Chipmaking Giant Slashes Capital Spending by 10 Percent, Slowdown Warning to Tech Sector

A chip by Taiwan Semiconductor Manufacturing Company (TSMC) is seen at the 2020 World Semiconductor Conference in Nanjing in China's eastern Jiangsu province on Aug. 26, 2020. (STR/AFP via Getty Images)

Taiwan Semiconductor Manufacturing Co. (TSMC) has slashed its capital spending despite posting strong profits, with the company expecting the market to slump in the near future.

Capital expenditure (capex) for 2022 was slashed to roughly $36 billion in 2022, down from previous estimates of at least $40 billion. About half of the change is due to capacity optimization based on the current medium-term outlook and the other half is due to continued tool delivery challenges,” Chief Financial Officer Wendell Huang said during a media call, according to Reuters.

TSMC saw an 80 percent increase in its Q3 profits which is its strongest growth in two years. Yet, it has decided to adopt a conservative position on investments for 2023.

TSMC CEO C.C. Wei said that the company expects the semiconductor industry to potentially decline next year in a media call.

However, Wei expects 2023 to be a growth year for TSMC. The company’s auto and data center businesses continue to remain steady for the time being, according to the chipmaker.

The Biden administration’s push to limit corporations from doing business with China is expected to hit TSMC hard as the company is the largest contract chipmaker in the world and manufactures chips for big tech firms like Qualcomm and Apple. The White House has tightened chip trade controls.

Analysts at Fubon Research are expecting the U.S. restrictions to hit up to 8 percent of TSMC’s total sales. They also calculate that TSMC might lower its growth targets for the coming years.

Wei believes it is “too early to provide a specific number, however the inventory correction will likely see its biggest impact sometime in the first half of 2023,” according to Bloomberg. The impact of the U.S. curbs is still manageable, he added.

Weakening Semiconductor Market

Malcolm Penn, CEO of Future Horizons and an expert in semiconductors, is expecting the sector to grow this year, but only by single digits. And for 2023, Penn believes the sector will fall by double-digits.

“For the most part, the industry is in hopeful denial,” Penn said, according to Electronics Weekly. “If we had a soft landing, it would be for the first time in the 70-year history of the semiconductor industry.”

The outlook for the electronics industry, on which the semiconductor sector is dependent, is darkening.

Consumer demand has been suppressed due to macroeconomic shocks like elevated inflation. Q3 shipments of laptop and desktop computers have fallen by 15 percent, Bloomberg said citing IDC data.

In August, chipmaker Micron Technology warned about slowing demand. The company has announced output reductions of up to 30 percent in a bid to stabilize prices.

Intel, which registered a $2.6 billion loss in revenue in July, is reportedly planning to reduce its headcount by 22,000 employees.