Welcome to TSMC's third quarter 2013 earnings conference teleconference call. This is Elizabeth Sun, TSMC's Director of Corporate Communications and your host for today. The event is webcast live via TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dialing lines are in listen-only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only. The format for today's event will be as follows. First, TSMC's SVP and CFO, Miss Lora Ho, will summarize our operations in the third quarter, followed by our guidance for the current quarter. Afterwards, TSMC's Chairman and CEO, Dr. Morris Chang , will provide his general remarks and a couple of key messages. Then we will open the floor to questions.
For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation. Before we begin, I would like to remind everybody that today's discussion may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears on our press release. Now, I would like to turn the podium to TSMC's CFO, Miss Lora Ho. Thank you, Elizabeth. Good afternoon, everyone. Thank you for joining us today. I will start the presentation with financial highlights for the third quarter, and I will follow that by providing the guidance for the fourth quarter.
In the third quarter, TSMC set another record in both revenue and net income, thanks to our leadership in leading-edge technology. In the third quarter, revenue increased 4.3% to reach TWD 163 billion. Gross margin was 48.5%, down 0.5 percentage points sequentially due to the lower capacity utilization offset by favorable inventory valuation adjustment. Total operating expenses were TWD 19.3 billion, slightly increased from the second quarter, mainly due to higher R&D expense for 20nm SoC and 16 FinFET technology development. The operating margin was 36.7%, down 3 percentage points from the second quarter. Non-operating items was a loss of TWD 0.3 billion in the third quarter, mainly due to the TWD 1.35 billion impairment charges associated with our investment of Stion. Stion is a U.S.-based solar company, which was invested in 2010. The EPS impact for this event is about TWD 0.05.
Overall, EPS was TWD 2 in the third quarter, and ROE was 26.8%. Let's take a look at the revenue by application. After five consecutive quarters of growth, communication segment declined by 3% in the third quarter as consumer customers start to manage down their inventories. Computer segment declined 18%. Consumer segment grew significantly in the third quarter, thanks to the strong demand from the game consoles. Meanwhile, industrial and standard related revenues grew by 5% from the second quarter. Despite the volatilities across different applications, our 28-nanometer continued to grow and contributed 32% of total wafer revenue in the third quarter, up from 29% in the second quarter. Combined with 40-nanometer, the advanced technology represented 52% of our total wafer revenue. Now moving to the balance sheet. We ended the third quarter with cash and marketable securities of TWD 218 billion.
Current liability decreased by TWD 95 billion as we paid out TWD 78 billion of cash dividends in July. On the financial ratios, accounts receivable turnover days increased 2 days to 45 days. Days of inventory further decreased by 2 days to 45 days, as we had less work-in-process inventory in the third quarter. On the cash flow side, during the third quarter, we generated TWD 96 billion from operations, invested TWD 55 billion in capital expenditure, distributed TWD 78 billion cash dividends. We paid TWD 13 billion bank loans and raised TWD 41 billion of corporate bonds. Overall, our cash balance decreased TWD 9 billion to TWD 217 billion. Free cash flow was an inflow of TWD 41 billion.
In US dollar terms, we spent $1.8 billion in capital expenditure in the third quarter, this adds to the total of $7.2 billion for the first three quarters, which is about 74% of our total year CapEx, which is about $9.7 billion. Lastly, I would like to make a few comments on our capacity plans. Our total capacity grew 6.5% to around 4.3 million 8-inch equivalent wafers in the third quarter, and we will increase another 1% in the fourth quarter. For the full year, our 12-inch capacity is expected to grow 17% year-over-year, and our total annual capacity will increase 11% to 16.4 million 8-inch equivalent wafers. I have finished my financial report. Now let me provide you our fourth quarter guidance. Based on current business expectations and a forecast exchange rate of 29.5, we expect our revenue to be between TWD 144 billion-TWD 147 billion.
In the US dollar terms, this will translate to around 10% quarter-over-quarter decline. On the margin side, we expect the fourth quarter growth margin to be between 44%-46%, and operating margin to be between 32%-34%. This concludes my remarks. Let me turn the podium to Chairman.
Good afternoon, ladies and gentlemen. My message is outlined here on the screen. First, a few comments on third and fourth quarters of this year. Third quarter was another record quarter for TSMC, both in revenue and in EPS. During the period, the sales of certain mobile products were slowing. They have with our third quarter results. I think that demonstrates once again, TSMC's strong position in the leading-edge technologies, particularly in the 28-nanometer node. As I said three months ago, the fourth quarter may be a down quarter, lower than the third quarter, because we expected the supply chain to take serious actions to manage the inventory in the second half of this year. That has happened and is still happening. As the CFO has just indicated in the guidance, our fourth quarter revenue will decline by about 10.5% from the third quarter.
This decline is mainly attributable to the softer demand for certain high-end smartphones and the inventory correction. We believe the decline is short-term. Meanwhile, TSMC's structural possibilities, our technological strength, and our close customer bonds remain intact. We are optimistic about 2014. Next, a few comments on industry outlook, supply chain inventory, and mobile products market. For the full year 2013, we estimate the semiconductor market, the world semiconductor market, will grow 4%, which is a bit higher than the 3% that we estimated last quarter, mainly due to the strength of the memory segment of the semiconductor industry. We again estimate that the tablet industry will grow 9%. That's unchanged from our last quarter estimate. We estimate that the foundry industry will grow 11%, unchanged from last quarter.
