TSMC gets 1-year US licence for China chip expansion

Taiwan Semiconductor Manufacturing Co has secured a one-year licence to continue ordering American chipmaking equipment for its expansion in China after the US rolled out tough export controls to block Beijing’s tech ambitions.

CC Wei, chief executive of the world’s biggest contract chipmaker, confirmed on October 13 that the company had been given a one-year licence covering its Nanjing manufacturing facility in China, confirming an earlier report by Nikkei Asia.

Sources previously told Nikkei that the US government assured TSMC it could ship the equipment to Nanjing, meaning the company’s plans to expand its manufacturing footprint in the world’s second-largest economy will remain on track.

The waiver comes after the US imposed tough export control regulations on China aimed at thwarting almost every aspect of the country’s semiconductor development. These rules not only prevent US makers of chip tools from supporting high-end chip production in China but also prohibit companies from third countries, such as TSMC, from using American-made equipment to serve Chinese customers in certain circumstances unless approved by the US.

TSMC on said quarterly net profits reached NT$280.87bn ($8.81bn) for the July-to-September period, a 79.7 per cent increase from a year ago and an all-time high. Quarterly gross margin was also at a record high of 60.4 per cent.

The company said it would cut 2022 capital expenditure to $36bn, from about $40bn previously forecast, in part due to weakening demand for smartphones and PCs.

Wei warned that the global semiconductor industry will probably decline in 2023 due to a market slowdown and macroeconomic woes, but said his company could still “grow” in a downturn thanks to its resilience and tech leadership.

“We think the [inventory correction] will take a few quarters, until the first half of next year, to rebalance to a healthier level,” said Wei.

TSMC’s market capitalisation has dropped more than NT$1tn since October 7 when the US announced its latest export controls against China, including its biggest one-day drop on the first trading day following the announcement. The company’s shares have declined more than 35 per cent this year.

Wei said the effects of US export controls should be manageable.

“Our initial reading and feedback from our customers [is that] the new regulation set the control threshold at a very high-end specification, which is primarily used for AI or supercomputing applications. Therefore, our initial assessment is the impact to TSMC is limited and manageable,” said Wei. “We are closely monitoring the situation to ensure we comply with all the rules and regulations.”

TSMC is mainly expanding some mature chip production — known as the 22nm/28nm production node — in Nanjing, its most advanced semiconductor production plant in China. The facility, opened in 2018, also builds chips in the 16nm grade, which fall under the scope of Washington’s latest export controls.

TSMC’s revenue from China has significantly decreased since its biggest Chinese chip design customer, Huawei Technologies-owned HiSilicon Technologies, was banned by the US from working with any foreign production partners that use American technologies in the manufacturing process.

China accounted for 10 per cent of TSMC’s revenues in 2021, down from 17 per cent in 2020. Its revenue from China for the April-June quarter for 2022 was 13 per cent of the total.

Another chipmaker, SK Hynix of South Korea, said on October 12 that it had won a one-year waiver from the US government to use American chip equipment in China, paving the way for the company to expand in the country.

Despite the waiver to maintain production in China, the US restrictions will still hit TSMC, as they mean it can no longer help its Chinese customers put advanced graphics and AI processors into production. The curbs also mean TSMC’s key US clients, including Nvidia and Advanced Micro Devices, can no longer ship high-end graphics processors for use in the Chinese market.

Mark Li, an analyst with Sanford C Bernstein, said the US rules only applied to the most advanced grade of graphics processing units for AI and supercomputer applications, and estimated that less than 0.5 per cent of TSMC revenue for 2023 would be affected. But if the regulations are further tightened to apply to chips for data centre CPUs and GPUs, that could affect up to 5 per cent of TSMC’s revenue for next year in a worst-case scenario, Bernstein estimated.

TSMC’s revenue for the July-September period was NT$613.14bn, up 47.8 per cent from a year ago, the company said.

The company said its October-December revenue for 2022 will be between $19.9bn and $20.7bn, which would put its full-year revenue at $76.26bn, at the midpoint of its guidance, meeting its earlier forecast of more than 30 per cent growth.

A version of this article was first published by Nikkei Asia on October 13 2022. ©2022 Nikkei Inc. All rights reserved.

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