon’s transition to 8-inch wafers. As part of the agreement, Infineon will also provide Resonac with SiC material technology-related intellectual property.

• Infineon and TanKeBlue, SICC

In May, Infineon signed long-term agreements with TanKeBlue and SICC to ensure a more competitive and substantial supply of silicon carbide materials. These two suppliers will primarily provide Infineon with 6-inch silicon carbide substrates and offer 8-inch silicon carbide materials, aiding Infineon in transitioning to 8-inch SiC wafers. The agreements also encompass silicon carbide ingots, as Infineon had previously invested nearly 1 billion RMB in acquiring a laser-based wafer technology enterprise, aiming to enhance the utilization of silicon carbide substrates and device cost competitiveness.

Notably, both TanKeBlue and SICC will account for a double-digit percentage of Infineon’s long-term demand volume.

• Infineon and Foxconn

In the same month, according to the Foxconn’s official website, Infineon and Foxconn have signed a memorandum of cooperation to establish a long-term partnership in the field of electric vehicles. Under this agreement, the two companies will focus on the adoption of silicon carbide technology in high-power applications for electric vehicles, such as traction inverters, on-board chargers, and DC converters. They also plan to jointly establish a system application center in Taiwan to expand their collaboration further.

• Infineon and Schweizer Electronic

Additionally, Infineon is collaborating with Schweizer Electronic to develop an innovative solution aimed at directly embedding Infineon’s 1200V CoolSiC™ chips into PCB boards. This move seeks to significantly enhance the driving range of electric vehicles while reducing the overall system cost.

• Infineon and Infypower

In September, Infineon announced a partnership with Shenzhen Infypower (INFY) to provide the industry-leading 1200V CoolSiC™ MOSFET power semiconductor devices, boosting the efficiency of electric vehicle charging stations.

In line with their goal of capturing a 30% share of the global SiC market by 2030, Infineon revealed plans to invest up to 5 billion euros over the next five years to construct the world’s largest 8-inch SiC power semiconductor facility in Malaysia.

(Photo credit: Infineon)

Question 6. Brett Lin from Bank of America

Operator: Next one to ask questions, Brett Lin from Bank of America.

Brett: Thank you for taking my question. So first of all, congrats on the strong result and then also the impressive gross margin. So I have two questions. One is on the end device AI, HAI and the other is on the CPO.

Brett: So appreciate the management’s constructive comments on growth outlook on the HAI. So besides the, well, interesting engagement with the clients, what are the implications for the wafer consumptions for the firm?

Brett: And also on the computing power and energy consumption angle on the end device with additional AI functions, should we expect it to re-accelerate the node migration for the end devices? That’s my first question. Thank you.

Host: Okay, so Brad’s first question is about edge and end device AI. He wants to know what is the implications for wafer consumption?

Host: And then with the increasing need for energy efficiency and power, he is wondering, does this re-accelerate or increase the node for, I guess, his words is node migration or adoption of leading edge technologies?

C.C.: Well, the edge device start to, that’s including smartphone and PCs, start to incorporate the AI functionality inside. We observe some of the neural engines has been added increasingly.

C.C.: So the die size will increase, even the unit did not increase dramatically, but the die size, it’s in mid-teens, no, not, I mean, mixed single-digit is the die size increase so far. And I expect that this kind of trend will continue.

C.C.: And so more and more application on the AI side will be incorporated into those kind of edge device. And that will need a very power-efficient chips to put it into the edge device, especially when it is a mobile.

C.C.: So I do expect, from my own perspective, I do expect that my customer will move into the leading edge node more and more quickly to compete in the market.

Brett: Okay. Thank you very much, C.C.. So, well, so a bit of a follow-up is that, well, now it accounts for some, well, mixed single-digit of the die size incremental for a chip. So does that, or are we seeing that to enlarge to something like mid-teens or, well, even bigger in the, well, mid to long-term?

Host: So Brett’s quick follow-up is if the AI portion is kind of mid-single-digit now, how should we expect? Can we expect mid-teens or what type of percentage in a few years’ time?

C.C.: Well, I will answer the question. Actually, we see the increase on the die size, but we cannot nail down the, we say the mid-single-digit, but I expect it to start to increase. And whether that will increase our forecast and our growth or something, it’s still too early to say to, at this moment.

Brett: Yeah, but we’re still quantifying the impact from these development. So we’re maintaining the previous statement that we expect it to grow to about, in five years, about mid-single-digit. I’m sorry, mid-teens of our revenue.

