TSMC May Increase Wafer Pricing by 10% in 2025

[Barnsley]

If you can afford it why would you not fully depreciate something as fast as you can?

 

[nghanayem]

With all the possible good intention from Intel, as you mentioned on extending equipment depreciation from 5 to 8 years, we have to look into to the reality and what kinds of problems can be imposed on Intel.

Under the rapid change of manufacturing technology and market demand, TSMC's strategy is to depreciate the equipment as quick as the tax laws and accounting rules allowed while Intel is doing the opposite way. Do we really believe Intel's assertion that the equipment is still be competitive during the 6th, 7th, and 8the year?

You tell me, does TSMC run it's fabs for more than 8 years?

If the answer is "yes", then Intel will be facing TSMC's near zero depreciation cost competition because TSMC completes its equipment depreciation in 5 years.

Yes and in years 9-20 they will be the same. In years 1-3 intel will also be spending less on asset depreciation than TSMC and year 4 is pretty close between the two periods.

If the answer is "no", Intel will be holding a lot of non-competitive or non-productive equipment for three additional years than TSMC. TSMC is going to recover all its equipment investment, buy newer and more powerful machines, and move on.

Nobody just scraps their equipment. Unless there is a new tool that is wildly more productive, to the point of paying for itself quickly, TSMC will keep utilizing the assets they already payed for. That is process engineering 101. TSMC's whole business model is predicated on sell wafers on depreciated tools and only pass on a small percentage of the savings to customers (just enough to ensure they can continue to stimulate demand on those old nodes). Trailing nodes is generally where the profit is not, cutting edge nodes during factory startups.

Extending equipment depreciation from 5 years to 8 years has several effects on Intel:

1. Reduce the the expense and possibly boost Intel's EPS or keep Intel's EPS not to fall too quick. It will be good for Intel CEO and CFO to reach their performance requirements at the expense of Intel's future. Intel spent $133.9 billion since 2000 or $83.6 billion since 2010 in stock buyback program in order to boost Intel's EPS. Extending years of depreciation and buy back shares bear the same Intel attitude: keep EPS afloat while avoid addressing Intel's fundamental problems.

Is it now a bad thing for intel to improve their financials

2. Reduce the annual depreciation expense can cosmetically boost Intel's "book value". Better book value and EPS can help Intel's stock price and consequently help Intel CEO's and CFO's performance review.

The bigger aspect of that is lowering wafer costs and start-up costs. TSMC can generally bear that burden while only straining GMs by a couple of percent. When intel's old nodes are getting sold for close to cost, start-ups have a huge swing on opex. Compared to getting to break-even in 3 years, how can IR/AZ being slightly less profitable for a small duration beyond the 2027 goal be a reasonable concern.

3. Reduce the annual depreciation expense can make people believe certain Intel capital investments are finically viable while the actual situation might be going the other way.

4. According Intel's estimate, extending the equipment depreciation from 5 years to 8 years resulted $2.5 billion increase to the gross margin for 2023. But wait a moment, Intel 2023 GAAP net profit was only $1.7 billion! That means without this depreciation manipulation, Intel 2023 will be in a net loss.

And... In years 5-8 intel's net profit will be lower because of the newer deprecation schedule. They are deferring some of their cost to a later date under the assumption that they will in be in a better fiscal position to absorb said costs post 2028 (which if they do hit break even in 2027 will be an objectively correct assessment). This is a trade-off that they decided was in their favor given the issue is getting the plane in the air. There is nothing stopping TSMC from doing the same and seeing the same results if they wanted to, but for them 5 years is evidently the sweet spot.

Semiconductor business is a very challenging and difficult business. But one thing for sure, financial engineering will masquerade the true problems and pass the hot potatoes to the future CEO and CFO.

So Micron is dishonest then for using 7yr? Was TSMC masquerading their issues with 5 year deprecation instead of 4? Hell while we are at it why not call them fraudsters for not doing it all in year 1? 5 years holds 0 significance, neither does 4, 7, or 8 years. The same amount will be payed either way. Which period a company uses depends on their business realities and what makes the most optimal balance for short term and mid term cost per wafer (long term being completely unaffected).

 

[Scotten Jones]

I reached out to multiple sources with direct knowledge of when depreciation starts.