We now estimate that TSMC this year will grow between 17% and 18%, which of course, is much higher than the foundry industry growth. On inventory. In the third quarter, due to slower sales of certain high-end smartphone models, we estimate that the supply chain DOI in the third quarter went up and was above seasonal. That was higher than we forecasted three months ago. In the fourth quarter, we expect the supply chain DOI to decline significantly and to approach seasonal level by the end of the fourth quarter. On mobile products. The smartphones, 2012, 730 million units. 2013, we estimate 987 million units, a 35% growth. 2014, we estimate about 1.2 billion units, a 26% growth over 2013. Tablets. In 2012, 165 million units. This year, we estimate 255 million units, a 54% growth. Next year, we estimate 310 million units, a 22% growth.
Next, I will talk about 28 nanometers. 28 nanometers is now in our third year of volume production. It still beats our competitors in yield and performance. Since the second quarter of this year, our quarterly revenue from 28 nanometers has exceeded the $1 billion mark. We expect to continue to grow our 28 nanometer business further in the next year. TSMC 28 nanometer market share in our sales available market is about 84%, which is higher than our 45 nanometer was in its third year of ramp. It is also higher than the market share of our 65 nanometer, our 90 nanometer, and our 0.13 micron in their respective third years ramp. In 28 nanometers oxynitride solution, we have a couple of competitors. TSMC delivers higher performance, better yield, and shorter cycle time, which help mitigate customers' inventory risk.
Our market share of the oxynitride solution is about 75% this year. In 28 nanometer high-k metal gate solution, we have little competition. Today, our market share of 28 high-k metal gate is above 90%. As some of our customers begin to migrate to more advanced nodes, 20 nanometer and 16 FinFET, we will have second-wave customers who come in to fill our 28 nanometer capacity. As a result, we expect to maintain a high level of capacity utilization for 28 nanometer in the next few years. Because of our substantial lead in yield, speed, power, and our customers trusting us, which we make a hard effort to earn every month, every day. Because we have a multitude of second-wave customers adopting 28 nanometer in future years, we expect to keep our 28 nanometer market share strong for a long time.
Indeed, keeping a high market share in every one of our more mature technologies has been part of our corporate strategy all along. As the leader in the foundry field, we usually started at a very high share at the leading edge. As competitors began to appear, they'd capture some market share. Our share in every mature technology, up to 45-nanometer, has never gone below 50%. A few comments on 20-nanometer and 16-nanometer FinFET. We will begin volume production of 20-nanometer in first quarter 2014. That's nine days from now. 16-nanometer will follow 20-nanometer in one year. We view both 20-nanometer and 16-nanometer as virtually one node. Specifically on 20-nanometer, we have received five product tape-outs and scheduled more than 30 tape-outs in this year and next year from mobile computing, CPU, and PLD segments.
All those tape-outs represent big volumes. The entire ecosystem on 20-nanometer has been validated in real products and is ready to support customers. Yield learning is in line or better than the 28-nanometer path. We expect a fast ramp of 20-nanometer next year, with revenue from 20-nanometer in 2014 bigger than that of 28-nanometer in 2012. You see, 20-nanometer will be starting next year, whereas 28-nanometer actually started in the fourth quarter of 2011. The corresponding point for 28-nanometer was 2012. Our ramp in 20-nanometer in 2014 is going to be faster than the ramp for 28-nanometer in 2012. While 28-nanometer ramp was a record for TSMC, 20-nanometer ramp will be even faster by about 30%. On 16-nanometer FinFET, technological development is progressing well. Risk production is on schedule by the end of this year.
More than 25 customer product tape-outs are planned in 2014, including mobile computing, CPU, GPU, PLD, and networking applications. We are on track to begin volume production within one year of 20-nanometer. On both 20-nanometer and 16-nanometer FinFET, we are confident that we are competitive. We derive our confidence from our close working relationship with several large customers. It is they, our large customers, who have to come out with products that will prevail over their competitors. It is they, our large customers, who ensure that our 20-nanometer and 16-nanometer FinFET technologies will enable them to prevail over their competitors. Next, let me talk about CapEx growth and visibility through 2010 product plans. As Lora mentioned, CapEx this year will be around $9.7 billion, give or take a couple hundred million TWD.
This year, our CapEx is partially for this year's growth, but primarily for next year's growth. We expect another double-digit growth year for 2014. Let's take a moment to revisit the five-year plan we announced in 2010. In 2010, we set a target of 10% per annum PBT growth and ROE of equal or greater than 20% for the five-year period of 2011 to 2015. We were dealt an immediate setback in 2011. Our PBT in 2011 actually retreated from the 2010 level. Since then, we have been catching up. This year, the gap between our forecast and the trend line, the 10% per annum trend line, is a very small one. In the meantime, we are still comfortably above our ROE of 20%. We expect on the profit forecast, we expect to more than catch up with the trend line, the plan line, in 2014 and 2015.
I will make a few comments about the CEO succession and the chairman's continuing hands-on role. I will get to the bottom line first. I will offer a few words of comment. The bottom line is just as it says. We do plan to appoint a CEO or two co-CEOs before June of next year. Let me just say that before June of next year, it doesn't have to be next year. It could be tomorrow even. Between now and June of next year. The other part of the bottom line is the chairman, my continuing hands-on role. I think there's no news to you that I will continue to be chairman. Today, I want to emphasize hands-on, continuing hands-on. Let me offer a few words of comments. You remember that I came back in June of 2009. Is this loud enough?
