Welcome to TSMC's 3rd Quarter 2012 Earnings Conference and Conference Call. This is Elizabeth Sun, TSMC's Director of Corporate Communications and your host for today. Starting last quarter, we have combined the quarterly earnings conference with the conference call and the event is webcast live via TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dial in lines are in listen only mode. As this conference is being viewed by the investors around the world, we will conduct the event in English only.
The format for today's event will be as follows: 1st, TSMC's Senior Vice President and CFO, Ms. Laura Ho will summarize our operations in the Q3 and give you our guidance for the next quarter. Afterwards, TSMC's Chairman and CEO, Doctor. Morris Chang will provide his general remark 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 now from TSMC's website at www.tsmc.com. Please also download a summary slide in relation to today's earnings conference presentation. Before we begin, I would like to remind everybody that today's discussions 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. And now, I would like to turn the podium to TSMC's CFO, Ms.
Laura Ho.
Good afternoon, good evening, and good morning, everyone. Thank you for joining us this afternoon. Today, my presentation will start with the financial highlights for the Q3 and followed by the outlook of the Q4. I am pleased to report a record quarter for TSMC in both revenue and net income, thanks to customers' strong demand from mobile computing applications and our leadership in technology. 3rd quarter revenue increased 33% year over year and 10% sequentially to reach NT141 billion dollars exceeding our guidance.
The better than expected revenue was due to higher shipments to support China smartphone demand and higher mask and back end revenue. On the profitability side, 3rd quarter gross margin was 48 0.8%. Operating margin was 37.2%. Both are better than our guidance. The higher margin was due to higher utilization and a better product mix and higher yields.
Total operating expenses dollars increased slightly in 3rd quarter. However, as a percent of revenue decreased to 11.6% on a larger revenue base. Overall, our 3rd quarter EPS was TWD1.9. ROE for the single quarter was 30.3%. Let's move to revenue by product segment.
During the 3rd quarter, wafer demand for mobile computing devices continued to be strong, leading to double digit growth in communication and industrial related segments, while demand for computer and consumer related products were relatively soft during this quarter. We are happy to see the good progress of our 28 nanometer. 28 nanometer revenue and shipments more than doubled during Q3 due to solid customer demand and excellent execution. The contribution to total wafer revenue has increased from 7% in the 2nd quarter to 13% in the 3rd quarter. We expect 28 nanometer revenue will exceed 20% of our total wafer revenue in the 4th quarter and will be more than 10% for the whole year.
Taking a look at the balance sheet. Cash and marketable securities ended the quarter at TWD148 billion, down TWD40 1,000,000,000 from the 2nd quarter. Current liability decreased by TWD93 1,000,000,000, mainly due to the payment of TWD78 1,000,000,000 cash dividend in July. Taking advantage of the low interest environment, we raised NT40.6 billion dollars in corporate bonds at an average interest rate of 1.33%. Our total long term debt, interest bearing debt has increased to TWD78 1,000,000,000.
On the cash flow side, we generated TWD77,000,000,000 from operation in 3rd quarter, invested $78,000,000,000 in capital expenditure, paid $78,000,000,000 for dividend and raised RMB41 1,000,000,000 through corporate bonds. Overall, our cash balance decreased TWD40 1,000,000,000 to TWD139 1,000,000,000 at the end of the 3rd quarter. Due to more capital expenditure, the free cash flow in the 3rd quarter was a negative RMB1.7 billion. Let me make some comments on our capacity plan. As we continue adding capacity for 28 nanometer, our total capacity has increased 5% to 3,800,000 wafers in the 3rd quarter.
We expect 28 nanometer will be fully utilized. For the full year, our 12 inches capacity is expected to increase 21% in 2012 and total annual capacity for the company will increase 14% to reach 15,000,000 8 inches equivalent wafers. Regarding capital expenditure for this year, up to the Q3, we have spent US6.2 billion dollars representing 75% of our total year budget. I have finished my report on the financial highlights. Now let me turn to the Q4 outlook.
Based on our current expectation and the forecast exchange rate of 29.47, we expect our revenue to be between TWD129 1,000,000,000 and TWD131 1,000,000,000. In terms of margins, we expect the 4th quarter gross margin to be between 45% 47% and operating margin to be between 33% 35%. This concludes my remarks. Let me turn the podium to our Chairman and CEO, Doctor. Morris Chang.
