TSMC and analysts who cover the company recognize an inventory glut in the electronics supply chain...
Taiwan Semiconductor Manufacturing Co. (TSMC) and analysts who cover the company recognize an inventory glut in the electronics supply chain.
That’s where they part ways.
TSMC is maintaining its outlook for this year, Chairman Mark Liu said at a press event Tuesday. The world’s biggest foundry has budgeted $15 billion to $16 billion for capital spending this year, an increase from last year’s $14.9 billion.
“iPhone sales are still pretty good,” Liu said of Apple, TSMC’s top customer.
Moreover, Liu is optimistic that the U.S. government will relax its restrictions on chipmakers that use U.S. equipment and design tools to supply semiconductors to Huawei subsidiary HiSilicon.
He said that by mid-July, TSMC will apply to the U.S. Department of Commerce for a license to sell chips to HiSilicon.
Stockpiling by Huawei
Yet analysts worry that excess inventory in the supply chain and the potential loss of sales to HiSilicon, TSMC’s second-largest customer, will impact the foundry and other electronics companies later this year.
“I don’t see any winners from this scenario,” says Brett Simpson, senior analyst with UK-based Arete Research. “It’s going to be a very challenging 12 months or so for the world’s supply chain. A lot of businesses that buy semiconductors are worried about business continuity.”
He says stockpiling by Huawei, its competitors and other companies in the Huawei ecosystem is a concern. And there’s more.
“The other concern is to what extent this escalates beyond being something that’s isolated to Huawei to suddenly becoming a far wider issue for the semi industry,” he says.
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TSMC takes a different view.
The impact from the coronavirus pandemic on employment will be like a “depression,” TSMC Chairman Liu said. But he noted changes in lifestyles that require the adoption of new technologies that drive business for TSMC. Liu said it’s now possible to take courses remotely at U.S. universities like the Massachusetts Institute of Technology or Berkeley. More people are turning to online entertainment and digital streaming amid the pandemic, he said. People in the tech industry are working and meeting virtually, he added.
“What was originally expected to be a three-year transition to new technology has been squeezed into three months,” Liu said. “It’s not likely that we will see a V-shaped recovery in the economy. But in the technology industry, it’s different.”
‘Caught in the middle’
“TSMC is caught in the middle” of the trade war between the U.S. and China, Liu said. But those restrictions apply equally to TSMC and competitors such as Samsung of South Korea and Semiconductor Manufacturing International Corp. (SMIC) of China, he added. “These trade restrictions will gradually be resolved.”
Analysts are more pessimistic about the Commerce Department relaxing its regulations.
“We estimate that most of HiSilicon’s supply-chain foundries and OSAT (outsourced semiconductor assembly and test) companies will have more than 10 percent sales exposure,” said veteran TSMC analyst Andrew Lu. He expects the impact to start during the third quarter of this year.
Credit Suisse analyst Randy Abrams expects TSMC’s sales to HiSilicon drop from the current 14 percent of its overall revenue to zero by next year.
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Huawei’s foundries include TSMC and SMIC, the latter of which counted on HiSilicon for 19 percent of its sales in 2019, Abrams said in a report provided to EE Times.
“We expect both to halt their production for Huawei unless a resolution, settlement or loophole is found after a 120-day grace period that allows the foundries to finish the 3-4 month cycle time of in-process wafers as of 15 May,” the report said.
Rattling the Supply Chain
The restrictions on Huawei are likely to have a further impact on the supply chain depending on the ability of the Chinese company to continue to ship products, according to the Credit Suisse report.
The company is one of China’s largest tech companies with $124 billion in 2019 revenue, based on Huawei’s annual report. The company derived 35 percent of its 2019 sales from the carrier business (mainly telecom equipment), 54 percent from the consumer business (largely smartphones) and 10 percent from the enterprise business (switches and routers), Credit Suisse said.
By geography, China accounted for 59 percent of Huawei’s sales, while Europe, Africa and emerging markets contributed 24 percent, followed by the Americas at 6 percent and Asia ex-China about 8 percent.
Huawei has been building a stockpile of supplies for about two years in anticipation of the U.S. crackdown, according to Arete Research’s Simpson. Huawei is not the only company preparing for an impact, he says.
“We are seeing stockpiling at the moment because of supply chain issues and uncertainty,” he says. “If you are (Chinese handset makers) Oppo or Vivo, how do you plan your supply chain for the next six months? Will Huawei be able to build handsets – if not how do you step in?”
Even leading smartphone makers Apple and Samsung need production plans that take into account the possibility that Huawei suddenly gets a Google license for the Android operating system in its phones and is able to re-enter overseas markets, according to Simpson.
Impact on 5G
European telcos that have been among the biggest buyers of Huawei equipment are probably making their own contingency plans, he says.
The installed base of most 4G networks in Europe have a significant Huawei component and need to expand capacity for both 4G and 5G. It will be very difficult if those companies’ supply lines are cut off because of the U.S. restrictions on Huawei, according to Simpson.
“It’s very difficult to rip and replace legacy wireless infrastructure equipment,” he says. “5G is not a standalone network, it relies on 4G legacy. You do need to have a lot of backup compatibility in 4G. This creates enormous challenges for telco networks around the world.”
He adds that this is an area where industry feedback is lacking.
Ericsson and Nokia will not be able to drop their own equipment into the European networks, according to Simpson.
“Networks are built in zones, so you cannot simply build an Ericsson base station into a zone where Huawei has a large installed base,” he says.
Simpson says the rollout of 5G, which TSMC has counted on as a business driver, will be delayed, but he declines to provide any timeframe for the slowdown.
“We need to hear from regulators and commissioners in the EU and exactly how they expect the telco industry to proceed,” he says. “There is going to be caution from telcos in the EU over investing in 5G.”
The rollout in the U.S. will probably continue because there’s no real market share for Huawei in 5G in that part of the world, according to Simpson. China has moved very quickly and built networks already to some extent, he adds.
While some companies have been betting on a fast recovery from the pandemic-related downturn, those expectations may turn into a liability.
“If you look at consensus expectations for OEMs and the big chip buyers in the markets, we are pricing in an aggressive V-shaped recovery,” according to Simpson. “If supply chains are building all for that scenario, and there is stockpiling going on, there’s going to be oversupply in the market.”
Credit Suisse shares those concerns.
“Growing inventory levels in the first half of 2020 could put risk on the Asian foundries by the fourth quarter of 2020 and the first quarter of 2021 for inventory digestion if end-market demand disappoints or business activity does not fully normalize in the second half of 2020,” Credit Suisse said in a May 27 report provided to EE Times.
TSMC Chairman Mark Liu is not the only one who sees a chance for Apple iPhones to shore up the electronics industry.
Apple probably looks at Huawei as one of the largest R&D spenders in the Android ecosystem, according to Simpson. Now that Huawei has been forced to pull back from overseas markets, Apple is in a strong position to capitalize on a weak Android ecosystem, he adds.
“They must see an opportunity for their business,” according to Simpson. “They’ve just launched the iPhone SE2 at a relatively low price. We will soon see what price they launch iPhone 12 at in the next quarter. Will they be aggressive and keep prices flat, to drive market share in a period where Huawei has largely pulled back from market? That’s an interesting question.”