In June of 2009. To become the CEO, I was always the chairman, and I will continue to be chairman. In June of 2009, I came back to resume CEO responsibilities. It was because I saw a golden opportunity for TSMC and also huge challenges. My pride in handling the purpose rallied pride. Once more unto the breach, dear friends. Once more. Unfortunately, the meaning of that rally cry is lost on many people because not very many people saw either the opportunity or the challenge as I saw them. As far as the challenge is concerned, many people thought that I was returning to an emerging company that saw itself as a global company. Actually, even at that point, I looked through that challenge and my gaze was already upon the two 700-pound gorillas in the industry.
As far as opportunity is concerned, very few people saw very clearly the mobile product opportunity. Of course, it's clear. I also said back in June of 2009 that I would be CEO for three to five years. Three years because I felt that was the minimum amount of time I needed to shift the company strategy and to execute. Five years because I thought, "Well, by that time, I will have done my bit. I will have really done my duty with TSMC." Almost four and a half years have passed, and I yet realize the shift and at least much of the execution of a new strategy at TSMC. I plan to follow the initial intention that I set on the five-year mark, and that's why I said that five years, which is next June, before then, we will appoint a CEO or co-CEOs.
The chairman's role. I think that many people, but not everybody, knows what the chairman's role in a company is in Taiwan. Let me just run a few statements by you. Under both the Taiwan Company Act and under the Taiwan custom, the chairman of a company is always the ultimate authority. There's no such thing as a non-executive chairman in Taiwan, and there's no such thing as an executive chairman either. The title chairman does not require any modifier, any adjective, nor does it even admit of a modifier. Chairman is chairman, and is the ultimate authority. However, not every chairman is hands-on. Many chairman, well, not many, but a few, are not hands-on. I, frankly, was not hands-on between 2005 and 2009. Now I'm telling you that I will be hands-on. Well, those are the comments that I wanted to make.
I guess we are now ready for Q&A.
Yes. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to limit the number of questions that you ask to two at a time to allow all participants an opportunity to ask their questions. Questions will be taken both from the floor and from the call. Should you wish to raise your question in Chinese, I will translate it in English before our CEO or CFO answers your question. For those of you on the call, if you would like to ask a question, please press the star then one on your telephone keypad now. Questions will be taken in the order in which they were received. If at any time you would like to remove yourself from the questioning queue, please press the pound or the hash key. Now let's begin the Q&A session.
Our first question comes from the floor. It will be [Friends of Mary Kay Merrill Lynch], Dan Heyler.
Chairman, thank you for taking my question. We hope you'll come back to participate in the quarterly. A couple questions. First, on the 16-nanometer meeting, you had made an accurate prediction of your position in '28 in two respects. You had said that TSMC would expand their lead from several years ago, and that has occurred. You'd also indicated that you would actually be, with your partners, more competitive than the two bigger foundries who were forming together. Could you offer us two forecasts of '20 and '16 on both metrics? Number one, where you would expand your lead relative to your competition in the year. Number two, where do you rest with your partners relative to IBM on 16 and 20? Thank you.
Thank you. You want to understand whether we will expand our lead in 20 and in 16.
On 20, most definitely. That's it. On 20. On 16, I think the battle is still raging now. On 20, I believe that we will start with a very high market share just like we did on 28 and so on. We'll keep that high market share for quite a while, several years. On 16, I believe that we do have the fierce c ompetitors, the littles that I mentioned. My goodness, we intend to prevail. I'm not going to tell you now that we have already won. I hope to tell you in, let's say, a year and a half, I guess. That is probably a longer one. On 16, that is the story.
Could you also follow up on that, a little bit of color on 16, because obviously it involves what TSMC does internally, and it also involves your ecosystem partners in achieving your agenda. Could you elaborate a bit on what more is going on at 16 to trigger, given how competitive it is, perhaps some intense alliances or closer collaboration with the ARM ecosystem? Perhaps more color there on how you can pull ahead.
Yeah. I think that there's nothing wrong with our competitors.
Ecosystem partners.
Huh?
Are ecosystem partners on the 16 nanometer development plan?
Without ecosystem partners. Oh. I don't think I'm an expert on that. You know who our ecosystem people are, and we do have Cliff, I think. Well, not I think. I know that we have Cliff that's in charge, responsible for that project. Working with our ecosystem partners, as you know, ARM is a very important one. Others there. Others, our EDA and the IP providers there are also very important. The more important thing, I think that our large customers don't need the ecosystem as much as the middle-sized customers. That's why the bond, our bond with the large customers becomes very important. We have really, I believe, worked very hard. Even 50 years ago, I started to say that we have three major strengths: technology, manufacturing, and customer partnership. That's true today. Technology, manufacturing, and customer partnership.
We made that kind of rotate it between the word partnership and the word customers trust. To us, it means the same thing. The large customers are most important, and they don't rely on the ecosystem as much. They do use them. They don't rely on it because they have their own special stuff. Yeah.
Thank you. That's great. Second question for Lora will be on EPS growth. Comments that you made are getting probably back about above the trend is not exceeding trend on the EPS growth. Does that require that your gross profit, structural profitability will actually increase next year to achieve that target? Or can you achieve that EPS growth with maintaining your current structural profitability? Thank you.