Good afternoon, ladies and gentlemen. For the Q3, we had a record quarter in both revenue and net income as Laura has already reported. 4th quarter as guided is going to be a modest dip about 8% in revenue. We also think that this will be followed by another modest dip in the Q1 and we expect a rebound in the Q2. All this we actually predicted 3 months ago.
The 4th quarter dip and the 1st quarter dip is caused by supply chain inventory adjustment. Right now, the days of inventory, DOI, is about 13 days above seasonal. We expect that it will be adjusted to 7 days above seasonal at the end of the year. And then it will become normal in the Q2 of next year. That is consistent with our prediction of 2 dips caused by inventory supply chain inventory adjustment.
Now both our 3rd quarter and our 4th quarter are better than our expectations 3 months ago. 3rd quarter, we did exceed guidance And even though 4th quarter will have a dip as we forecast now, but it's a dip from a higher level than we forecasted 3 months ago. Why? We think the reason is the strength of mobile product demand. First mobile IC demand is indeed very strong, stronger than we expected a year 3 months ago.
Secondly, TSMC is foundry leader in mobile IC. And together with our partners, we are the technology leader in mobile IC. This is a leadership that we and our partners will continue will maintain. 3rd, TSMC value added increases as smartphones get smarter and feature phones get smart. We expect mobile products to fuel TSMC growth for a number of years, a number of years.
Next, I will talk about a few product segments. 28 nanometer. In the 3rd quarter, it was 13% of our revenue. In the 4th quarter, it will be higher than 20% of our revenue. And for the whole year, next year, we expect it to be more than 30% of our revenue.
Yields have continued to improve and the gross margin of the 28 nanometer will be in the low 40s low 40% in the 4th quarter. And it will be in 2013, it will be at corporate average. Another product segment are CMOS image sensor. We have made significant improvements in optical performance. And dual cameras and higher resolution sensors have been introduced in smartphones and tablets as an example of value added increase in mobile products.
Next, another example of value added increase in mobile products, PSMC value added increase in mobile products. And that's the fingerprint authentication and near field communication. On 20 SoC, 20 nanometer SoC, Our 112 megabit SRAM yield has progressed significantly and we are now accepting customers' test ships. In fact, we have already accepted several customers' test chips and are accepting more. On 16 FinFET, we plan to accept test ships in Q1, next quarter, Q1 2013, next quarter.
And then in June of next year, we plan to have the 1st cyber shuttle. And then in November of next year, we plan to start risk production. This is a somewhat faster cadence than our previous generations. And one big reason for that is that basically 2014 are quite alike. The interconnects are very, very alike, of course.
16 is FinFET. That's the big difference. But other than that, there are many similar aspects. And so we will be able to introduce
16
quicker, a lot faster than normally we introduce a new generation. Another point that's worthy of note along with our development of 20 SoC and 16 FinFET That's that our Open Innovation Platform, OIP, which is our design ecosystem. It is becoming a more important competitive advantage as the technology advances to 20 nanometer. At 20 nanometer, our competitive advantage in our design ecosystem is greater than in 20 nanometer or earlier generation. Our customers rely on us for design exploration, solution development and design validation.
Next item I want to report is that we did invest in ASML to the tune of 1.1 approximately 1,100,000,000 Of the €1,100,000,000 a quarter is in R and D sharing and 3 quarters are investment in this box. The R and D sharing will be spread over a 5 year period starting in 2013. This investment is important to us because of EUV and 450 millimeter lithography, both of which are important to us at 10 nanometers and beyond. Next item I want to report is that we have purchased 14 hectares of land in China. It's about 20 minutes of driving from the science park in Hsinchu.
So it's really very nearby. And the reason it has to be nearby is that we're using the land for our new advanced R and D fab. And that R and D fab is going to be for 4 50 millimeters and 7 nanometers development. Next, we expect 2013, 2014, 2015, 2016, those 4 years to be either growth years or strong growth years. We believe that the strategy we adopted a few years ago of vastly expanding our R and D and our capital investment is beginning to pay off.
Actually, you can already see it from the last couple of years' results. But more is yet to come. The best is yet to come. And we'll continue the R and D expansion. Now on capital expenditure, I will make separate comments.
