Demand for chips remains strong, but getting great tools is hard

TSMC’s sales will set a record for the company this year, thanks to high demand for chips and the higher prices customers are willing to pay for its services. While the company admits that the demand for chips for consumer devices is declining, the demand for chips for 5G, AI, HPC and cars remains stable. In fact, TSMC’s biggest problem at the moment is getting more great equipment like ASML and other tooling companies and reporting that the demand for semiconductor manufacturing tools is significantly outpacing the supply.

Last week TSMC Posted its financial results for the second quarter of 2022. The company’s revenue reached a record $18.2 billion, up 43.5% year-over-year. Company revealed that while sales in April and May increased by 55% and 65.3% (respectively), June sales rose ‘only’ by 18.5% year-on-year, indicating a slowdown in sales growth.

Demand for client devices is decreasing

“Due to the declining momentum of devices in the smartphone, PC and consumer market segments, we are already seeing supply chain action and expect inventory levels to decline in the second half of 2022,” said CC Wei, chief executive of TSMC, during the company’s earnings conference call.

While we can only speculate on this, it appears that some of TSMC’s customers reduced their orders for customer-facing chips after Russia launched a large-scale war against Ukraine in late February. TSMC charges/recognises revenue when it delivers chips/wafers to a customer.

The production cycle for chips on modern process technologies is well over 60 days, depending on the complexity and number of layers: N16 is ~60 days, N7 is 90+ days, N5 is probably well over 100 days. These nodes are responsible for: 65% of TSMC’s revenues. So if customers started phasing out orders in March and April as they anticipated increasing inflation and end-user uncertainty, the effect will be visible in June, which can be seen in TSMC’s reports.

TSMC admits that demand for customer-facing chips is declining, but demand for chips designed to support 5G, AI and HPC applications still exceeds the company’s supply.

“While we see weakness in consumer end-market segments, other end-market segments, such as data center and automotive-related, remain stable,” Wei said. “We are able to reallocate our capacity to support these areas. Despite the ongoing inventory correction, our customer demand continues to exceed our ability to deliver. We expect our capacity to remain tight in 2022 and our growth for the whole year will be 30. % expressed in US dollars.”

Advanced nodes continue to drive growth, expansions are getting harder

More than half of TSMC’s revenue (51%) comes from chips made using advanced manufacturing technologies (N7 and thinner nodes), which is not particularly surprising given that TSMC is one of the few contract foundries to offer such advanced offer production processes to customers.

These technologies will be one of TSMC’s key growth drivers in the coming years, especially as more customers adopt N7 and more advanced technologies. But more N7/N6 and N5/N4 orders mean TSMC needs to build more capacity for these nodes, as well as more capacity for N3 and subsequent nodes, which is why the company estimated its CapEx this year would be $40 billion – $44. billion.

“With the successful ramp of N5, N4P, N4X and the upcoming ramp-up of N3, we will expand our customer product portfolio and increase our addressable market,” said the head of TSMC. “The macroeconomic uncertainty may persist into 2023, our technology leadership will continue and support our growth. […] We believe that the long-term fundamental structural growth trajectory in semiconductor demand remains firmly in place. “

The world’s No. 1 semiconductor contract maker is also urging customers to migrate from legacy nodes to 28nm and specialty technologies as this will ensure capacity availability (as TSMC plans to increase capacity for 28nm and dedicated nodes by 50 nm by 2025). % expandable) and denser designs with more features.

Building additional advanced capacities, 28nm and specialized capacities not only requires huge investments, but TSMC must also acquire additional semiconductor manufacturing tools. Whether TSMC is building capacity for its brand new N3 node or 28nm/special technologies, it should be noted that the company needs all kinds of lithography machines to do so. An N3 compliant fab will need dry litho instruments, immersion litho scanners and EUV compatible equipment. Without the required number of dry and immersion scanners, an advanced EUV machine is useless on its own. Meanwhile, lithography tools are not the only machines a fab needs.

Apparently, the demand for fantastic equipment is so great that TSMC cannot spend its CapEx budget this year, and some purchases related to advanced (N7 and thinner) and mature nodes will be delayed until 2023. As a result, TSMC’s CapEx will be released this year. year will be at the bottom of the company’s forecast (about $40 billion), not because it doesn’t want to invest, but because it can’t invest in tools that aren’t available.

“Our suppliers have faced greater challenges in their supply chains, extending tool lead times for both advanced and mature nodes,” said Wei. “As a result, we expect some of our CapEx to be pushed to 2023 this year.”

ASML confirms record quarterly bookings

Meanwhile, ASML, the world’s largest producer of lithography tools, this week Posted its revenue in the second quarter of 2022 of €5.431 billion, an increase of 53% year-over-year. During the second quarter, the company (recognized sales) delivered a total of 91 new lithography systems (compared to 59 in the second quarter of 2021), of which 12 are EUV systems (versus 3 in the second quarter of 2021).

Perhaps more importantly, ASML’s net bookings for new systems in the quarter were $8.461 billion, so the company’s bookings are ahead of quarterly revenue. Meanwhile, ASML’s backlog now stands at $33 billion and spans the next few years, essentially confirming that it is extremely difficult for companies like TSMC to get new tools.

The backlog for DUV machines is now around 600 units and lead time of product order for a new DUV scanner is now about two years. The backlog for EUV tools is well over 100 machines. Meanwhile, ASML says PO lead time metrics aren’t really relevant as it deals with supply chain and own production capacity issues, meaning its partners need to build additional capacity and ASML build additional capacity (which takes time) and only then it can supply the recently ordered tools.

For the full year 2022, ASML expects to supply 55 extreme ultraviolet (EUV) lithography scanners, but recognizes sales of 40 EUV systems worth €6.40 billion (€160/$140 million per machine), because 15 EUV systems machines will supposedly be fast. shipments — a shipping process that skips part of the testing at the ASML factory and then final testing and formal acceptance is performed at the customer’s site (therefore, revenue acceptance is deferred). The company also plans to supply 240 deep ultraviolet (DUV) litho instruments this year. ASML expects production capacity to reach a total of 60 EUV scanners and 375+ DUV tools by 2023.


While the demand for chips aimed at customer/consumer devices is declining due to rising inflation and geopolitical uncertainty, the global megatrends such as 5G, AI, HPC and autonomous vehicles are still there and require many advanced system-on-chips, special processors, and not-so-advanced things like sensors. Therefore, TSMC is confident of strong demand for chips in the coming years.

But there is a problem meeting that demand as TSMC is not the only company expanding its production capacity. ASML’s backlog now includes more than 100 EUV scanners and about 600 DUV scanners – it will be years before the company ships these machines. As a result, TSMC is having trouble getting the tools it needs to build additional capacity it needs. It is unclear whether the company has enough capacity to meet all of its largest customers’ potential demand on N3, N4, N5 nodes (Apple, MediaTek, AMD, NVIDIA, etc.) of its process technologies.

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