Hey, Dan. We are confident we can either maintain or slightly improve our structural profitability. I know many analysts are concerned about our capital intensity being so high. How can we maintain our structural profitability? I have gone through the number myself, so let me explain to you this thing. Our depreciation, about 85% of our depreciation goes through COGS. If you just look at depreciation increase year-over-year, year-over-year increase so high. Now this year versus last year is around 10%. Let's move for the third part again, to how can you sustain this profitability. And that is, when we invest in CapEx venture, actually we adding the capability to do more business. So our volume will also increase. So we divided by unit cost. Its depreciation cost actually didn't increase that much.
Other than that, since we have migrated technology to more leading edge, our ASPs will go higher, as you have seen in the past few years. In addition to that, with the continued productivity improvement from our operation people, we were able to drive the non-depreciating cost to go down on a per annual basis. That means we can maintain the profitability. Make it simple. We continue to invest in CapEx, and those capacities will utilize, and we continue drive the efficiency, and then we can maintain a good structure, so the EPS will grow. I hope my explanation is clear.
Looks good. Thank you.
Next question also comes from the floor, it will go to UBS, Jonah Cheng.
Thank you. I'm Jonah Cheng. Interestingly, for my first question, I think, last time, chairman highlighted something about the Q4 will be a big slowdown. Right now, since the days of inventory already go back to normal in end of this year, can we assuming that in Q1 next year, there will be a normal seasonal pattern, like roughly flat PC and slightly down in 2T, this kind of normal pattern? Still something we need to watch? Thank you.
Jonah, his question is whether or not we will have a normal seasonal one Q14 or
Anything different.
Yeah, anything different.
What's your idea of a normal seasonal?
Okay. My idea for normal is roughly flat to down slightly QoQ.
Flat to slightly down.
Well, it's a bit early to predict first quarter. I do want to say that with the introduction of our mobile products, the mobile products have a seasonality pattern that's different from what you described from our traditional normal seasonality pattern. So I would not rely on that normal seasonal pattern. As to what the first quarter will be, I think that it's a little too early to forecast at this point. Seasonality refers to what happens during one whole year, not what happens quarter-to-quarter. I said earlier that we're very optimistic about next year will be a double-digit growth year. The whole year. The full year. Now, if the first quarter comes in a bit low, we will have a surge in the second and third quarter that will rival our peak in Q4.
In fact, the mobile products in the fourth quarter, this time in this year, fourth quarter is a bit down, 10% down. That's mainly because of the inventory adjustment and because, as I said, of the slowing of just a few. I am sorry. I just want to use the same words I used before. I know what they are, but I just want to use the same words regarding ARM mobile products. That does not necessarily reflect the normal pattern of the mobile products. I don't know. I guess my answer for you is summarized by the following sentences. We cannot rely on the normal seasonal pattern, and we are optimistic about the year as a whole.
Thank you. My second question is about the Chairman just making your announcement during this year. Starting trying to know is for the investor relations side, can we keep hearing from you [if we met decline next year]? We can see the analyst meeting and the provider view here. That may be helpful. I want to know.
Just to make clear, you said that Chairman Chang still comes to the investors' conference after relaying the CEO position.
Thank you for the invitation. I will consider attending. Thank you. Just to show how hands-off I will be. We are expecting you.
Okay. All right. Next question comes from the floor again. It's Deutsche Bank , Michael Chou .
Hi, Chairman. One question regarding the 20-nanometer gross margin improvement. Given that you forecast 20-nanometer for the first year to faster in 28-nanometer for the first 12 months of that, can we expect the gross margin in 20-nanometer [inaudible] will be faster than 28-nanometer?
The question was, what will 20-nanometer margin look like?
Yes. You're asking what the 20-nanometer gross margin is compared to 28-nanometer gross margin. As Chairman just talked about, the ramping profile for 20-nanometer will be more aggressive than 28-nanometer. We expect 20-nanometer will contribute a quite significant revenue in 2013 Because we are still ramping for a fact, we can expect the gross margin growth will be faster, and the gross margin slope in 20-nanometer if you compare to the same period by same period. Michael, your question really is whether or not the gross margin will also improve faster for 20-nanometer than for 28-nanometer, the speed of gross margin improvement.
No. I think the answer is yes. Actually, as you said earlier, that up to this point, the 20-nanometer year-over-year improvement has been on faster pace than the 28-nanometer. There's no reason to expect that that will stop. I think it will continue the year-over-year improvement pace. That was the question?
That was the question? I'm sorry, I don't see any. How about that one? Okay. That was the question, right? Yes. Okay. The answer is yes.
Thank you. Second question is that regarding the long-term, let's say, your profit before tax policy of 10% growth. Given that the gross margin of the mobile devices should decline in terms of growth rate going forward. If you continue to improve your structural profitability, the second driver could be a bigger gross margin or it can be a lever driver for your profitability.
The driver for structure profitability improvement, what are the-
Given that overall growth, as you mentioned, structure profitability should improve.
Yes.
The [inaudible] of the mobile devices should start to see the lower growth rate. How can you absorb this new truth while you try to have your profit before tax of 10% growth?
Given the slowing growth of the smartphones and tablets, why can we still achieve PBT growth rate bigger than 10%? Given the growth drivers, which is the mobile product, the rate of growth is slowing. How can we still achieve PBT growth bigger than 10%?
