Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker, warned for the first time that trade tensions may disrupt its access to key production equipment and hit its operations, amid increasing friction between the U.S. and China.
The Bloomberg report noted that "The company, which produces semiconductors for Apple Inc. and other major global tech companies, said in its annual report released on Friday that "ongoing trade tensions or protectionist measures could result in increased prices for, or even unavailability of, key equipment." It pointed to factors such as delays or denials of export licenses, additional export control measures, and other tariff or non-tariff barriers." Below is the full statement from TSMC's U.S. SEC Form 20-F filing on this point:
We may be unable to obtain in a timely manner and at a reasonable cost equipment that is necessary for us to remain competitive.
"Our operations and ongoing expansion plans depend on our ability to obtain an appropriate amount of equipment and related services from a limited number of suppliers in a market that is characterized from time to time by limited supply and long delivery cycles. During such times, supplier specific or industry-wide lead times for delivery can be as long as six months or more. To better manage our supply chain, we have implemented various business models and risk management contingencies with suppliers to shorten the procurement lead time. Further, growing complexities especially in advanced lithographic technologies may delay the timely availability of the equipment and parts needed to exploit time sensitive business opportunities and also increase the market price for such equipment and parts. Additionally, ongoing trade tensions or protectionist measures could result in increased prices for, or even unavailability of, key equipment, including as a result of necessary export licenses being delayed or denied, additional export control measures, and other tariff or non-tariff barriers. If we are unable to obtain equipment in a timely manner to fulfill our customers’ demand on technology and production capacity, or at a reasonable cost, our financial condition and results of operations could be negatively impacted."
Another segment of TSMC's Form 20-F reads as follows:
"Any major change in economic, fiscal and/or trade policies in the U.S. from which we derive a substantial portion of our revenue or in another major jurisdiction could severely affect our business, financial condition and results of operations.
For example, recent political and trade tensions among major economies have resulted in and could escalate trade barriers, including higher tariffs on certain products and other protectionist measures that could reduce overall consumer demand, increase our manufacturing costs and make our pricing less competitive. If and to the extent certain countries adopt further protectionist measures such as import and export controls, our ability to offer our products and services in some markets or source key materials and key production equipment may be limited, which may have adverse effects directly and indirectly on our sales. Any law or government policy that encourages our customers to relocate their manufacturing capacity or supply chain to their own countries or require their respective contractors, subcontractors and relevant agents to do so could also impair our ability to sustain our current level of productivity and manufacturing efficiency.
An important aspect of our business operation is an ecosystem of interconnected semiconductor fabs, employees and suppliers in the R.O.C. that provides us with significant operational synergies, flexibility and efficiencies. For example, we are able to temporarily reassign thousands of our engineers and other relevant personnel from one manufacturing site to another that are in close proximity to each other, to refine specific designs and adapt manufacturing processes in a timely manner. These advantages permit us to operate our manufacturing fabs efficiently and resolve any technical or commercial difficulties quickly to maintain our competitive edge. If these advantages are impaired or lost as a result of government policy or otherwise, we may not be able to sustain our current ability to supply our customers with goods and services at the current level of cost, quality, quantity and delivery schedule to which our customers have been accustomed." You could read the full Form 20-F here.
Bloomberg's report adds that "TSMC relies on equipment from U.S. suppliers including Applied Materials Inc. and Lam Research Corp. for production. The company said trade tensions could also prevent it from securing raw materials required for production, repeating a point it mentioned in the previous annual report.
The South China Morning Post reported this week that TSMC suspended new orders from Tianjin Phytium Information Technology Co., one of the companies blacklisted by the U.S., over concerns it’s involved either with building supercomputers used by China’s military actors, its military modernization efforts or weapons of mass destruction.
The Taiwanese chipmaker warned new measures adopted by China to counter U.S. sanctions could affect its operations. In January, China adopted a blocking statute that “entitled Chinese entities incurring damages from a multinational’s compliance with foreign laws to seek civil remedies,” it said.
“Measures adopted by an affected country to counteract the impacts of another country’s actions or regulations could lead to significant legal liability to multinational corporations including our own,” TSMC said in the report. For more, read the full Bloomberg report on MSN Money.
Keep in mind that SEC filings, such as SEC Form 20-F, always present worst case scenarios as a way to warn investors. Apple's own SEC filings are filled with negativity about lawsuits and what could possibly go wrong. So, while this information is important to be made aware of, rarely does every negative issue come to be. You have to balance that with TSMC's excitement about the future of the company.
Looking forward to the future, President of TSMC Wei Zhejia emphasized yesterday that perhaps the overall economic uncertainty will continue to exist, and TSMC will continue to strengthen the company's fundamentals to further expand technological differentiation, and they are full of excitement about the company's prospects. You could read more about this second report here (translation required).
Hopefully trade-war politics will get resolved over time or the negative warnings will eventually play out and have a rippling effect on global economies. We'll worry about that another day.