Host: Yeah, I think, Brett, probably just very simply, as we said, edge AI, we do see some activity. It will drive silicon content, but this will occur over time, okay? And we don’t have any quantitative number to share. All right?

Brett: Got it, thank you.

Host: Okay, what is your second question?

Brett: Okay, so the second question is on CPO. So basically, we have learned that TSMC is doing quite well and also leading the industry in CPO or so-called silicon photonics and has introduced a platform to clients with the technologies.

Brett: So may we learn that opportunities and implications of the new technology for the industry and for our firm? And also, shall we expect the platform to offer additional competitive advantage for TSMC in the mid to long run? Thank you.

Host: Brett, your second question is on silicon photonics. Is that correct?

Brett: Yes.

Host: So he wants to know our positioning or progress on silicon photonics. How important is this? And will this be a competitive advantage for TSMC going forward in the future?

C.C.: Okay, let me answer that question.Silicon photonics actually is growing its importance because of just a larger amount of data need to be collected, processed, and transferred in an energy-efficient manner. Silicon photonics tends to be the best to fit that role.

C.C.: And TSMC has been working on silicon photonics for years.

C.C.: And most importantly, we’re collaborating with multiple leading customers to support their innovations in this field. It takes a lot of time to develop the technology and to build the capacity.

C.C.: And when we increase the volume production, we believe that TSMC’s silicon photonics will be the best technology and when customers roll out all their innovations. But as I said, it’s gradually increasing in their activity and gradually increasing their demand as of today.

Brett: Got it, thank you very much.

Host: All right, thank you. Operator, can we move on to the next caller, please?

Question 7. Sunny Lin from UBS

Operator: Next one, we have Sunny Lin from UBS.

Sunny: Good afternoon. Thank you very much for taking my questions. So, my first question is on advanced packaging. Incrementally, we are hearing more customers’ interest in the adoption to achieve better heterogeneous integrations. But I want to get your thoughts on what could be the potential impact of customers relying a bit more on packaging to improve the system performance and perhaps less on the process migrations given cost considerations. Meanwhile, SOIC has been introduced for quite a while, whereas the customer adoption still seems to be limited at this point. So, when should we expect a more meaningful pickup of SOIC and what could be the major catalyst? Thank you.

Host: Okay. So, Sunny, sorry, I may have missed a little bit of the first part, but I think her question is on overall advanced packaging, looking at this trend and the move to more, of course, heterogeneous integration. What are the cost implications and how does advanced packaging work and go together with the process technology standpoint? And then also a question about the update or progress of SOIC. Is that correct, Sunny?

Sunny: Well, so maybe if I may clarify a bit, so for the first part, I wonder if customers may consider relying a bit more on packaging, whereas slowing down a bit on the process migration because of the increasing cost.

Host: Okay, so she’s asking will customers, because of the increasing cost of the process technologies, will customers rely more on advanced packaging as a result?

C.C.: Let me answer that. It’s not because of the increasing of the costing in the more advanced node. It’s actually, they try to, our customers try to maximize the system performance. That’s all. That’s the major portion. That includes the kind of a speed improvement or the power consumption decrease, all those kinds of thing, put it all together. And maybe cost is also part of the consideration, which we notice about. And so more and more customers are moving into the very advanced technology node, and they start to adopt the chiplet approaches. And so, you know, no matter what, TSMC provides the industry-leading solution in both very leading technology and also very advanced packaging technology. And to work with our customers for their product, they have a best system performance.

C.C.: And the other one is, you are asking about the SOIC, when it will become a high volume and more substantial revenue for TSMC. It’s coming, it’s coming. Actually, the customer is already ready to announce their new product, which are widely adopted. And I expect, you know, starting from now and next year, the SOIC will generate revenue and become one of the faster-growing advanced packaging solution in the next few years.

Sunny: Got it, thank you very much. If I may, a quick follow-up. Three months ago, you had a target to double your co-op capacities. And just now you mentioned AI demand continues to surprise on the upside. I do wonder if there’s any update on your co-op capacity expansion?

Host: Okay, so I will take this as your second question, Sunny. But as she’s asking about co-op expansion, we had said that we will double the capacity three months ago. Can we provide an update on the overall co-op capacity and I guess capex and capacity go hand in hand? What is our plan?

C.C.: Well, Sunny, you know, the last time we say that we will double our co-op capacity, we are working very hard to increase the capacity more than double, but today is limited by my supplier’s capability or their capacity.