Actually, you noted that in the past two years, in 2012 and 2013, our PBT growth has been higher than 10%. We had a setback in 2011, we had to make up. In 2012, we showed a slide again. The dotted line, the upper dotted line, is the 10% growth line. We had a setback in 2011. In 2012, we had to grow faster than 10%. PBT had to grow faster than 10%. In 2014, it grew faster than 10% again. Now, in 2014, I drew a kind of hazy ellipse here to show where it might fall. My expectation is that we're going to more than catch up in 2014, and we're going to do, by the time 2015 comes, I think we'll be above that. Now we're going to grow double digits, I think.
Comfortably double digits next year. Not just barely double digits, but comfortably double digits next year. Okay. It's our intention to grow our PBT proportionally. You say, how can we do that? Well, gee, that's complicated. It's a mistake to try to analyze our company one technology at a time, or one customer at a time. I run a company as a whole, and part of a company may be down, but parts are going up. I just want to be sure, that's my hang-up, that the up parts more than balance the down parts. Okay? I'm just trying to say that the mobile product growth is slowing down, and that's why maybe our revenue growth next year will be a bit less than this year. This year, it's 17%-18%, and next year may be a bit lower.
It will still be comfortably, as I said, double digits.
If I may, some comment on the smartphone growing. You are concerned about the high-end smartphone growing is slowing down. We still believe smartphones still going to grow, at least for the 10% for this next year and the year after next. The overall smartphone will have very high penetration on mid to low end. We believe the overall smartphone will grow 35% this year and 25% next year. Our market position on the smartphone field will be a very big driver for TSMC's growth. Okay. All right. I think it's about time that we should take our next question from the call. Operator, please proceed with the first caller in the line.
The next question comes from the line of Steven Pelayo from HSBC.
Great, thank you. Two questions, one very near term and one much longer term. If you could provide some more color on your guidance for the fourth quarter. Revenue's down about 10% or 11%. I'm curious, is that all segments declining? Can 28-nanometer maybe still grow in TWD? Will all segments be down? Which one would relatively outperform? Can you give us some more color and detail on both by segment as well as technology nodes, relative to your overall guidance of down about 10%-11%?
Steven, your first question is to provide additional color on the fourth quarter's 10.5% decline, whether or not the decline is all from the decline of the 28-nanometer. That's your first question, is that right?
No. Actually, my question was, can 28-nanometer still continue to grow in the fourth quarter? Alternatively, will all segments be down? Can you provide us a little bit more detail by both technology node as well as by communications, computing, consumer? Will all those segments be down or any of them relatively outperform? I'm looking for just more general color by technology and by segment on the fourth quarter guidance.
Okay. Steven, you're asking about the segment changes on the fourth quarter. Of the 10% growth decline for TSMC, we will see most decline will be in consumer segment, decline the most, followed by the computer and followed by the communication. In dollar terms, it actually is slightly down or flattish. Steven, we do not give you any guidance on a particular node, sorry. What is your second part of the question?
My next question is just much longer term for Chairman there. You obviously have a much better crystal ball than all of us, having seen the mobile opportunity in 2009. You just shared some forecasts for smartphones and tablet growth rates, falling from the 35% and 50% growth rates to the 20%-25% next year, and I think IDC is talking about 10%-15% in 2015. I'm curious, as you're looking out beyond 2014, what are going to be those next big opportunities to drive growth? Perhaps just as important, will TSMC need to spend the greater than 40% CapEx to sales that they had to over the last few years to capture whatever those opportunities you see?
All right, your question.
Before I ask you to repeat Steven's second question, I want to add to Lora's answer to his first question. All right? His first question was whether the 28-nanometer will decline in the fourth quarter, Lora didn't really answer that. Lora just said, "No." How am I answer it? Well, remember, we said that one of the main reasons for the fourth quarter decline is the high end mobile products, the slower growth. The 28-nanometer, our 28-nanometer, will decline just a little bit. All right? Not 10%. Just a little bit. Yeah. Okay.
The second part of Steven's question is how the Chairman sees our growth drivers beyond 2015. What will be the other growth drivers beyond the mobile products for us? How much CapEx will you be spending to capture those type of growth beyond 2015?
I see. Very difficult question on the outlook for beyond 2015. We made a five-year plan, I thought that was pretty far-reaching back in 2010, nobody even remembered it until today when I brought it out here. Okay. I said in my autobiography that as far as semiconductors are concerned, I am an eternal optimist. I believe that people will keep finding new applications for semiconductors. With the mobile products, the next one may well be something even more miniature and something even more convenient, like the wearables, like the watches. I think it could well be something even beyond that. I don't think one can foretell what the future holds for us in semiconductors. I know that it is good because it's a fundamental component. It's indispensable to the world, as almost food is, I would say.
Of course, you cannot go without food. In this information technology world, information technology was what drove the economic progress in the last 30 years. In the information technology world, semiconductors are indispensable, people will keep thinking about it, keep thinking of thinking up new applications. I'm optimistic about years beyond 2015, I cannot tell you what the exact application, where the exact applications will be. Was there another one, another question?
Steven, thank you for your question.
Thank you.
Now we come back to the next question comes from the floor of Credit Suisse, Randy Abrams.
I wanted to ask, you talked about the double-digit profit before tax growth. Could you talk about now your expectations on CapEx? Also, there's some talk about EUV continuing to be a bit slower, could you tell how that affects capital intensity and timing for EUV?
[Can you repeat that]?