Capital expenditure will be about $8,300,000,000 this year, which is right in the middle of the range that we guided a few months ago. We said $8,000,000 to $8,500,000,000 and it now appears that it will be about $8,300,000,000 this year. Of course, the resulting cash flow stream from this capital expenditure is going to be much greater, much greater than the capital investment. I will give you a ballpark number for next year's capital expenditure now. It will be the same ballpark as this year's capital expenditure, Same ballpark.
Just to preempt the question of how big is your ballpark. Well, my answer is, it's neither very small nor very big, okay? It's in the same ballpark. I think that you can use this common sense. I'm a very commonsensical person.
I'm not trying to play any tricks on you. We plan to do more borrowing via corporate bonds. Actually, our net cash flow from operations in the 3 years 2012, 2013, 2014. I'm talking about a 3 year period. Our net cash flow from operations in those 3 years is sufficient to support our CapEx in those 3 same years.
I'm going to let that sinking a little bit because that defines another boundary for our CapEx. So why do we borrow money? We borrow money to pay dividend, which we will keep at $3 per share in this period. That concludes my comments. Thank you very much.
Thank you, Chairman. And this concludes our prepared statements. Before we begin the Q and A session, I remind everybody that please to limit the number of questions that you have to 2 at a time, so that other participants have opportunities to ask questions to the management. Questions will be taken both from the floor and from the call. Should you wish to raise your question in Chinese, I'll translate it to English before our CEO or CFO answers your questions.
For those of you on the call, if you would like to ask a question, please press the star then 1 on your telephone keypad now.
Would you translate into English a little bit?
Rui Lin's question is about the near term outlook where Chairman had once said last quarter that Q2 next year we will see a rebound. So he would like to
know a little bit more color
in terms of the strength of that rebound for Q2 next year.
Well, it's just like my comment earlier that Q3 and Q4 are actually better than we forecast 3 months ago, even though we are still forecasting a dip in the Q4, because it's better than we forecast 3 months ago, because we are dipping from a higher level. So to your current question, I said I think that your present question is I said 3 months ago that the second quarter will be a strong rebound. And I'm you are a very alert person. You had noticed that I did not use the word strong this time. Is that the origin of the question?
Well, my answer, however, is that I did not use too strong because we are now talking about a higher level in the Q1. So it will be a rebound. In fact, in some people's eyes, I think it will be viewed as a strong rebound. But I think that we've got to I decided not to be too aggressive on this sort of things. So I say it will be a rebound.
We're still working. I mean it's still 2 quarters away frankly, even though I think our visibility is in general quite good, but 2 quarters away, we can't be sure exactly what the strength of the rebound is. But I know I am 100% certain that it will be a pretty good rebound. Higher revenue base that we predicted pretty much.
Yes, that was my point. Okay.
Thank you. I think my second question is regarding the 20 nanometer and the 15 nanometer.
Well, on 20 nanometer's performance, I want to give you the numbers, the correct numbers that our technical people have given to me. The performance gain from 28 to 20, that's your question, right? From 28% to 20% the performance gain is 15% to 20% at the same total power. And the power reduction is 20% to 25% at the same speed. You got that?
15% to 20% performance gain at the same power and 20% to 25% power reduction at the same speed. Now I know that some customers want more. But one phenomenon that we have faced is that customers are consolidating. The bigger customers are bigger than the other customers than big customers used to be bigger than other customers. All right.
So evidently, I was rereading a passage of Michael Porter's classic competitive strategy just the other night. And he said that there are 5 things that every company has to cope with. One of those things is customers' bargaining power. Another thing is suppliers' bargaining power. And I'm glad to report that after looking over those findings and thinking about each of them in relation to us, we have come out I think pretty good overall.
But your question reminds me of customers' borrowing power and also customers' relative importance. So all right. So here there may be a larger number of customers that want more performance or less power than their customers who are already satisfied with them. But it turns out that those that are already satisfied with them buy more than the ones that want more.
Okay. Next question goes to Deutsche Bank, Michael Zhou. Right. Michael's question is, given that we began risk production of 16 things that at November 2013
when
our risk production of 16 nanometer starts November 2013, when will we start mass production for 2016?
I think it will be approximately a year later. Yes. CoWatts will be used with the 20 nanometer part. In fact, it's already being used with the 28 nanometer part. But the revenue is still relatively small.
And as I said, technically it's progressing fine. We're trying to reduce the costs more. The revenue would there will not be significant revenue until 2015, 2016.
