US-China chip spat hangs over TSMC's recovery, Reuters, Apr. 19, 2023.

By Robyn Mak

TSMC's (2330.TW) China risks are growing. Quarterly earnings due on Thursday at the world's largest contract chipmaker are set to fall 5% year-on-year thanks to a global semiconductor glut, but demand should rebound later this year. Beijing's retaliatory strategy against U.S. chip sanctions is a bigger worry.

Taiwan Semiconductor Manufacturing has so far remained relatively unscathed since Washington stepped up sanctions to hobble China’s domestic semiconductor development. The $437 billion group's unrivalled dominance in cutting-edge chips means that even if it can't sell to the People's Republic, there are plenty of other buyers. It lost Huawei, a major client, in 2020 after the Chinese telecommunications-equipment giant was placed on a U.S. blacklist, yet sales still jumped 31% that year thanks to strong orders from Apple (AAPL.O), Advanced Micro Devices (AMD.O) and others.

Even so, TSMC looks vulnerable. China’s cybersecurity watchdog is reviewing Micron Technology's (MU.O) products, and more investigations into Western firms could follow. Chris Miller, author of "Chip War", reckons Beijing might pressure local and foreign companies selling to Chinese consumers to buy locally made components via formal or informal barriers to technology imports.

That would hurt the Taiwanese company in two ways. First, thanks to generous government funding and subsidies, smaller Chinese rivals like Semiconductor Manufacturing International (0981.HK) are aggressively expanding production of relatively mature technologies, like 28 nanometer chips and older. Such products may not be as profitable as the advanced chipsets that power the latest iPhones, but they still generated over 30% of TSMC's revenue last year.

Second, even if Chinese companies account for just 11% of TSMC’s top line, its other customers are far more exposed to the People's Republic. Qualcomm (QCOM.O), for instance, reported revenue from China of $28 billion in 2022, 64% of its total sales. Should handset makers buy locally or develop their own chips, the U.S. firm, which designs semiconductors but relies on TSMC to produce them, would probably cut back orders. How Beijing responds to American pressure will define the scope of TSMC’s recovery.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to add dropped word in last paragraph.)

CONTEXT NEWS

Taiwan Semiconductor Manufacturing, or TSMC, is forecast to report net profit of T$192.5 billion ($6.3 billion) in the three months to March, a 5% decrease from the same period a year earlier, according to the average of 21 analysts polled by Refinitiv.

In January, TSMC said its capital spending in 2023 would be between $32 billion and $36 billion, compared to $36.3 billion in 2022.

Editing by Pete Sweeney and Thomas Shum

https://www.reuters.com/breakingviews/us-china-chip-spat-hangs-over-tsmcs-recovery-2023-04-19/