C.C.: So we still maintain that we will double our co-op capacity by the end of 2024. But the total output actually is more than double from 2023 to 2024 because of a very high demand from our customer. So as you can, this kind of a trend, we will continue to increase our co-op capacity to support our customer, even into 2025.

Host: Okay, Sunny, does that answer your question?

Sunny: Okay, thank you.

Host: Operator, can we move on to the next caller, please?

Question 8. Madi Husseini from FIG

Operator: Next one, please. Welcome, Madi Husseini from FIG.

Madi: Yes, thanks for taking my question. I understand there are a number of new products that you’re ramping into a year end and into first half of 2024 for various markets. And I want to understand how the ramp of these new products are to impact the seasonality. Could we see a scenario where in the first half, the ramp of these new products, especially to be at the leading edge to somewhat upset the seasonal factors? And any thoughts there? And I’ll have a follow up.

Host: All right, Madi. Well, Madi’s first question is, in terms of new products, which of course, customer products, we don’t comment on, but he said we’re ramping products into the second half. And so how will this ramp of new products go into as we go into first half 2024? And can this offset or mitigate some of the seasonality?

Madi: Yeah, let me rephrase that. Contribution of customers’ new products, and how would that impact, or how could that upset seasonal factors?

Wendell: Yeah, Madi, I don’t think we can comment on specific customer products, but I can tell you that we’re not seeing any dramatic change in the seasonality as of now.

Madi: Okay, because I was looking at your year calendar 23, and given your Q4 guide, you’re actually doing better than what you guided three months ago. Three months ago, you said revenues could be down 10% US dollar, and now it could actually be down by a single digit. Is that a combination of a stronger new product ramp and better pricing? Is that a fair assessment?

Host: Okay, so Madi is really looking at, he rightly notes that three months ago, we said this year will decline around 10% in US dollar term.Now with the fourth quarter implied guidance is slightly better. So he wants to know what is the implication or behind this.

C.C.: Well, let me give you one simple reason, because our ramp up of N3, because of the demand of N3 is strong. So ramp up quickly to meet customers’ demand, so the final result is better than we expected three months ago.

Host: Yeah, and we have also said that the strong ramp of N3 will continue in the next year, okay? That’s about all the seasonality we can give.

Madi: Gotcha, okay. And then perhaps if I were to ask a second question, I just want to better understand your view on your customers’ inventory correction. We’re reaching the bottom, where we don’t have any visibility on how quickly they’re going to refresh inventory. The slope of the recovery is still not clear. Did I understand you correctly?

Host: So, Madi’s second question you would like to clarify. So are we saying that customers’ inventory is reaching or approaching a bottom, but the slope of the inventory is not clear? Is that what we are saying?

C.C.: Okay, I’ll answer the question. Actually, you know, in these couple of months, we start to see the demand stabilized in the PC and smartphone end market. And in fact, we see some kind of urgent PO asked for more devices to be shifted to their place to meet the demand. That gave us a hint that their inventory control has already become more healthier than we thought. So in terms of uncertain macro, it probably will continue, but our expectation is very close to a healthy condition. So that’s why we say we can expect 2024 to be a healthy growth year for TSMC. Okay. Madi, did I answer your question?

Madi: Great, thank you.

Host:

Okay, in the interest of time, thank you, Madi. In the interest of time, we’ll take questions from the last two participants, please.

Question 9. Krish Sankar from TD Cohen.

Operator: Next one to ask a question is Krish Sankar from TD Cohen.

Krish: Yeah, hi, thanks for doing my question. I had two of them. First one is on gross margins. When do you expect N3 to reach corporate average gross margin? And as you look into next year, as more mature node capacity comes online across the industry, how do you think about mature node gross margins also? And I have a follow up after that.

Host: Okay, so Krish’s first question is on gross margin. When do we expect three nanometer or N3, I should say, to reach the corporate average gross margin? And how do we see the gross margin trend for the more mature nodes?

Wendell: Yeah, Krish, in the past, our leading nodes normally reach gross margins, corporate margin in about eight quarters. But as we progress with more and more leading nodes, it will become more and more challenging because of several reasons. Well, first of all, our corporate margin is higher than before. And secondly, the leading node is N3. The leading node, as I just said, is becoming more and more complex.

And also, in the past few years, the inflation pressure that was not expected also contribute the higher costs in the N3. So it’s gonna be pretty challenging for future leading nodes to reach corporate margin as in before, like before in the same timeframe. The mature nodes, I can tell you that our mature nodes are the gross margins are really congregated around the corporate average in a pretty narrow band because we focus on specialty technology. It’s not a commodity capacity. Yes.