Yes, the standard is: "Depreciation of an asset begins when it is available for use" but what does this mean in practice?

In drug manufacturing you can have an entire facility ready to go but you don't start depreciating it until the drug is FDA approved.

If you build a new fab do you start depreciating a tool as soon as it is installed, what about qualification. Do you start depreciating when a single tool is on-line even though you can't run wafers because you don't have all the other necessary tools in place?

The answers I got is each company sets a policy and once set they stay with it because they would have to restate their results.

One company cited starts depreciation once they have equipment in place and qualified to produce 500 wafers per month, at that point they start depreciating that group of equipment. My understanding is the number varies company to company but that is the typical implementation of the standard. Companies also add capacity in groups and presumably depreciation starts for each group when it is ready.

So for example:

2010 - Q1 - 500 wafers per months (wpm) of capacity goes on-line and that starts the first depreciation for the new node or fab.
2010 - Q3 - 5,000 wpm of is added and starts depreciating
2011 - Q2 - an additional 5,000 wpm of capacity is added and starts depreciating
Etc.

This means you will have a portfolio of equipment installed at different times all depreciating over different timelines which is exactly what I see and track.

If 500 wpm goes on-line and starts depreciation, it will be 1 to 2 quarters before that becomes revenue, this aligns with my comment that what I see is depreciation starting 1 to 2 quarters before first revenue is reported.

 

[milesgehm]

With all the possible good intention from Intel, as you mentioned on extending equipment depreciation from 5 to 8 years, we have to look into to the reality and what kinds of problems can be imposed on Intel.

Under the rapid change of manufacturing technology and market demand, TSMC's strategy is to depreciate the equipment as quick as the tax laws and accounting rules allowed while Intel is doing the opposite way. Do we really believe Intel's assertion that the equipment is still be competitive during the 6th, 7th, and 8the year?

If the answer is "yes", then Intel will be facing TSMC's near zero depreciation cost competition because TSMC completes its equipment depreciation in 5 years.

If the answer is "no", Intel will be holding a lot of non-competitive or non-productive equipment for three additional years than TSMC. TSMC is going to recover all its equipment investment, buy newer and more powerful machines, and move on.

Extending equipment depreciation from 5 years to 8 years has several effects on Intel:

1. Reduce the the expense and possibly boost Intel's EPS or keep Intel's EPS not to fall too quick. It will be good for Intel CEO and CFO to reach their performance requirements at the expense of Intel's future. Intel spent $133.9 billion since 2000 or $83.6 billion since 2010 in stock buyback program in order to boost Intel's EPS. Extending years of depreciation and buy back shares bear the same Intel attitude: keep EPS afloat while avoid addressing Intel's fundamental problems.

2. Reduce the annual depreciation expense can cosmetically boost Intel's "book value". Better book value and EPS can help Intel's stock price and consequently help Intel CEO's and CFO's performance review.

3. Reduce the annual depreciation expense can make people believe certain Intel capital investments are finically viable while the actual situation might be going the other way.

4. According Intel's estimate, extending the equipment depreciation from 5 years to 8 years resulted $2.5 billion increase to the gross margin for 2023. But wait a moment, Intel 2023 GAAP net profit was only $1.7 billion! That means without this depreciation manipulation, Intel 2023 will be in a net loss.

Semiconductor business is a very challenging and difficult business. But one thing for sure, financial engineering will masquerade the true problems and pass the hot potatoes to the future CEO and CFO.

Deeply cynical

 

[hist78]

Thanks for explaining what the accounting guidelines say about depreciation -- this seems like the right source to look at. However, reading this discussion, I'm thinking about an even more basic accounting principle: matching (expense should be reported in the same period in which the corresponding revenue is earned). I would interpret it as meaning that depreciation should be reported together with revenue, or at least it would make sense to start depreciation when first revenue is reported. Is this too much of a "book knowledge" understanding of accounting?

"matching (expense should be reported in the same period in which the corresponding revenue is earned)."

Yes, the above principle is correct. A company should record those expense incurred by producing revenue. But the question is whether expense will always generate revenue? Let me use an example to explore the situation.