All right. Randy asked Chairman to share your view about our future CapEx. Given EUV appears to be a bit slower, what would be its impact to our CapEx and capital intensity?
EUV what?
Slower. Delayed.
EUV delayed, slower? Okay, we'll get to that. I want to ask you for the information takeout. Well, let me first talk about CapEx. Next year's CapEx will still be high, if you want me just to give you a ballpark, I would say the ballpark is around $10 billion, okay. Earlier, I said that this year, $9.7 billion, give or take a couple of hundred million. If I give you $10 billion, I have to say, give or take a couple billion, okay? Now, it highly depends on what we see the growth opportunity of 2015 will be. All right. I do think that the capital intensity has really peaked this year. This year, the capital intensity is about 50%. We have $20 billion of revenue and about $10 billion of CapEx. I do think that 50% is about the wide peak.
Well, actually, I just met with our ASML partners yesterday. They told me just the reverse of what you just said. It's slow or something. No, I think that the EUV progress is good, and we are obviously tracking it very carefully. Remember, we are a significant investor in ASML, and we also join in their EUV R&D program. We're tracking it very carefully, and we are pretty sure that we will need it sometime in the future.
This is Paul. The reason I mentioned ASML, I think, at their investor conference, perception was throughput was improving a little bit slower because fewer tools were coming out in next year. It's the perception it would get a little bit slower path in terms of improving productivity and throughput. It sounds like by 10-nanometer, you expect EUV to start for some of your process steps.
EUV progress itself has not slowed. It had a breakthrough about, I guess, early this year. Before that, it was a bit disappointing. They had a breakthrough early this year, and since then, their progress has been on track.
Next question comes from the floor from Citigroup, Roland Shu.
Thank you. Good afternoon, Chairman. First question is, Chairman mentioned about you are going to have the second wave of 20-nanometer product adoption. Can Chairman explain more for that? Are your first set of second wave 20-nanometer product, is this coming from the existing customers or coming from the existing product? Or this is a totally new customer or totally new segment? Thank you.
Well, until about three or four years ago, our first-wave customers at any leading edge were graphics and baseband and the DRD and so on. The first wave was taken over by the IC makers, IC suppliers for the mobile products. The second wave now is what used to be the first wave. In the first wave, there are some users that are later than the first wave. For instance, the providers, suppliers to the China phone market. It's later than the IC provider to the American, European market.
Okay. Thank you. As you said, since the original first wave leading-edge technology adapters are mainly for the computers like Galaxy or the [PGD] . This time around, I think for this to become a second wave customer, I think that the adoption curve is more likely from the high-k metal gate point of view. It's not from the poly-Si, because I think that they will need more powerful devices. That means that going forward, of course, when they go for 20-nanometer, probably it is even faster than the volume growth because with this high-k metal gate adoption, they come with a higher ASP and higher cost margin. Am I reading it right, or?
I'm sorry, repeat.
All right. Roland is making a prediction that our 20 nanometer capacity will be the ones that require high-k metal gate instead of the oxynitride. Therefore, our revenue growth of 20 nanometer will be faster because high-k metal gate is more valuable.
Revenue growth will what?
On 20 nanometer.
Will be faster.
will be faster than otherwise. Yes.
Because of higher ASP on high-k metal gate.
Well, now that I think about it, you may be right.
Thank you, Chairman. My second question is on the 10-nanometer chip. Personally, I perceive Intel's 10-nanometer mass production probably will be two years after its 14-nanometer, which probably will be 2016. We look at TSMC, according to your product roadmap, now you are going to reach production 10-nanometer from 2015. Is there any chance, or what is the chance are you seeing for TSMC on 10-nanometer? TSMC probably going to beat Intel in the next production cycle. Thank you.
Would you repeat the question?
All right. Roland is also making a prediction. Judging by just recently announced Intel pushing out their 14-nanometer by one quarter to next year. That's 2014. Mass production follows in two years, that's 2016. Roland said, since we start this production about 10-nanometer in 2015, is there a chance that we will be ahead of Intel?
Yeah, you heard my question. What's the chance, if not is there a chance, what's the chance do you think we are going to beat Intel in 10-nanometer production? Thank you.
I am not going to comment on that, Roland. I'm not going to comment on that. I never underestimate anybody, I will not underestimate Intel. I didn't even underestimate any of the others, anybody that was lesser than Intel, I will not underestimate Intel.
Maybe I can ask in another way. Two questions, how long does it take for 10-nanometer from this production to next production?
Ours?
Yeah.
10.
Okay.
It's a 10. 10 is two years after what? After 16. 10 is two years after 16.
How long does it take for the risk production to come to market?
Well, that can be shorter than it traditionally was. That could be shorter than it traditionally was.
Okay. Thank you.
You know.
Okay. We do have quite a few people in the queue.
I saw Andy.
I know that there are several people waiting a long time. All right. Andy comes first.
All right. You call me-
Okay.
You call me when-
Yeah. Okay, Andy first.
Thank you, Dr. Chang. Much appreciated. I have two questions. First one is regarding earlier you mentioned Q1 next year will start your mass production, the 20-nanometer Q1 2015 mass production. This mass production is wafer start. Is that correct?
Yeah. Wafer start.
Wafer start.
The cycle time is given then, yeah. Yeah. Wafer start. Well, wafer start.
Can we say
At this minute, I think that we expect to have some revenue, I think.
Second quarter. Revenue comes from second quarter.
Yeah.
The first quarter has to be wafer start.