Next question goes to Credit Suisse Randy Abrams.
Talk about how customers are weighing, choosing 1 versus the other, if you could talk about the benefit?
And also, do you
expect customers to choose 1 versus the other or a number of customers to migrate to both?
We do. We talk to every one of them. We talk to every one of them, every major one painstakingly, explain to them painstakingly and exhaustively. Now the smaller customers we of course do it in the technical symposium. We hold 3 or 4 of every year.
Yes. So is that your question? Do we expand to them the pros and cons of 2016? It's
more just a few usually it's 2 years between each node.
Cost? I think that there will be customers that will go light on 1 and heavy on the other. And there may even be customers that will skip 1, skip 20 to get to 16. So right now we're still in the discussion stage with a number of customers with a number a pretty large number of customers. But again, going back to my earlier point, we would not be making this kind of investment if we didn't have some very big customers already in view.
My follow-up question, you mentioned CapEx has been the same ballpark for next year. Could you talk about the financial, how we should factor in CapEx in that ballpark, depreciation expense in the next year, interviewing structural profitability in light of that?
Laura, would you answer that?
We have now finalized the next year's CapEx, although Chairman talked about it will be in the range of the ballpark. Can see this year the depreciation has increased by about 20%, maybe a little bit more than 20%. With the ballpark that Chairman was just describing, I believe the depreciation will also increase at maybe 20% level for next year. But I don't want you to be scared by those depreciation increase because depreciation increase is not a problem. As long as the capacity that we invest getting utilized and those products get the very similar or better structure profitability, so you will not see a deterioration factor to the overall margin.
It is our strategy to have 100% utilization at the leading edge.
All right. We will now take our next question from the call. Operator, please proceed with the first caller on the line.
Your next question is from Hedi Hosseini from Susquehanna International.
Thanks for taking my question. First one has to do with your commentary on Q1. You referred to it as a dip. Is the dip similar to Q4 level?
Whether or not the magnitude of the dip in Q1 will be similar to the dip in Q4?
It will be in the same ballpark. The magnitude of the dip will be well, look, I would really hate to normally we don't really guide 2 quarters ahead of us. But last time I did give a rough indication of Q1. Now so I really would hate to make a habit of it. But since you asked now I will honestly I try to answer you as honest as I can.
I think it's about this in ballpark. We have a what we forecast now to be 8% in the Q4. And Q1, I think, will be in the same ballpark. But it's really a bit early for us to tell. Certainly
And then the second question has to do with the 20 nanometer and the tape out. How should we think about the number of tape outs or the level of customer interest as you are installing the pilot line?
The question is how many takeouts on 20 nanometers that we have already received?
I think currently the 20 nanometer PayPal is roughly maybe around 50 Paypaws, which is maybe 1 5th of our 28 nanometer PayPal.
And then the pipeline, should I assume that pipeline will be constructed and ready by summer of next year?
I can't hear you very clearly. Can you repeat that again please Mehdi?
Sorry about that. And just to be clear, the 20 nanometer pilot line should be constructed and ready to go by the summer of next year. Is that correct?
The 20 nanometer pilot line is yes, Laura?
We have started to spend money on 2020 since this year. However, the real production will not start until 2014, but we do have an engineering line per se being built up this year and next year.
Great. Thank you.
Okay. Now we're coming back to the floor. The next question goes to Bank of America Merrill Lynch Stan Hyler.
Thank you, Elizabeth. Thank you, Elizabeth. Thank you, Chairman and Laura for the great introduction, comments and color on your products. I wanted to follow-up on a question I had last quarter a bit on the idea of perhaps building kind of more of a focused fab approach for some of your largest larger customers versus the very diversified fabs that you currently run. I guess as you look at some of the largest mobile chip users in the world, you look at the product cycles can be quite volatile with some huge swings on new product cycles back and forth.
I'm wondering as you manage those fabs, should we anticipate perhaps more volatility in those fabs versus your very diversified fabs? Granted, you're getting new business, so perhaps it's good that you're generating more revenue, albeit perhaps with more volatility? Or do you think you can achieve kind of the same level of returns on a focus fab versus a broad based diversified fab? Thank you.