Krish: Okay. Yeah, that’s very helpful. Thank you for that. And then as a follow-up on Arizona, you mentioned that you’d hired about 1,100 local employees. I’m kind of curious, is that critical mass enough for you to start four nanometer production or do you have another target level of employees before they can actually start getting this production since you’re still maintaining the output to be in first half of 2025? Okay. Thank you.

Host: Thank you, Krish. So Krish’s second question is about our first fab in Arizona. He notes that we have said we hired 1,100 local employees. So his question is, is this enough critical mass or enough people basically to support the ramp of the first fab as we plan, as we said today, in first half 25?

C.C.: Of course. We continue to hire the local talents to join the TSMC 5 in Arizona. So when we start to have a volume production, we are confident that we will have enough resources to support our ramp up in Arizona.

Host: Okay. All right.

Krish: Thank you.

Host: Thank you, Krish. Operator, can we move on to the last participant, please?

Question 10. Charles Shi from NIEM

Operator: Yes, the last one to ask question, Charles Shi from NIM.

Charles: Hi, thank you for squeezing me in. First off, I really want to congratulate TSMC for delivering good results for Q3 and very good guidance for Q4. But I want to really call out the reported revenue for 5 nanometers in the third quarter looks like you are showing some really good counter cyclical strength and probably the record high. I want to understand the rebound in the 5 nanometer business in Q3. Is that going to be more in the following quarters and what’s behind that?

And the relative, let’s say, with the expectation like three to six months ago when you were reducing your 23 hour, is 5 nanometer doing better than expected? And how has the demand trended for the last two to five nanometer? Thank you.

Host: Okay, so Charles first question is about 5 nanometer. He’s asking in the very near term, he notes that he saw a very strong sequential revenue increase in the third quarter. So he’s wondering what is driving this? And then he’s asking about what is the outlook for the next three to six months for 5 nanometer specifically?

Wendell: Yeah, Charles, I can share with you the increase in revenue and five in the third quarter mainly comes from two platforms, HPC and smartphone. HPC also includes the AI related demand. Smartphones are basically customers, some customers product seasonalities. Now for looking wise, I’m not going to share with you, but we will tell you in January what actual the next quarter N5 revenue will be.

Host: The overall revenue.We don’t provide revenue by process node, okay. What’s your second question, Charles?

Charles: Yeah, thanks Jeff. The other question is about CapEx. It sounds like that you are expecting CapEx on absolute dollar may still grow going forward. I know that’s a long-term comment, but I looked at the near term, QSMC CapEx seems to be running at a 7 billion U.S. dollars per quarter in the second half 23, which kind of is at a 28 billion annualized around rate. But if we are expecting total CapEx for 24 to grow in a dollar term over 23, it seems like you are expecting a CapEx ramp in 2024. Maybe that’s your planning for some of the CapEx ramp in 24. Is that the right way to think about a CapEx is 7 billion pretty like a really bottom level run rate for QSMC CapEx at this point? Thank you.

Host: All right, so Charles’ second question is also on CapEx.Basically he’s saying, given the guidance, he’s looking at our CapEx is running at about a U.S. dollar 7 billion run rate. So he’s assuming, although we do not comment on 24, he’s assuming if next year’s CapEx dollar amount is going to increase, but if we’re running at 7 billion run rate, does that imply 28 billion? How should he reconcile this?

Wendell: Charles, every year the CapEx is invested based on the future opportunity to growth. We invested to capture those future opportunities. Too early to talk about 2024, really. We’ll share the guidance with you in January quarterly release.

Host: Okay. All right, thank you, Charles. Thank you, everyone. This concludes our Q&A session.

*The entire content of the Transcript was assisted by AI tools and edited by human correction for the purpose of industry information dissemination and reference only. It should not be used as an investment guideline, and official announcements should be the primary source for detailed information.

(Photo Credit: TSMC)

Question 1. Gokul Hariharan from JP Morgan

Operator: Gokul Hariharan from JP Morgan.

Gokul: Yeah, hi, congratulations on the great result and thanks for the details on N3 and N2. My first question is on the technology leadership.

Gokul: Given we are hearing a lot of competitive messaging from your US IDM competitors slash customer in the last few months, Intel seems to think that they will be getting into technology or process technology leadership in 2025. Just wanted to hear what does TSMC think of Intel’s claim?

