Simply amazing. After spending the week at the Design Automation Conference and Semicon West I have never been more positive on the semiconductor industry, absolutely. Long term I see no issue with semiconductor supply and demand. TSMC will grow 35% this year! In 2023 my guess is half of that (15-20%) due to inventory corrections. TSMC outpaces the overall semiconductor industry but, contrary to other analysts, I see the semiconductor industry back to mid single digit growth. AI will be the new driver and that plays well into the TSMC leading edge growth plans. We will never have enough performance or memory for AI and AI will touch just about every vertical market that we track.
It was mentioned that CAPEX will be at the lower end of the $40-44B due to equipment shipment delays. Does anyone know what equipment they might be talking about? EUV or DUV? Other? I'm wondering if this "shipment" delay is an opportunity to slow capacity builds and prevent oversupply? It will be interesting to see what the equipment people say also Intel, Samsung, and GF.
Second quarter gross margin increased 3.5 percentage points sequentially to 59.1%, slightly ahead of our guidance, as we enjoyed a more favorable foreign exchange rate, cost improvement and value selling.
5-nanometer process technology contributed 21% of wafer revenue in the second quarter while 7-nanometer accounted for 30%. Advanced technologies, which are defined as 7-nanometer and below, accounted for 51% of wafer revenue.
All six platforms increased in the second quarter. Smartphone increased 3% quarter-over-quarter to account for 38% of our second quarter revenue. HPC increased 13% to account for 43%. IoT increased 14% to account for 8%. Automotive increased 14% to account for 5%. And digital consumer electronics increased 5% to account for 3%.
We believe the current semiconductor cycle will be more similar to a typical cycle, with a few quarters of inventory adjustment likely through first half 2023. We have also internally modeled and prepared ourselves for various different scenarios in case it is necessary.
Despite the ongoing inventory correction, our customers' demand continues to exceed our ability to supply. We expect our capacity to remain tight throughout 2022 and our full year growth to be mid-30% in U.S. dollar terms.
Three key factor in supporting TSMC's strong structural demand are our technology leadership and differentiation, our strong portfolio in high-performance computing and our strategic relationship with customers. All of these factors are TSMC's strength in the foundry industry.
Next, let me talk about the tool delivery update. As a major player in the global semiconductor supply chain, TSMC work closely with all our tool supplier to plan our CapEx and capacity in advance. However, like many other industries, our suppliers have been facing greater challenges in their supply chains, which are extending toward delivery lead times for both advanced and mature nodes. As a result, we expect some of our CapEx this year to be pushed out into 2023.
Now let me talk about the N3 and N3 status. Our N3 is on track for volume production in second half of this year, fiscal year. We expect revenue contribution starting first half of 2023, with a smooth ramp in 2023, driven by both HPC and smartphone applications.
Our N2 technology development is on track and progressing well to our expectation, with risk production schedule in 2024 and volume production in 2025. After careful evaluation and extensive period of development, our 2-nanometer technology will adopt the narrow sea transistor structure to provide our customers with the best performance, cost and technology maturity.
N2 deliver full node performance and power benefited to address the increasing need for energy-efficient computing, with 10 to 15 speed improvement at the same power or 20% to 30% power improvement at the same speed and larger density of more than 20% increase as compared with N3E. Our 2-nanometer technology will be the most advanced semiconductor technology in the industry in both density and energy-efficient when it is introduced and will further extend our leadership position well into the future.
Q&A:
Yes. It seems like TSMC already has a very high exposure on the ARM base. So can we expect the next few years still a growth driver to more come from the X86?
C. C. Wei
We have very high exposure to X86 also.
Intel is coming, absolutely!
With the higher cost, how our negotiations and discussions with governments? How our negotiations and discussions with customers about this cost differential?
Mark Liu
Okay. Gokul, yes. Yes, I did mention that the cost in the fab in the U.S. is higher than we expected. We are still in the construction stage of the fab. And during this past two years, we found that the labor cost in the States is higher than we planned. And also, some of the COVID supply chain interruption also was an unexpected. And we did confer this information to the government at the location, give them a full perspective of the cost gap.
But Gokul, is indeed the -- our customer in U.S., they all want to load that fab. I mean, this is the needs from our customers. And we also believe there is ample -- amplify our business opportunity at there. So the cost is increasing, but cost is not the only factors. And we are still working on the government subsidy and we'll continue working on the cost reduction. And every company have different ways to reduce the cost. So that is the work in the process.
Would TSMC consider any type of joint venture fab in the U.S. for outsourcing? He notes we have done certain JVs in the past. So is this something we will consider in the U.S. for outsourcing opportunities?
Mark Liu
Yes. Let me answer this question again. This -- our -- yes, TSMC indeed has some joint venture arrangement maybe 20 years ago within U.S. But right now, we understand -- with that experience, we understand, our customers' demand will go up and down. And we don't -- and also, we don't want to limit this fab into a specific set of customers. It's open to the RO customer base to utilize. So no, at this point, we do not plan to have a joint venture arrangement in the U.S.