Well, to summarize Dan's very long question is the comment Chairman made last quarter about dedicated fabs for customers. Chairman made the dedicated fab comments. And so Dan's question is, given single product lifecycle product lifecycle could be more volatile than a diversified pool of products. So if we have fabs that are dedicated to 1 or 2 single products, we have to be able to manage higher volatility or Chairman thinks that the volatility will be about the same. Volatility, more volatile.
Specifically big new product cycles that could take 2 quarters to ramp and then go away. Thank you.
Try to figure out what you really want to ask. You appear to be concerned that if we dedicate fabs to a certain customer then that customer may leave the fab because he migrates to a more advanced technology. Is that right? Yes. Or a
group of products that are dedicated to Indeed. Thanks.
Yes. Well, then it's I think it's very important for us to be able to convert to a new technology to convert the fab to a new technology with as little loss as possible as well. And I think that's an odd that the DRAM companies actually have learned. And we have also done some of that, but we are going to do the same thing the DRAM companies have done in the past. And we're trying to make the product development as commonly usable as early as possible.
I think that now of course we do have an additional advantage because we do have a very large second wave of users. We have always had that. We have always had that. And so in the past, the 2nd wave users have always begun to take over the perhaps that the first wave users leave behind. And we'll continue to have that.
Now I do want to clarify this business of educating fabs. Well, I don't think that one should take that literally in many cases. There may be or there will be very rare cases when we would dedicate something to a customer, But that's not going to be a very common practice.
And I guess I'll take a follow-up to that. I guess the distinction being that your second wave adopters in the past were quite mainstream and quite broad based. So if you're pushing the Frontier technology quite a bit ahead, I'm wondering if there's a concern that that maybe n-one group may come later and hence perhaps the returns on the most advanced whether the second wave adoption is sufficient as in the past to generate the higher returns?
Yes, we generate a lot of returns from 2nd wave and 3rd wave and 4th wave. And I mean it, 4th and 5th wave. Yes. Look, we're still running fab 2 and it's full more frequently than it's not. Okay.
By the way, Fab 2, in case we have forgotten, is 6 inches half micron, half micron.
Okay. So no you anticipate no change in the timeline between the early adopters and the second wave adoption, even though you're putting your technology very, very leading edge that that second wave will continue to be quite strong even with concentrated customer base and even with a very mobile focus. Okay. Thank you very much.
All right. Next question goes to Goldman Sachs, Donald Lu.
I have two questions. First is on the structural profitability. Kevin, you commented earlier that 28 nanometer margin will improve in the first half
Well, we hope that it will be 50%, but 50% is something that we have very rarely done frankly. So to assume that corporate average is I think the 100% utilization is 50%, we don't do 50%, yes, right. But we're talking about corporate average next year. And next year, as I already said, we're going to start off with a not very good quarter. So next year's corporate average utilization is not going to be 100%.
Sure. And then in assuming
the utilization is pretty different.
In Q3, I think utilization is a little bit over 100%, Gross margin was 49% and 48.6%. So next year we'll be improving
Your question is about 28 nanometer, right? Is that right?
Yes. I mean 28 would be the key factor
impacting this. Yes.
Well, actually, I mean, I really have a simple answer for you. If you're asking about our total the whole company's structural profitability. I have a simple answer. It is a challenge every year, but we have so far managed to at least maintain it. And we actually have eked out a little progress in the last few years.
And you can tell from the results, we have eked out a little progress, but it's a challenge every year. But it's we consider it to be our major challenge, a major task and we are going to at least maintain this structural profitability. It cannot be allowed to deteriorate.
Yes. Follow-up question on this is after 20 nanometer presumably will do double tightening, the cost will increase.
We will reduce the cost. We reduce the cost. I don't think it's a question of full pace. It's never a zero sum game. We reduce the cost.
And as you may or may not have noticed that our average rate of decline of price has slowed down in the last 3 years. It's still going down, but the rate of decline has slowed down. I can't really don't want to tell you anymore.
Okay. I think we will go back to the call and have the next question come from the call. Operator, please proceed.
The next question is from Brad Simpson from IRAD. Please go ahead.
Yes. Thanks very much. I had a question for Laura just on the gross margin guidance for Q4. Can you maybe talk a little bit about how you see depreciation moving Q on Q and whether there's any changes ahead in other manufacturing costs per wafer? The guidance seems to imply there's some savings in cost of sales.