Gokul: And when TSMC thinks about customer engagement, do you feel you will lose a little bit of market share to Intel when it comes to the N2 or the first generation of nanosheet transistors? Or you think your very high market share in N3 will continue into N2? That’s my first question.

Host: Okay, thank you, Gokul. Please allow me to summarize your first question. So Gokul’s first question is about technology leadership and competition with, I think, particularly IDM. He notes this IDM is very messaging about taking over process technology leadership from TSMC.

Host: And so Gokul’s question is, how do we see this? Are we concerned that we will lose market share by nanosheet or N2 to this IDM, given their claims of regaining process technology leadership? Is that correct, Gokul?

Gokul: Yeah, that’s right. Thanks.

C.C.: Well, Gokul, this is C.C. Wei.

C.C.: Let me answer your question with a very simple answer, say no. But, well, I will stay a little bit long. Actually, we do not underestimate any of our competitors or tax them lightly.

C.C.: Having said that, our internal assessments show that our N3P, now I repeat again, N3P technology demonstrated comparable PPA to 18A, my competitors’ technology. But with an earlier time to market, better technology maturity and much better cost.

C.C.: In fact, let me repeat again, our two nanometer technology without backside power is more advanced than both N3P and 18A. And what the semiconductor industries are most advanced technology when it is introduced in 2025. Does that answer your question, Gokul?

Gokul: Okay. That’s quite clear. Thank you very much. Could you also talk about, my second question is, could we talk a little bit about the AI related demand?

Gokul: You’ve seen a pretty strong demand on the data center side and you’ve talked about AI being about 6% of revenues this year, mostly on the data center side.

Gokul: Are we starting to see more engagement on AI demand on edge devices based on TSMC’s expectations? Is this going to be a big road driver in the next one to two years for TSMC’s leading edge AI devices, sorry, AI on edge devices? Do you think that that is a bigger driver for you?

Host: Okay. Thank you, Gokul. So Gokul’s second question is on AI related demand. He notes, of course, that we have talked last time also about our AI related demand outlook and particularly focused on what we call server AI processors or Gokul referring to data centers.

Host: So his question is really more about on the edge devices. Are we starting to see AI related demand for edge devices? Do we expect this to be a big growth driver in the next one to two years for our leading edge technologies as well?

C.C.: Well, the answer is also very simple. Yes.

C.C.: We do see some activities from customers who add AI capability in end devices such as a smartphone and PCs through neural engine and AI on PC or whatever it is. And we certainly hope that this one will add to the course, help TSMC (become) more strengthened under our AI business.

Gokul: So do you see that happen in the next one year or is it something that will happen in a more longer term horizon? Just wanted to understand when to think about the cadence of this growth.

C.C.: Okay. Let me answer briefly. It started right now. And we were expecting that the more and more customers will put that AI capability into the end devices, into their product.

Gokul: Got it. Yeah. Thank you very much.

Host: Okay. Thank you, Gokul. Operator, can we move on to the next participant, please?

Question 2. Charlie Zhang from Morgan Stanley

Operator: Next one to ask question, Charlie Zhang from Morgan Stanley.

Charlie: Hi, good afternoon, C.C., Mark, and Jeff. So my first question is about the cycle recovery. So much appreciation about your comments about in demand.

Charlie: So my question is about when do you expect there will be an uptick of the fab utilization, assuming demand is stabilizing and also inventory get back to the healthy level.

Charlie: Because it’s just very hard to believe your fab utilization outside of the leading edge will stay at only 70%, 80%. So first question is about, do you see that overall fab utilization to pick up at any time soon? Thank you.

Host: Okay. So Charlie, I think your first question is sort of, if I’m correct, around the cycle and in terms of how do we see the cycle and the recovery? When do we see the fab utilization picking up, which really is a function of, I guess, do we see the cycle bottoming out and when do we expect the recovery? Is that correct?

Charlie: Yes. Thank you.

C.C.: Well, Charlie, this is C.C. Wei again. Let me answer your question. As I said, we do observe some early signs of demand stabilization in PCs and smartphones and market. Those two segments are the biggest segment for TSMC’s business. We want to say that 2024 will be a very healthy growth. But right now, did we see the bottom? Very close, very close.

C.C.: We want to, I cannot give you a number, but it’s because it’s too early to call it a sharp rebound. But even with a macro environment remain uncertain, we weigh in customers inventory control in first half of 2024. Having said that, we already say that we are strong technology leadership and the broad customer base. 