We now have about 3-4 months wafer start, work-in-progress time. We are going to build a lot of inventory in Q1. Can we assume-
Work-in-progress inventory.
Work-in-progress inventory. That will share some of the depreciation cost in Q1.
You're looking into deep into our accounts, aren't you?
Sure. That's a standard accounting procedure.
Yeah.
Thank you.
Yeah.
The second question is, I remember two years ago, TSMC provide 20-nanometer for 1,000 wafer investment for TWD 120 million. Can we have rough number for 20-nanometer investment for 1,000 wafer and 15-nanometer investment for 1,000 wafer?
I haven't reviewed the numbers lately, I can't give you an exact number. Design. Is that right? Are you talking about the design?
CAPEX, please.
CAPEX. CAPEX.
CAPEX, please.
Oh, CAPEX. You're asking what is CAPEX per 1,000 wafer. For what?
20-nanometer and 15-nanometer.
Okay. It's around or approximately 20% higher than 28, yeah.
Oh, okay.
28 has been reduced, I think you heard the number. Okay. Sure. I mean, it's a key parameter for us. Capital expenditure per 1,000 wafers per month capacity. It's a very, very critical parameter for us. It's also something that we would love to know about our competitor. You know. We tried very hard. We have a standing program, a standing project that we're using. When we told you about the 28-nanometer CapEx for a K per month was What did we tell you?
20%.
Huh?
420 for 20.
Oh, it was.
420, meaning year 1,000.
Oh, that's been reduced.
20-nanometer has been reduced since then, Yeah.
Yeah. The costing, and I'm saying the noun, the costing is approximately 20%.
How about 16?
30 is-
20 and 16 together.
We got them almost as one node, you know.
Okay, good. Thank you.
It's about 20%, but it's not 20% above the 120 or whatever it is because the 120 has been reduced.
Okay.
Okay, the next question will come from the call. Operator, please proceed to the next caller.
The next question comes from Mehdi Hosseini from Susquehanna. Please go ahead.
Thanks. My first question to Dr. Chang. Have you seen any changes to your Q1 volume forecast, particularly from some of your customers that have exposure to China, and specifically post the early October holidays?
Mehdi, your first question is, do we see any change in our rolling forecast for Q1 2014, given our Chinese customers' business after the Golden Week? That's right?
Yes.
Okay.
Yes, that's the question. Yeah.
Yeah, Mehdi.
That's the question.
You want to answer that question?
It's partly linked up to Chinese Lunar New Year. Of course, the one-year forecast constantly changing, and also the fourth quarter is changing. If you want to say your fourth quarter example, it's kind of fluid. We don't see much changes there. That's the simple answer to your question.
Great.
Mehdi, do you still have another question?
Yes.
Do you have another question?
Actually, for Lora, you were talking about the unit cost at 20-nanometer, pretty competitive to a 28, even though depreciation is going up by 20% plus, but unit cost is competitive. What about 16-nanometer? Would the unit cost actually go down because 16-nanometer is a true shrink compared to 20-nanometer?
I think Mehdi's question is, he wants us to comment on the unit cost between 20-nanometer and 16-nanometer. Unit cost of 20-nanometer and 16-nanometer.
Well, unit cost of 16-nanometer is projected to be higher than unit cost of 20-nanometer. You talk about cost or price?
Cost.
Cost right now, yes. It's still projected to be higher than the 20-nanometer.
Okay, let's come back to the floor. The next question I think it will come from Morgan Stanley's Bill Lu.
Hi, Dr. Chang. I'm hoping to start with a very broad question. You said earlier you came back as CEO, and it required a different strategy for TSMC. Now that we are here, in the next three to five years, do you see any changes that you need to implement as far as TSMC strategy for the next several years?
Whether we will have a different strategy for the next few years.
Any changes?
Any change.
Yes. I think not a different direction, but I think we modify our tactics almost all the time. The general direction, I think, is still the same. General direction is this is a technology. Ours is a technology business, we want in technology. However, to allow that, we have to generate enough income from the existing products, existing technologies. Therefore, we need a good structural profitability. All right. Once we have good structural profitability, we push R&D. We push R&D expenses, we push our R&D, expand our R&D capabilities to the limit. Of course, to realize all the benefits that technology leadership brings in, we also expand our capacity, our manufacturing capabilities. We expand those things. That has to be the general direction. At the same time, we wanted to make sure that we have large customers all the time.
As I said, we work every day to earn the customer's trust. All this is integrated to the whole. That general direction has not changed. As far as the tactics are concerned, they change quite often. How much emphasis do we put on one technology versus another? Particularly the specialty technologies, how much do we put on one versus another? How much really can we afford to expand R&D, how much emphasis we could put on one customer versus another? Those change all the time. The general direction does not change. The general direction, like how we described it. First, we have to have good structural profitability. You push to expand, you strengthen R&D to the limit of your affordability. To realize the benefits that technology leadership brings you expand manufacturing.
If you have listened to what I said, you will begin to understand why our R&D expenses have gone up, why we have emphasized so much technology leadership, and why our capital expenditures have gone up so much. Okay. Is there another question?
Yeah. There is a very quick one. The Stion write-off, can you talk about whether that means a change in strategy in the solar business or what exactly is happening there?
What about Stion write-off? I'm sorry that it happened, but what was the question?
I'm just wondering what it means for TSMC's solar business overall.
Amy?
I can take that one, Jimmy.
