Following the news that TSMC reported solid Q2 2023 results; Josep Bori, Thematic Research Director at GlobalData, offers his view:
“TSMC’s Q2 2023 results were mixed, showing further deceleration from Q1 due to cyclical headwinds. Despite the Q3 guidance implying a revenue decline of 14% year over year, its long-term outlook looks bright thanks to its dominance in advanced nodes as it navigates the US/China trade dispute.
“Q2 revenue decline of 10% year-on-year (YoY) is dramatically lower than its 43% growth in Q4 and even the 4% growth in Q1, but increasingly consistent with the double-digit declines of Nvidia, AMD, Micron, and Kioxia. Further, the Q3 revenue guidance of a 14% drop suggests it has not yet reached the floor. That said, the decline was expected due to softening consumer demand and headcount reductions across the tech industry. This is believed to have led the company to cut its orders for extreme ultraviolet lithography (EUV) tools earlier in the quarter. However, its relative resilience versus industry peers is a testament to TSMC’s technology leadership and strategic positioning in the global semis supply chain.
“Despite management warnings of end-market demand softness and customers’ ongoing inventory adjustments, the company remains structurally very well positioned. Its advanced technologies (i.e., five and seven-nanometer nodes) accounted for 53% of total wafer revenue, stable from last quarter. This manufacturing technology leadership places TSMC front and center of any country’s artificial intelligence (AI) strategy, as advanced AI chips require this miniaturization level.
“However, the long-term investment case hinges on the delicate balancing act between geographic diversification and geopolitical relevance. For TSMC, geographically diversifying its fabrication facilities makes sense from an operational risk-management perspective, but from a geopolitical standpoint, it cannot be taken too far. Diversifying geographically will make its main Taiwan facilities less critical from a global supply chain standpoint and, therefore, less crucial for the US to defend if China makes any moves on the island. Yet the capex reduction, the recent commitments to build fabs in the US, and advanced plans for European sites suggest this diversification will only accelerate. What is unclear is what impact a potential return of Trump to the US Presidency in 2024 could have on the US position regarding defending Taiwan’s independence.
“As demonstrated by the rise in geopolitical tension between the US and China, the US export bans on chip technology transcends the semiconductor industry. In GlobalData’s view, this is about AI dominance, which underpins what many call the fifth industrial revolution, and, ultimately, about global economic leadership in the next few decades.
“GlobalData predicts that the accelerating adoption of AI in commercial and military use cases will drive global AI chips revenue from $12 billion in 2021 to $130 billion by 2030, at a compound annual growth rate (CAGR) of 30%. For a more detailed analysis of this industry, see our recent ‘AI Chips’ report.”