C.C.: And those two are unique and specific to TSMC and never our customer to win business in market and TSMC continues to deliver healthy growth. And that’s why we can do better than overall industry. And that’s why we have  confidence that we will have a healthy growth next year.

Charlie: Okay, okay, thank you. Yeah, so just want to kind of verify because we do see some green shoots and some rush orders to wafer foundry sector. Thank you. But second question is also about AI.

Charlie: My question is about, over the past three months, do you see any upper revision of a forecast and amend from the GPU or does that cost and chip?

Charlie: And I know it’s a very, very recent, right? Just two days ago, the US put up some additional export control on the AI shipment to China. Do you think that that is going to have any kind of near-term or long-term impact to your AI semi-revenue growth assumption? Thanks.

Host: Okay, thank you, Charlie. So Charlie’s second question is related to AI. Two-parter, first, do we see over the last three months, I think his words were an upper revision in the demand from AI in the last three months.

Host: And then he wants to know, given the recent additional regulations announced, what would the impact to the AI demand be to TSMC, both for the short-term and the long-term.

C.C.: Charlie, the AI demand continues to grow stronger and stronger. So from TSMC point of view, now we have a capacity limitation to support them, to support the demand. We are working hard to increase the capacity to meet their demand. That’s for one thing.

C.C.: Now, US government put a new regulation and for some of the product cannot be shipped to mainland China. However, it is, you know, just for a couple of days, we are still in evaluation, we are still doing our assessment. But so far we can tell you that the impact to TSMC is limited and manageable. At least for the short-term, for the long-term we are still evaluating what is the consequence. At least for the short-term, for the long-term we are still evaluating what is the consequence.

Charlie: Got it. So actually there was one embedded question about the custom chip. So may I know your perspective about this custom chip long-term may kind of gain share or outgrow GPU products. So what’s your assumption for this custom chip in terms of the real contribution within AI or to TSMC? May I ask this follow-up?

C.C.: Okay, let me answer it. Where the customer develop the CPU, GPU, AI accelerator or AC for all the type of AI applications. The commonalities that they all require usage of a leading edge technology with stable yield delivery to support large or die size and a strong boundary design ecosystem.

C.C.: All of those are TSMC’s strengths. So we are able to address and capture a major portion of the market in terms of a semiconductor component in AI.

Charlie: Okay, okay, thank you.

Host: Okay, thank you, Charlie. Operator, can we move on to the next participant, please?

Question 3. Bruce Liu from Goldman Sachs

Operator: Next one to ask question, Bruce Liu from Goldman Sachs.

Bruce: Okay, thank you for taking my question. I think the question is try to ask about the outlook for next two years. I do recall that management mentioned about like 15 to 20% revenue kickers from 21 to 26. The smartphone business supposed to be in line or slightly below the corporate average in terms of the gross rate.

Bruce: But the smartphone business was down meaningfully in 2023. Do we expect to see a sharp rebound for the smartphone business to get back to the corporate average in terms of gross rate? Also that the management also mentioned that the backend business will grow in line with the corporate average. Will we see a much stronger growth from the backend business in the coming two years?

Host: Okay, so Bruce’s question really is looking at, we have indeed, you’re right, Bruce. We had said we will grow between 15 to 20% revenue kicker in US dollar terms from 2021 to 2026. So Bruce’s question wants to break down the components here to look at smartphone in particular, given that it has been a slower going market these last few years.

Host: How do we see the growth of the smartphone market the next one to two years in the context of this CAGR? And then also I think Bruce is also asking about the backend growth. We have said previously we’ll grow slightly faster than the corporate average.What is the current expectation now also for the next one to two years? Is that correct, Bruce?

Bruce: Yes, thank you. Right, Bruce, this is Wendell.

Wendell: Yeah, in the next two to three years, backing up to 21 to 26, we still expect that the smartphone as a whole will grow slightly slower than the corporate average. We still think that HPC will be the strongest one and will be the major growth contributor to our multi-year growth. This is your first question.

Wendell: As to the growth of backend business, we still expect that the backend business as a whole will grow slightly faster than the corporate average in the five-year time period.

Bruce: I see, thank you. So the next question is for the technology traders. I mean, for TSMC, for revenue contribution for 5nm, we start to see the minimal revenue contribution for 5nm starting at third quarter 2020, and 3nm is third quarter 2023. So the cadence, it looks like, is longer for 3nm versus 5nm and 7nm.