So I just wanted to understand that more. And then the second question for Doctor. Chang. Regarding the trend towards COOS and TSV, when we think about your wireless customers moving to these new packaging technologies, how do you engage with memory as part of this road map? And is there a need for a more strategic partnership with DRAM makers?
And given there's so few mobile DRAM makers out there, how do you really manage this with your leading edge wireless customers going forward? Thanks very much.
Brett, I think your first question is for Laura and your question is with respect to depreciation quarter over quarter increase and how that is impacting the cost. Is that correct?
Yes. And also whether there was any changes in other manufacturing costs per wafer.
All right. How we can change the other manufacturing costs for the wafer manufacturing costs, other manufacturing costs. Yes. Okay. Second question, Brett, I think you need to clarify.
You asked Chairman about TSV. And you are talking about 3 d IC packaging solution using TSV and with a memory partner, right?
Yes, exactly. Okay.
We'll have Laura answer your question first.
Your first question asking about quarter over quarter change of depreciation. Now we're in the Q3 now. The Q3 depreciating for for the whole quarter is around TWD 35,000,000,000. We estimate the next quarter, 4th quarter depreciation will be a little bit more than TWD 36,000,000,000. So each quarter will increase slightly.
You also asked about how will we reduce the non depreciation costs? To be frank with you, we have taken a significant effort in the past 2 months trying to reduce the all other costs, including the material purchase price, the indirect material use for the wafer, continued effort in TSMC, especially when we see the continued 2 quarters in the downturn and the management team has put a lot of effort trying to reduce that. And so far, we have been quite successful in doing that.
Great. Thank you.
So Brett, could you please repeat your second question a little bit slow?
Okay. So when we think about the move to 3 d packaging, particularly from a wireless perspective, how do you engage how does TSMC engage with memory as part of this road map? So is there a need for a more strategic partnership with mobile DRAM makers? And how do you manage this with leading edge wireless customers?
Okay. Your makers to form a strategic alliance and how we manage that?
Yes.
Is that right?
That's right.
Okay.
Yes. We have been in active collaboration with 2 memory makers, Hynix and Micron. So actually we started the discussions with Alpida, but then they went bankrupt. But we're having an active collaboration and discussion with Hynix and BiPAP.
Okay. Now we are coming back to the floor. And the next question goes to you are in Daiwa now, right? Daiwa, Eric Chen.
Okay. Actually my first question probably go to the lower. Once you talk about the depreciation expenses for next year probably jump by 20% year on year, what kind of CapEx you assume? Is the freight CapEx trend or up the CapEx? How many percent?
You're asking a question that I cannot answer. It's in the ballpark of Chairman just mentioned. I see. Okay. Well, of course, this is very preliminary because we are still in 2012, the number may change.
So I just give you a range of based on a range of bulk costs in the 20% range. I can only say that. It can be a little bit higher, it can be a little bit
Okay. Let's talk about consensus CapEx. And for the TSMC next year, probably around the RMB10 1,000,000,000. If you like the case, let's talk about all the EBITDA for next year. And I guess probably around RMB11 1,000,000,000 to RMB 12,000,000,000.
And we look at and then we look at the cash dividend and we probably have to give like US2.6 billion dollars So if life is the case, can I assume you are going to borrow like US2 $1,000,000,000 as a covered bond?
Chairman just mentioned, we borrow to pay dividend. Every year we pay $2,600,000,000 dividend. So 3 years is 2.6 times 3. So we are planning to do that much of borrowing in 3 year timeframe.
Okay. Are you talking about the borrowing for the coming 3 years? Yes. Including this year. Okay.
Thank you. And my second question probably I needed an answer from the Chairman. The Brian Wright and I remember you talked about the year 2013 to year 2016 will be very strong and strong for the semiconductor, strong for you. If they're strong, those
4 years will be either growth or strong growth.
Okay. What kind of strong growth you're talking about? The more You tell me, you tell me. Okay. I will say 20%.
20% strong, yes. Okay. Yes, I more or less agree with that. Those 4 years will be either growth or strong.
Okay, I see. Actually, I would like to get an idea what's your logic behind. What kind of product, what kind of the trend you've seen the TSMC on the very good presentation and to catch up this kind of high growth? Okay.
And basically, I think it should be clear by now that we are our emphasis is on mobile product market segment and also leading edge technology And whatever goes with leading edge technology like 3 d IC and whatnot.