Okay.
Stion was the technology investment that we did in 2010. The purpose to build and license the CIGS technology. When we do that, we have. It's a core technology we developed ourselves, and it has been quite successful. There's no change in that front. The write-down is just because the company decided not to continue the operation. We have to take off from our books. Since we have their technology and it's protected, it's no impact to our solar strategy and business. All right. I know there are still people waiting on the queues on the call. Operator, please proceed to the next caller.
The next question comes from Brett Simpson from Arete Research.
Thank you very much. Dr. Chang, if we go back to fourth quarter 2012, I think you said back then after the first year of ramping 28-nanometer, that the gross margins were at or above corporate average. Can you just give us your impression, how do you see 20-nanometer playing out? Should we expect we get the same gross margin level, at or above corporate average by the end of 2014? What will the 20-nanometer gross margin be at the end of 2014?
That's right.
Thank you, Allen. Our 28-nanometer, it takes seven or eight quarters, the gross margin reach to the corporate average, it has happened in the first quarter of this year. We believe the 20-nanometer will follow the same pattern.
Okay, great. Just to follow up.
28-nanometer reached.
Corporate average
corporate average when?
Seven to eight.
Seven, eight quarters. She's saying that the 20-nanometer will follow the same pattern. I tend to think that 20-nanometer will reach the corporate average sooner than eight quarters. As I said earlier, the learning curve is faster up to this point than 28-nanometer. I think that will continue, and in fact, I think it's almost necessary for 20-nanometer to learn faster because the ramp-up is very fast. The ramp-up is faster than 28-nanometer. In time, it will have to take a shorter time for 20-nanometer to reach corporate average. I think it will. I cannot answer you exactly what it will be by the end of next year, because the end of next year will only be the third or fourth quarter.
I do say that the gross margin will be higher than the 28-nanometer was at its third or fourth quarter.
Got it. Thank you. Just a follow-up. I think you talked earlier about unit cost. We can all see at 20-nanometer, this is the first node you start multi-patterning and FinFET will be expensive. If you're expecting to maintain your structural profitability and the costs are rising, what do you think the impact of this is going to have on the mobile value chain? Do you think the mobile market can absorb a cost increase, or do you think that chip prices are structurally going to start rising? How do you see the ripple effect from the inflation at leading edge that's coming?
Okay. Rex has a very profound question, saying that 20-nanometer will be using double patterning and 15-nanometer will be using FinFET. Those are expensive, which will have an impact to the mobile value chain. How will the mobile product, therefore, use higher prices or cost? What would happen to the value chain?
Well, actually, I can talk for hours about this. I believe that the supply chain value price, the end price to consumers, is a pretty elastic one. That means that the lower the price, the more you sell. If you are constrained by the cost, your price will have to be at a certain level, and you sell less. Now, of course, everybody wants to push it to a lower price so that they can sell more. It's not a simple matter of being able to afford it or not being able to afford it.
Thank you very much.
All right. I think.
There is a matter of competition. We just want our cost to be lower than competition. I come back to the story of two people in the camp, and a big bear is approaching. The first person quickly puts on his running shoes. The second person says, "What's the use? The bear is going to outrun you anyway. It's going to run faster than you anyway." The first person then starts to run, and before he departs, he says to the second person, "All I have to do is to run faster than you, not the bear." On this pricing costing, all we have to do is to run faster than the competitor.
Okay. On the board, there are a couple of media people in the back, and they are raising their hands. We'll give you the microphone, but you please identify yourself. This is the last question.
Okay. I enjoy this, but I think that every good thing, every piece comes to an end.
Good afternoon. I'm from Reporter from Yiding TV. I just have two questions for you. The first question being that you have gone quite in depth of the TSMC outlook in the fourth quarter and the first quarter in the next year. People are quite concerned the current economy and with the complications in the U.S. Would you like to share your wisdom on maybe the next year's economy outlook, and if it's pessimistic, what would affect your expectation of TSMC in the next year?
Global economic outlook for next year? Oh, my goodness. I don't know what our company official forecast is. Our company forecast that this year it's 2.5% global GDP, and next year it's 2.8% global GDP. Global. That's kind of consistent with my view. I think that things are slowly improving. I think the U.S., in spite of the short-term problem which I think probably faces a pretty quick resolution. The U.S. is on recovery path. I look at the new job creation, I look at the housing prices, those are the two main things I look at, new job creation and housing prices. The housing market really. Those things tell me that the U.S. is on recovery, continues to be on a recovery path. Europe, I think, actually is not doing any worse anyway. Japan, I think, is doing better.
China, I think, is going to be successful in a soft landing, you might say. I think I'm optimistic. Intuitively, I think that the 2.5, 2.8 forecast, which means that next year will be somewhat better than this year. Intuitively, I think it's about right.
Okay, thank you. My second question being that, of course, Chairman Chang has just talked briefly about when the CEO succession will be announced. People are quite curious about who would be in line. Would that be a current Chief Operating Officers in the company, or can we expect someone outside of the company?
The logical candidates are the two COOs. I think those are the logical candidates, yeah. Was there another question?
Yeah. Thank you.
Okay. As Chairman said, all good things must come to an end, we will end here. Before we conclude today's conference, please be advised that replay of conference will be accessible three hours from now. Transcript will be available within 24 hours from now, both of which will be available through TSMC's website at www.tsmc.com. Thank you for joining us today. We hope you'll join us again next time