Bruce: What is the technology cadence moving forward? Are we able to see a minimal revenue contribution of 2nm in two-year time frame or three-year time frame? I think the technology migration cadence is an important indicator as well.

Host: Okay, thank you, Bruce. So Bruce’s second question, again, as he said, is around the technology cadence. He notes that 5nm started contributing revenue in 3Q20, but I think you’re saying 3nm revenue is a contribution in 3Q23. So the cadence is growing longer to kind of three years between five and three.

Host: So what will be the technology cadence in the future? And thus for 2nm, when should we expect meaningful revenue as well? Is that correct, Bruce?

Bruce: That’s correct.

Host: Okay, thank you.

C.C.: Okay, Bruce, let me answer the question. I think that we develop the technology to meet the customer’s demand. That’s a first priority to us. But then different customer may have a different product schedule consideration. And as time goes by, the technology complexity actually become more and more complicated.

C.C.: And our customer design their product and react to the market situation. So let me answer the question that’s in a very simple way. TSMC’s technology cadence remain constant to support our customers’ growth. But whether we got the same amount or same percentage of the revenue, it will depend on customers’ product schedule.

Bruce: But the follow-up question is that if the customer doesn’t really need the advanced technology in as fast as before, maybe we slow it down a bit, which will make a better returns, right?

Host: So Bruce’s follow-up is, so if the customers do not need the needed node as fast or as soon as before, then slow down the cadence. Does that mean we will see better returns?

C.C.: Well, we don’t slow down our technology development per se. We might slow down our capacity expansion according to customers’ demand. Did I answer your question, Bruce? That’s it. That’s what we are doing right now.

Bruce: I understand. Thank you.

Host: Okay. Thank you. Operator, can we move on to the next participant, please?

Question 4. Laura Chang from Citi

Operator: Yes, the next one, we have Laura Chang from Citi.

Laura : Hello. Hi, good afternoon. Thank you for taking my question. I think my question is also similar to what Bruce mentioned about the capacity expansion plan.

Laura: As we see that healthier inventory situation right now, and at the same time, the most advanced process now depends on customers’ demand. So I just want to get your feeling about the overall, the capex outlook or capacity outlook into the next two years.

Laura: Do you feel that will be better to resume the year-on-year capex next year or later? Considering there’s still quite a strong demand on N3, N2 ramp-up at the same time, the most advanced now seems you will see maybe two times more expensive on N2 versus N3. So my question is just about the future capacity expansion plan. Yeah, thank you.

Host: Okay, so Laura’s first question, again, is on the capacity expansion plan. She notes that, of course, the inventory, as we said, is becoming healthier, but also with N3 and N2. So she really wants to know what is the capex and capacity outlook plan for the next one to two years?

Wendell: Right, hi, Laura, it’s Wendell. C.C. just mentioned our capacity plan will really depends on the customer’s product plan. Now, in terms of capex, what we can see now is that we, in the past few years, have invested very heavily to capture the growth in the next few years.

Wendell: And as we begin to harvest those investments, we expect the increase of our capex to be leveling off in the next few years. That doesn’t mean the dollar amount is going to reduce, but the capital intensity is expected to decline in the next few years. That’s what we can see at this moment.

Laura: Thank you, Wendell. I recall that previously we mentioned about, like we target longer term to back to like mid-30s for our capex intensity. So is any possibility we see we achieve that target next year?

Wendell: It’s, first of all, it’s not a target. It’s a forecast based on the customer’s demand. And secondly, it’s like three or five years out. It’s not the immediate next year.

Laura: Okay, thank you. Very clear. And also my second question is about N2 progress. I appreciate C.C.’s previous sharing on the progress and also the backside power timeline. I’m just wondering that what would be the most challenging part if we migrate to like a backside power? And also since the transistor density will become a totally different analogy. So I’m just wondering that the client’s migration or intention to adapt the most advanced node into our next two, three years. And what will be the most challenging in technology perspective? Thank you.

Host: Okay, so Laura, let me make sure I got this right. So your second question is about N2 and you want to know with the adoption of backside power rail, what is the most challenging part from a technology perspective? And then how do we see the customer adoption?

Laura: Yes, correct. Thank you.

C.C.: Laura, I answer that. You know, as a technology moving to more and more advanced node, the challenge is always there. Technology complexity increase dramatically, but we can do it. No doubt about it. And we are still remain the technology leadership in this industry.

C.C.: If you ask me, what is the most challenging part? I will say its cost. I mean, that’s how you look at it today. Inflation, everything and the tool have become more and more expensive.