Okay. I see. Okay. Thank you.
Next question goes to JPMorgan, Rick
Xu. Yes. Thank you. Hi, Chairman. Just one question for me.
Can you talk a little bit about next year's outlook on a macro basis? First of all, your macro economy forecast and the global semiconductor industry forecast, global foundry forecast and also how this will perform relative to the global foundry average.
This year the semiconductor actually is a negative growth about 2%. Based on what we have seen next year forecast, semiconductor will grow about 3% for next year. And what's your other questions?
The foundry growth and also how TSMC will perform relative to the foundry average. Average?
Okay. We currently expect foundry will grow around 7% in 2013 and TSMC will all grow foundry in 2013 as well.
Well, semiconductor growth, I know that you are interested in it and we also keep track of it. But frankly, the total semiconductor growth is becoming less and less relevant to our growth plan. And actually the total foundry growth while still relevant, but also is becoming less and less so. We feel that we are on a level in foundries by ourselves.
Thank you.
Next question goes to Barclays Andrew Lu.
The first one. I'm sorry, I didn't hear you.
I say congratulations to Doctor. Chen and TSMC to get the most important order from your competitor. My first question, in the past 25 years, TSMC keep its value proposition to keep most of the time hourly over 20% and surely maintain good margin. While you take a lower margin order to below the corporate average ROI in the next 1 or 2 years, but actually
think that TSMC's strategic position in the next 5 to 10 years,
which means some of 5 to 10 year position, we are willing to But for 5 to 10 year position, we are willing to take this kind of low margin order in the beginning time. That's my first question.
I'm sorry. I didn't really hear it. I didn't understand it anyways. Andrew's
comment was that we in the past said that we want to keep above 20% ROE. And we his question is will we be willing to take lower margin business for a short time like 2 to 3 years in order to improve our strategic position in the 5 to 10 years.
Low margin products in the 1st few years in order to improve our later position? Are you asking a philosophical question my own philosophy? No, I do not do it, because I have to live the next few years first, okay? I do not. That's the personal philosophical answer.
All right.
Thank you. The second question I have, if your mobile customers are not adopting adopting co works in 2014, because earlier Doctor. Chen mentioned co works won't ramp up until year 2016 or 2016 to have a revenue contribution. So are you ready in house packaging on packaging or you need to partner with some other packaging house to do the POP? Thank you.
I think that we are going to be partnering. We are going to look at both possibilities. Of course, we prefer to do it ourselves, but I think that we have become more flexible in partnering with OSATs. Is it OSAT? Yes.
Yes. OSATs.
I think Dan will have a follow-up question. Dan Heiler from Bank of America Merrill Lynch.
Just very few.
I thought you asked this question.
This is a follow-up.
Very short housekeeping question for Elizabeth. You can take a break and I'll keep it short. So could you walk through industrial your industrial products, what's in that category? I think I heard you say earlier, communications was strong. And I think I kind of heard some of the communications and multiple related strength was also helping drive industrial too.
So I wanted to understand what's in the industrial that's growing so strongly? Thanks.
Laura, will you answer what is included in industrial or you
It's growing strongly.
Many things including industrial such as power IC, MCU, data converter, flash controller, PLD, MANS and smart car.
You're not putting the power management in communications?
No. Okay.
Because it's generic, it's standard.
Okay, got it. And the second classification, I think perhaps I wanted to ask on your definition of foundry. Obviously, the lines are getting blurred now. I think most of the capital equipment companies include Samsung in their concept of foundry. I know that it's both an IDM as well as a foundry as well as an equipment company.
So perhaps in your definition going forward whether or not you could talk about foundry growth incorporating your largest competitor Samsung when you're talking about forecast? Is that something that you would entertain? Thanks. You're frequently talking about a semiconductor forecast, which in fact is not relevant to your forecast. What is important is your perception of the foundry growth industry, but your forecasts are excluding Samsung.
I'm wondering going forward if we could have your forecast of the foundry growth including Samsung. Thank you.
I don't think our forecast excludes Samsung. I think for Samsung's semiconductor part, non well, for semiconductor, we even include Samsung's memory. And for the semiconductor X memory we include Samsung's system LSI in our forecast.
Thank you. This is his question whether our boundary forecast includes Samsung? I think it does.
Yes, we do. Yes, it does.
Just Samsung's foundry business or their logic business overall?