Okay. And then his second question is on N2. He wants to know, for HPC applications on N2, what is the percentage or that may adopt a chiplet architecture approach?
C. C. Wei
I cannot release the number. But let me assure you that the number of the customers using the chiplet in the N2 or the 2-nanometer technology will start to increase and that will become a major approach in the 2-nanometer and the following technologies.
It was mentioned that CAPEX will be at the lower end of the $40-44B due to equipment shipment delays. Does anyone know what equipment they might be talking about? EUV or DUV? Other? I'm wondering if this "shipment" delay is an opportunity to slow capacity builds and prevent oversupply? It will be interesting to see what the equipment people say also Intel, Samsung, and GF.
Second quarter gross margin increased 3.5 percentage points sequentially to 59.1%, slightly ahead of our guidance, as we enjoyed a more favorable foreign exchange rate, cost improvement and value selling.
5-nanometer process technology contributed 21% of wafer revenue in the second quarter while 7-nanometer accounted for 30%. Advanced technologies, which are defined as 7-nanometer and below, accounted for 51% of wafer revenue.
All six platforms increased in the second quarter. Smartphone increased 3% quarter-over-quarter to account for 38% of our second quarter revenue. HPC increased 13% to account for 43%. IoT increased 14% to account for 8%. Automotive increased 14% to account for 5%. And digital consumer electronics increased 5% to account for 3%.
We believe the current semiconductor cycle will be more similar to a typical cycle, with a few quarters of inventory adjustment likely through first half 2023. We have also internally modeled and prepared ourselves for various different scenarios in case it is necessary.
Despite the ongoing inventory correction, our customers' demand continues to exceed our ability to supply. We expect our capacity to remain tight throughout 2022 and our full year growth to be mid-30% in U.S. dollar terms.
Three key factor in supporting TSMC's strong structural demand are our technology leadership and differentiation, our strong portfolio in high-performance computing and our strategic relationship with customers. All of these factors are TSMC's strength in the foundry industry.
Next, let me talk about the tool delivery update. As a major player in the global semiconductor supply chain, TSMC work closely with all our tool supplier to plan our CapEx and capacity in advance. However, like many other industries, our suppliers have been facing greater challenges in their supply chains, which are extending toward delivery lead times for both advanced and mature nodes. As a result, we expect some of our CapEx this year to be pushed out into 2023.
Now let me talk about the N3 and N3 status. Our N3 is on track for volume production in second half of this year, fiscal year. We expect revenue contribution starting first half of 2023, with a smooth ramp in 2023, driven by both HPC and smartphone applications.
Our N2 technology development is on track and progressing well to our expectation, with risk production schedule in 2024 and volume production in 2025. After careful evaluation and extensive period of development, our 2-nanometer technology will adopt the narrow sea transistor structure to provide our customers with the best performance, cost and technology maturity.
N2 deliver full node performance and power benefited to address the increasing need for energy-efficient computing, with 10 to 15 speed improvement at the same power or 20% to 30% power improvement at the same speed and larger density of more than 20% increase as compared with N3E. Our 2-nanometer technology will be the most advanced semiconductor technology in the industry in both density and energy-efficient when it is introduced and will further extend our leadership position well into the future.
Q&A:
Yes. It seems like TSMC already has a very high exposure on the ARM base. So can we expect the next few years still a growth driver to more come from the X86?
C. C. Wei
We have very high exposure to X86 also.
Intel is coming, absolutely!
With the higher cost, how our negotiations and discussions with governments? How our negotiations and discussions with customers about this cost differential?
Mark Liu
Okay. Gokul, yes. Yes, I did mention that the cost in the fab in the U.S. is higher than we expected. We are still in the construction stage of the fab. And during this past two years, we found that the labor cost in the States is higher than we planned. And also, some of the COVID supply chain interruption also was an unexpected. And we did confer this information to the government at the location, give them a full perspective of the cost gap.
But Gokul, is indeed the -- our customer in U.S., they all want to load that fab. I mean, this is the needs from our customers. And we also believe there is ample -- amplify our business opportunity at there. So the cost is increasing, but cost is not the only factors. And we are still working on the government subsidy and we'll continue working on the cost reduction. And every company have different ways to reduce the cost. So that is the work in the process.
Would TSMC consider any type of joint venture fab in the U.S. for outsourcing? He notes we have done certain JVs in the past. So is this something we will consider in the U.S. for outsourcing opportunities?
Mark Liu
Yes. Let me answer this question again. This -- our -- yes, TSMC indeed has some joint venture arrangement maybe 20 years ago within U.S. But right now, we understand -- with that experience, we understand, our customers' demand will go up and down. And we don't -- and also, we don't want to limit this fab into a specific set of customers. It's open to the RO customer base to utilize. So no, at this point, we do not plan to have a joint venture arrangement in the U.S.
Okay. And then his second question is on N2. He wants to know, for HPC applications on N2, what is the percentage or that may adopt a chiplet architecture approach?
C. C. Wei
I cannot release the number. But let me assure you that the number of the customers using the chiplet in the N2 or the 2-nanometer technology will start to increase and that will become a major approach in the 2-nanometer and the following technologies.
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