TSMC Adds Negative Semiconductor News

TSMC warns soft phone/crypto & flat capex!
Does this impact DRAM?
Can Intel keep Apple?
We love Tesla (Model 3)!

TSMC added to the negative news in the semiconductor industry by lowering guidance of future revenue due to reduced cryptocurrency chips and soft mobile phone sales. In addition they said capex will be flat for the next several years in the range of $10B to $12B.

TSMC did up capex for this year for two one time exceptions. A $300M deposit for NA tools from ASML which we heard about yesterday from ASML in their report. They are also spending $500M more on mask production as the number of mask sets needed is increasing. (we also assume that the cost of EUV masks has added to this number as well). The ASML deposit doesn’t result in any new tools or production capacity any time soon but rather is a prepayment place holder for TSMC’s spot in line to get High NA tools whenever they come out.

This means that fabrication tool makers, such as AMAT, LCRX & TEL will not be seeing more incremental revenue out of TSMC any time soon. In fact, it is clear that there is a very high, 90%+, reuse rate of equipment between 10NM, 7NM & 5NM as the process flow is quite similar.

Ever the practical manufacturer, TSM is not pushing EUV so fast as there is no near term cost savings and the performance increase may not warrant a potential increase in yield risk. However when EUV does happen (in our view most likely for 5NM at TSMC) this will be a further slowing of dep & etch as excess tools will be freed up from today’s multi-patterning steps that will be reduced on conversion to EUV.

So the TSMC news was not good for WFE tool makers (except litho and mask) but the implication of slowing crypto and mobile could also be a collateral negative for DRAM demand which has been driving WFE tools crazy. Thats not good.

On the bright side, TSMC said nice things about auto and IOT demand which is probably a better long term trend than “flash in the pan” crypto.

What does Crypto & Mobile weakness mean for DRAM?
We are concerned that the weakness in crypto and mobile chips that TSMC talked about can have collateral damage on DRAM and NAND as well. While we are less concerned about NAND as NAND demand is very elastic and deep, DRAM demand is much more finite and linked to product demand.

While everyone knew that crypto demand was a short term phenomenon the mobile softness is more troubling. The crypto “bubble” is very similar to the “Tamagotchi” bubble of 1997. A huge chunk of foundry capacity was sucked up by the toy fad in 1997 and dislocated the chip industry. It faded as quickly as it came on, and we would expect crypto to behave in a similar way now that Bitcoin prices have fallen and “basement” miners figure out they can’t even pay back their PC investment.

Capex shifting back to litho
We think that the comments and trends seen at TSMC point to litho (and associated spending such as masks) increasing back to a higher percentage of overall WFE as multipatterning slows after introduction of EUV. This transition back to a higher litho spend has started but has not resulted in any slowing of etch and dep because the industry has not transitioned manufacturing but has clearly started to spend on it.
Luckily, we won’t see this trend in memory for a long time as memory is not at the bleeding edge of litho process. Aside from ASML this trend also benefits KLAC and others who help monitor the litho process.

Could Intel follow TSMC to keep Apple?
Its very clear that TSMC has a virtual “lock” on Apple’s mobile and tablet business going forward. It could get even richer by having Apple’s desktop and laptop business as well.

We are surprised that investors and the industry are so “surprised” about the potential of Apple fabbing laptop & desktop chips of its own design at TSMC. Its simply not “new news”. We wrote several articles, starting way back in 2014, about the possibility, as it became clear to us that Apple’s mobile chips were quickly becoming very competitive with desktop class CPU’s.

Our 2014 article on Apple using its own chips rather than Intel
CPU’s are all about “Price, Performance & Power”. Those three factors are at the heart and soul of “Moore’s Law”, which improves all three simultaneously. Its also very clear that Intel has lost the lead in Moore’s Law (or given it up willingly) to TSMC and Samsung. TSMC’s 7NM is as good as Intel’s 10NM, but where is Intel’s 10NM process while TSMC is making 7NM devices?

Apple simply wants to stay on the leading edge of Moore’s law with the best performance, power & price. Intel used to offer the best power and performance which outweighed price but now TSMC and Samsung will be able to offer the equivalent.

In addition Apple gets architectural compatibility and software compatibility across mobile and compute platforms.

If Intel doubled down and got back in the Moore’s law race it could potentially keep Apple one way or another. While Apple may be moving away from an X86 model they still need leading edge chip process. Intel could get a great customer for foundry services for Apple’s “A” series processors and Apple could get a great, US based, second source as it certainly doesn’t want to give any more business to “Frenemy” Samsung. The problem is that Intel would need to catch up on Moore and get real about providing foundry services.

Probably not any risk to TSMC any time soon……

The automotive bright spot- Tesla leading the way
TSMC pointed out automotive as a bright spot going forward. This is clearly a long term secular trend as automotive use of semiconductors continues to increase.

The latest Tesla Model 3 has eight video cameras, lots of sensors and a completely electronic glass cockpit (like the aircraft industry transitioned to years ago….). It also has a mobile LTE broadband real time connection as well as lots of power semiconductors to keep analog chip makers happy.

We are doing our part to help out the chip industry in automotive as we just took delivery this past weekend on a midnight silver metallic Model 3, one of the first 25 in my area. (yes, we were stupid enough to be on line at 5 in the morning the first day orders ere allowed 2 years ago….).

We’ve already put several hundred miles on it and we are in awe and love. Its a dream come true. Great fit, finish and performance.

The stocks
Obviously this additional negative news for the industry is going to pound on the stocks, it’s going to be very hard to find a calm port in this brewing storm as investors reasons for being nervous piles up. We still like Micron as it is so cheap but even its attractive price doesn’t help in negative news flow.

We don’t expect any news from companies due to report that will reverse the trend and we may be stuck in a negative semiconductor/tech tape for a while.

It’s not clear that things are rolling over here and this could be just another tech air pocket but the news feels a bit deeper and more ominous.

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