They're what? They're logic business. Overall, okay. They're logic business. Well, I don't think they do any memory foundry, do they?
They have their
own products in logic. They also sell products into the merchant market and they also have a dedicated foundry business.
I think our numbers include their Samsung's our foundry numbers include Samsung's foundry numbers. Now if they make the products for themselves, then we don't include that. That's right.
Perfect. Thank you.
Next question comes goes to Citigroup's Roland Xu.
Thank you. Trends in your 3Q, how about the momentum in 4Q? And what's the application for this new photo market in 3Q? Thank you.
I think this question coming from we have said 3rd quarter revenue was exceeding guidance partly because we have higher mask revenue, right? Looking at Q4, mask revenue overall will be less than Q3, will be a decline in mask. However, the new tape out mask did not will not decrease. It's the repeated tape out will reduce a little bit. And mask business has been a very good business for TSMC and it has very good margin as well.
Another follow-up question coming from the floor that goes to Goldman Sachs, Donald Lu.
Can I take the opportunity maybe asking more long term questions? As more flow going forward 2016 nanometer, from your discussion with your customers, do you think the absolute growth of the high end revenue, the leading edge revenue will continue to grow at the same
I think yes. The leading edge revenue for each generation of leading edge will continue to grow as Moore's Law progresses. For instance, our 28 nanometer revenue is while its leading edge is now ahead of 40 nanometer at the same stage. So I anticipate the 20 nanometer will be the same way. So I think that will continue.
Now of course, I mean, you've been asked about nobody asked about how important EUV is, how important 4 50 millimeter is. They are very important. I mean EUV, I think is the only economic way of doing, I won't say 10, but surely it will be the only economic way of doing 7. Even the 10, if we have a good EUV, a high throughput EUV, I think that our cost will be in good shape, will be in better shape. Of course, we can use double patterning, triple patterning, quadruple patterning, but those we would like to avoid.
And to avoid them depends on getting ASML to succeed with their high throughput EUV. Now likewise, 450 millimeters that's going to be another impulse on cost reduction, I think. And I think that will cut in at 4 50 millimeter, that will cut in at 7 nanometer. It may cut in earlier. I think Intel is talking about cutting in at 10 nanometer.
But my feeling is that you were cutting at 7.
Donald, okay. In the interest of time, I think we will just allow one last caller and we'll give the venue to the call. Operator, please proceed.
The next question is from Steven Celia from HSBC.
Great. Thank you. Just a question on 28 nanometer. TSMC is much larger than its competitors. It's going to have 20% of revenues in the Q4 from 28 nanometer when many of your smaller competitors are still struggling to get their first 5%.
So for now you're just dominating this space. The competition is trying to get more aggressive there. I'm curious what you think about the total capacity out there and if the competitive environment is going to be more intense maybe by mid next year at 28 nanometer. Do you
have any thoughts on that? The total industry foundry industry capacity on 28. Well, I think it's quite large. But frankly, I think that in well, I know that in Oxinitride, which is equivalent to our 28 LP. Our 28 LP is Oxinitride.
I think that our competitors also have produced pretty good yields, not nearly as good as ours, but good enough for them to sell. I think so. But on the high key metal gate, which is our 28 HP and our 28 HPM, I think that we will be the only one that has effective capacity. Effective capacity, I mean capacity that you can sell that customers will accept. I think that we'll be the only one on 28 nanometer high ks metal gate for quite a long time.
And by that I mean 2 years maybe.
Okay. And then one follow-up question, which is, I'm curious about your customer discussions going on now. The perception is that Samsung is probably going to have some free capacity available maybe second half of 2013, 2014 and maybe they're starting to engage more of your traditional customer base. Are you hearing that back from your customers that the potential that they may be being offered capacity elsewhere?
Question is Samsung may have extra or free capacity at 28 nanometers starting 2013 2014. Have we heard anything from our customers that Samsung has approached them and want to engage them?
So they will use that excess capacity to invade our customers. Is that your question?
That's my concern, yes.
If I were Samsung, I would certainly do it. It's a question of whether we can prevent them from successfully doing it. And certainly, if you want me to predict the outcome, I will predict to you. But you have to wait for a while to see the final outcome. I have no doubt what the final outcome will be.
Stephen, this is a very cheerful answer to your question quarter. Thank you and goodbye.