HSINCHU, Taiwan (Sep 5): In late August, the new chairman of chip-making titan Taiwan Semiconductor Manufacturing Co, Mark Liu, got the sort of news that would make any boss smile: his biggest competitor was throwing in the towel.
Just under three months into Liu’s tenure, rival GlobalFoundries had announced that it would not compete in the latest generation of chip-making technology. It was a reminder of just how dominant TSMC has become in manufacturing chips for other companies, a business it all but invented.
TSMC stock quickly hit an all-time high. But Liu’s job seems likely to get tougher, not easier.
In an interview at the company’s newly christened Morris Chang headquarters building, named after its founder, Liu said global politics were his biggest worry.
“The worst you can imagine can be very bad,” Liu said, referring to geopolitical developments such as the U.S.-China trade war and tensions between Taiwan and the mainland.
The thoughtful, soft-spoken engineer took over from the ebullient and outspoken Chang at a tricky time.
Emerging competition from China casts an ominous shadow, and the intricate network of relationships that have enabled TSMC and its brethren in the global technology supply chain to thrive are under threat amid the trade dispute.
Worse, global smartphone sales have flattened. Purchases of smartphone chips by the likes of Apple Inc and Qualcomm have powered TSMC for a decade.
But Liu remains optimistic about that business.
“Smartphone units have plateaued, but the silicon content of each smartphone on average is still increasing,” he said, projecting growth in the high single digits over the next couple of years. He said smartphones would continue to account for 40 percent to 50 percent of TSMC’s revenue.
A slowing smartphone market was one of the reasons the company cut revenue targets this year. It also reduced capital spending for the year from $11.5 billion-$12 billion to $10 billion-$10.5 billion - a move it attributed at the time partly to more efficient equipment delivery and currency adjustments, but which Liu acknowledged was also influenced by softer demand.
Meanwhile, new markets such as autonomous vehicles and the “internet of things” - interconnected consumer and industrial devices - have been slow to arrive. Liu chuckled as he predicted self-driving cars would come “within our lifetime,” but said little about when they might benefit TSMC.
“The issue is that these new areas are not going to be big enough in the foreseeable horizon to offset the slowing growth of smartphones,” said Mark Li, an analyst at Sanford C. Bernstein.
Liu was more optimistic about the sophisticated chips that power data centers. The boost TSMC and others enjoyed from the sale of such advanced processors for mining cryptocurrencies has largely dissipated, but Liu said the sector had made a lasting impact on high-performance computing (HPC).
“They have an amazing architecture innovation and it will carry onto other areas of HPC, including blockchain and artificial intelligence applications,” he said.
Moves by consumer tech giants such as Google to design their own chips could also be a boon for a company that vows to be “everyone’s foundry.”
Liu, who worked at Intel and AT&T’s Bell Laboratories before joining TSMC in 1993, shares the job of running the company with chief executive C.C. Wei, another industry veteran.
One major investor, speaking on condition of anonymity because he was not authorized to discuss individual companies, said he was cautiously optimistic that they could adequately replace “hero” Morris Chang, who ran TSMC for 30 years.
Analysts say the company has some fresh opportunities with the pull-back of GlobalFoundries and could win more business from top chip vendors, including AMD and Qualcomm.
Still, Liu acknowledged that global overcapacity in an older production technology, stemming in part from new investment by mainland Chinese firms, “gives you headaches.” The company said that category accounted for 23 percent of the company’s revenues.
And questions about long-term growth loom large. Liu expressed optimism that the current “cooling down” in smartphones would last only a couple of years before 5G technology drives a new round of growth.
But it is far from a sure thing.
“What they are doing right now is moderating their spending, and returning extra cash back to investors,” said Li of Sanford C. Bernstein. The big test for Liu, he added, is to prepare “for something new, some growth in the next era.”
Liu is confident that will happen, and said the company may increase spending on advanced production techniques in light of the GlobalFoundries retreat. In China, where the company has pledged to invest $3 billion on its latest factory, Liu said TSMC would stay on the offensive.
“We will (invest more) to make sure we have a local position to compete,” Liu said.
($1 = 30.7330 Taiwan dollars)