• TSMC has announced a capital spending of $40-44 billion for 2022 keeping in view its massive new fab construction plans. This is above the industry forecast of $38-42 billion.
• According to TSMC, 70-80% of capex in 2022 will be used for advanced node technologies (7nm and below), 10-20% for specialty technologies and 10% for advanced packaging.
• If we factor in TSMC’s higher spending as well as greater sales growth (25-29% YoY) in 2022, we see the WFE capital intensity (capex to sales) for logic (non-memory) semiconductor reaching 23% in 2022-2023, the highest in the past 20 years.
• TSMC’s massive capacity plan also implies higher wafer demand in advanced nodes, largely used in smartphone processors today. But we expect the demand from high performance computing (HPC) to exceed that of smartphones from 2023 at TSMC.      

Before TSMC’s investor conference on January 13, equipment vendors expected TSMC to raise its capital spending in 2022 based on the company’s multiple investment plan announced in the second half of 2021. TSMC reported $30 billion of capital spending in 2021, about two times larger than Intel’s from the WFE (front-end wafer equipment) perspective. Based on the new guidance, it would spend $40-44 billion in 2022, which is above the industry forecasts.

In our view, TSMC’s higher capital spending implies the company’s more aggressive capacity build-up plan for (1) 3nm and 2nm nodes, as they might see greater demand from Apple and Intel beyond 2023, in addition to the CPU/GPU growth from data centers (2) 3D packaging, due to more demand from HPC clients (3) Specialty nodes, especially at 28/22nm.

Exhibit 1: TSMC Revenues vs CAPEX Trends 2016-2021

TSMC’s major capital spending items in 2022 include:

• P5-P8 in Fab 18 (Tainan, Taiwan) ramp-up, mainly for 4/5nm and 3nm
• Constructions in Arizona Fab 21, mainly for 5nm in the initial stage
• Nanjing (China) Fab ramp-up, mainly for 28nm
• Fab 20 (Hsintsu, Taiwan) ground-breaking, built initially for 2nm production
• Kumamoto (Japan) Fab ground-breaking, primarily for local clients at 28/22nm
• Kaoshiung (Taiwan) Fab ground-breaking, mainly for 7nm in the initial stage

Exhibit 2: Capital Intensity Ratio for Logic Semiconductor (Non-Memory) ,, 2010-2024

Implications for global logic semiconductor industry’s capital intensity ratio

Overall, the foundry industry is expected to account for 30-35% of the global logic (non-memory) semiconductor wafer production in 2022-2023. TSMC leads here by capturing two-thirds of the foundry market. Therefore, TSMC’s higher spending outlook indicates greater semi industry capex as well in 2022, and likely in 2023, if we also consider moderate expansions from other foundry/IDM players.

We usually use the capital intensity ratio (capex divided by sales) to track the semiconductor industry cycle to find early indications of future market growth. The chart above has two lines – the blue one for the entire logic semi industry (foundry and IDM) and the red one for TSMC and Samsung Foundry, the two major players dominating the capacity in leading-edge nodes. Factoring in TSMC’s new forecast for 2022 and industry outlook from increases in other new fab constructions, the capital intensity ratio would reach 23% in both 2022 and 2023, the highest in the past 20 years.

What are the projections for the semiconductor industry in 2022-2023?

Since the middle of last year, the supply chain has started to reflect concerns about the oversupply of fab capacities going into 2022, if we only look at the normal product cycles for consumer electronic devices such as smartphones and PCs. TSMC’s big announcement clearly indicates there are more structural growth drivers in semiconductors beyond 2021. Its clients too seem to be more optimistic about the silicon wafer demand amid the mega trend of digital transformation. If we use the capital intensity ratio to forecast the production cycle, it appears we won’t reach the peak before 2024 when most of the new capacities (matured and advanced nodes) start mass production. The current high inventory may only suggest a near-term correction in orders for certain components. 5G applications, HPC and automotive all require more silicon content going forward and will offset the saturated demand in smartphones.