C.C.: Although we can do it on time to meet customers’ requirement, our challenge right now, actually, I would say, number one, cost. I want to reduce the cost so more customer can afford it.

C.C.: But even with that, actually, we have a lot of customer interested and engaged with the TSMC today. Actually, it’s probably higher than the N3 at a similar stage. Okay. Did I answer your question?

Laura: Yes, very clear. Thank you very much, CC.

Host: Okay, thank you, Laura. Operator, can we move on to the next participant, please?

Question 5. Brett Simpson from LFA Research

Operator: Right now, we have Brett Simpson from LFA Research.

Brett: Thanks very much. I had a question for CC regarding the hyperscalers.

Brett: Major US hyperscalers are hiring a lot of chip designers at the moment and looking to make their own AI silicon, going direct to TSMC, much like Apple has done over the years. Are you, is TSMC generally supportive of this trend or not?

Brett: And can you give us your perspective as to whether hyperscalers have the in-house IP and skills to cut out the ASIC suppliers or not and go direct to TSMC? Thank you.

Host: Okay, Brett, thank you. So Brett’s first question is looking at his observation, US hyperscale companies are hiring a lot of people to do AI custom chips silicon and working directly or coming directly to work with TSMC. So his question is, is TSMC support such efforts? And how do we see such type of customers, I guess? Is that your question, Brett?

Brett: Yeah, and to generally just share your perspective on how you see this part of the business developing at TSMC. Thank you.

C.C.: Hi, Brett. Okay, those are hyperscalers. I don’t comment on the specific customer, but all we know or our fundamental rule is where the customer develop the CPU, GPU, AI accelerator or ASIC for their own application or for any purpose in the AI area, we will support them, actually.

C.C.: And because of our technology leadership and our good manufacturing, so we are able to address and capture a major portion of the market. And so you are asking whether we support it or not, we support every customer all over the world.

Brett: Okay, thanks, that’s very clear. And maybe just as a follow up, I wanted to ask about some of the areas in the quarter that were weaker than expected, namely seven nanometer, I think it’s half year on year, and also automotive that saw a decline sequentially, a meaningful decline sequentially.

Brett: Can you just help us understand how you build back up seven nanometer, what led to the weakness and what’s happening in automotive and how do you assess prospects for automotive over the next six, nine months or so? Thank you.

Host: Okay, so two parts to Brett’s question, maybe I’ll start with the second, but anyway, looking at automotive demand and the weakness in the past quarter, how do we see the automotive demand?

Host: And then also his question is about seven nanometer, also year on year sharp revenue decrease. So how do we see the outlook for seven nanometer as well?

C.C.: Well, let me answer the question on automotive demand. In fact, in the past three years, automotive demand has very strong and we deliver whatever they asked.

C.C.: And today I think it’s automotive demand already entered the inventory adjustment mode in the second half of 2023. However, we still expect the automotive demand-wide increase again in 2024, because the more and more EV, more and more functionality being added to automotive and that’s what we saw.

C.C.: Now talking about the N7, the seven nanometers technology, why we have such a low utilization or the revenue decrease? It’s a goal beyond our initial, our original plan because we expect the N7 to be very fully utilized even now, but it is not.

C.C.: Let me answer the question because we suddenly have in 10 years, the smartphone demand dropped dramatically from about 1.4 billion units to about 1.1 billion now.

C.C.: So that exactly in this timeframe, the N7 utilization has been impacted and followed by one major customer who delays their product introduction. And so that’s why we have a low utilization.

C.C.: But seeing that, we are confident to backfill our seven, six nanometer capacity with additional wave of specialty demand from a consumer, RF, connectivity and other applications and will return to a healthy level of utilization over the next several years.

C.C.: This is very similar to a situation that we have a 28 nanometer back in 2018 and 2019 timeframe. Okay. In the beginning it was underutilized for a period of time and we work hard with our customer and then for developing some specialty technologies and then now we have to expand 28 nanometers of specialty capacity. That’s the same kind of a story. Brett, did I answer your question?

Brett: Thank you. Okay, thanks a lot. Yep. Thanks very much.

Host: All right, Brett. Thank you. Operator, can we move on to the next participant please?

*The entire content of the Transcript was assisted by AI tools and edited by human correction for the purpose of industry information dissemination and reference only. It should not be used as an investment guideline, and official announcements should be the primary source for detailed information.

(Photo Credit: TSMC)