Assume a public traded company XYZ Corp. manufactures the famous XYZ Potatoes Chips. Just before the Covid-19 lockdown, it completed the second production line and it was ready to produce the chips for the eastern part of United States. Unfortunately due to the pandemic and other challenges, XYZ Corp. was forced to put that brand new production line into idle mode for three years.

There was no revenue generated from that production line for three years. Can XYZ Corp. skip the depreciation reporting for all three years?

Or, if XYZ did start using that second production line for one year then shut it down for three years before resuming production again, can XYZ skip those three years' depreciation expense?

If skipping depreciation for three years is allowed, how about skipping 5 years or 7 years?

IRS might be happy to receive more tax from XYZ due to higher profit (less expense). But SEC and XYZ's auditor will go after such depreciation skipping behavior because it's deceptive and against accounting principles.

Let's expand the subject a little bit. Depreciation is for tangible fixed assets (equipment, buildings, cleanrooms, etc.) while amortization is for intangible assets (patents, trademarks, R&D, etc.).

Starting 2022, R&D expenditures need to be amortized over 5 years (15 years for R&D expenses attributed to foreign research) in stead of writing off in one year. As we all know, a lot of R&D will not generate any revenue at all. The 5-year amortization on R&D expense is in the same spirit of 5-year depreciation on equipment.

Depreciation has little to do with whether the equipment has generated revenue or not.

 

[Scotten Jones]

"matching (expense should be reported in the same period in which the corresponding revenue is earned)."

Yes, the above principle is correct. A company should record those expense incurred by producing revenue. But the question is whether expense will always generate revenue? Let me use an example to explore the situation.

Assume a public traded company XYZ Corp. manufactures the famous XYZ Potatoes Chips. Just before the Covid-19 lockdown, it completed the second production line and it was ready to produce the chips for the eastern part of United States. Unfortunately due to the pandemic and other challenges, XYZ Corp. was forced to put that brand new production line into idle mode for three years.

There was no revenue generated from that production line for three years. Can XYZ Corp. skip the depreciation reporting for all three years?

Or, if XYZ did start using that second production line for one year then shut it down for three years before resuming production again, can XYZ skip those three years' depreciation expense?

If skipping depreciation for three years is allowed, how about skipping 5 years or 7 years?

IRS might be happy to receive more tax from XYZ due to higher profit (less expense). But SEC and XYZ's auditor will go after such depreciation skipping behavior because it's deceptive and against accounting principles.

Let's expand the subject a little bit. Depreciation is for tangible fixed assets (equipment, buildings, cleanrooms, etc.) while amortization is for intangible assets (patents, trademarks, R&D, etc.).

Starting 2022, R&D expenditures need to be amortized over 5 years (15 years for R&D expenses attributed to foreign research) in stead of writing off in one year. As we all know, a lot of R&D will not generate any revenue at all. The 5-year amortization on R&D expense is in the same spirit of 5-year depreciation on equipment.

Depreciation has little to do with whether the equipment has generated revenue or not.

I reached out to sources with direct knowledge of how the start of depreciation is handled at Semiconductor companies, see my post above.

Yes "Depreciation of an asset begins when it is available for use" but there is some interpretation that goes into "available for use".

 

[MKWVentures]

I agree with Scotten.. Each company has policies that they need to follow, and there is some judgement on "available for use". I can give examples for underloaded fabs and pre-production and end of life fabs etc . In general most large companies are going to follow principles and documented procedures and not randomly tweak the depreciation... its pretty dangerous for CEO, CFO, and CPA (I can remember one small company that did that.... It ended up with the infamous "restatement of earnings" report to the SEC... )

IMO it is rare for a fab to have depreciation go to or near zero. I have seen Fabs add 1B or more in capital spending in a year for upgrades, replacements, expansions.... and you can even capitalize other items. so there is some depreciation ongoing even if 80% drops off. And people using 8 year depreciation may have write offs at the end. I can give lots of examples of how it works in some cases.

 

[Scotten Jones]

TSMC released their 2024-Q2 results today and I went through my proprietary analysis. I see no evidence that 5nm equipment dropped off being depreciated yet.

 

[staf]

You tell me, does TSMC run it's fabs for more than 8 years?

Yes, till eternity . When I was still @imec around 5 years ago TSMC bragged how they never stopped a process until that time. Don't know if that has changed in the mean time.