TSMC Expects 10% Revenue Share & HPC Products From 5nm In 2020 – Confirms Customer Shift To 2nd Gen 5nm In 2021

TSMC fab
Inside TSMC's 8-inch Fab 3; Credit: Taiwan Semiconductor Manufacturing Co., Ltd

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Taiwan's premier foundry, Taiwan Semiconductor Manufacturing Company, Ltd  (TSMC) is one of the world's most important makers of chips used inside smartphones and personal computers. The company's latest manufacturing node marketed as '7nm' has enabled Santa Clara-based application processor and graphics processing unit designer Advanced Micro Devices Inc. to compete effectively with Intel Corporation in the microprocessor arena.

TSMC's management spoke to analysts recently and provided key insights on what to expect from the foundry and the semiconductor industry throughout the course of this year. The fab has been busy investing heavily in both of its N7 and N5 nodes as it expects demand for them to increase.

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TSMC Sets $15 billion - $16 billion Capital Expenditure For 2020, With 80% of This Allocated For Its 7nm, 5nm and 3nm Process Nodes

2019, for TSMC, was the year marked by growth in 7nm. The fab's process technologies covered under N7 contributed to 35% of its revenue, up 8% sequentially and 12% year-over-year. For the full year, 7nm-based products contributed to 27% of TSMC's revenue up from 9% in 2018. Interestingly, while revenue contribution from smartphones grew by 4% in the year, that from high-performance computing, which includes wafers intended for central and graphics processing units declined by 3%.

More importantly, TSMC is cognizant of keeping its capacity up with customer demand, and to that effect, the fab intends to invest $15 billion - $16 billion in capital expenditure through the course of this year. For comparison, the company had a capital expenditure of $14.9 billion in 2019, driven by the ramp in 5G deployment.

80% of this year's expenditure will be allocated to advanced manufacturing nodes including the 7nm, 5nm and 3nm families, with 10% each going to advanced packaging, mask making and specialty technologies. TSMC's specialty technologies cover MEMS, CMOS Image Sensor, Embedded NVM, RF and other areas. Additionally, approximately $120 million of the $14.9 billion that TSMC spent acquiring property, plant and equipment throughout 2019 is directly related to the upcoming 5nm ramp and the development of 5nm and 3nm process technology families.

TSMC earned $34.6 billion in revenue last year. $9.3 billion of this was from 7nm process technologies.

TSMC States 5nm Ramp This Year Will Include HPC Products, Impact Its Gross Margin & Contribute 10% To 2020 Revenue

TSMC outpaced the semiconductor and foundry industry this year, and the fab expects this to be the case for the next couple of years as well. The semiconductor and foundry industries are expected to grow by 8% and 17% over the next four years, and TSMC expects that it will outpace foundry growth by a handful of percentage points in U.S. Dollar terms. For its current quarter, TSMC believes that the current 5G ramp will help it produce better results than seasonality generally allows for.

Additionally, the company believes that not only is mid-teen 5G penetration expected in markets this year, but this penetration is surpassing what 4G exhibited at a similar stage. Subsequently, it believes that strong demand for 5G and HPC products will drive demand for advanced processes over the next couple of years, and if you're careful, you'll notice that application processors for smartphones are missing from this list.

Now, let's move to the juicy bits. TSMC's N6 manufacturing process (6nm) is at the far end of the fab's 7nm process technology family. N6 offers an 18% density improvement over N7+ (TSMC's first EUV-based 7nm), has an additional EUV layer over it and has design rules fully compatible with N7 (DUV-based 7nm). TSMC has confirmed that risk production for N6 is on track for Q1 2020 and that the process technology will enter volume production before the year ends (probably in late-H2 if our guess is accurate).

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Following N6, TSMC's first 5nm-based process node is referred to as N5. The manufacturer has confirmed that N5 adopts EUV extensively and that the process has an 80% density and 20% performance gain over products based on the 7nm family. 5nm entered risk production in April last year when the TSMC validated the process node's design through silicon test vehicles. The manufacturing process will enter volume production in the first half of this year and ramp aggressively in the second half.

This aggressive ramp will be driven by mobile (hello Apple A14) and, more importantly, as stated by TSMC's management, High-Performance Compute products. This last bit in bold is confirmed, and it opens up a limited set of possibilities. TSMC's HPC products cover central processing units, artificial intelligence and networking applications, so feel free to speculate what these products might be. TSMC expects 5nm to contribute to 10% of its revenue for 2020.

The 3nm process will be 39% more expensive than the 0.18µm node. Courtesy: International Business Strategies, Inc.

Fab Confirms All Major Customers Will Shift To Second-Generation 5nm In 2021, 7nm Process Revenue Will Grow to 34% of Overall Revenue This Year

TSMC is also working with its customers on designing the N3 (3nm) process node, but as is custom, it declined to mention which customers are involved. More importantly, the fab has confirmed that all major customers will shift to N5P in 2021. N5P is TSMC's second-generation 5nm process. It provides front-end-of-line and middle-of-line optimizations for either a 7% performance or 15% power efficiency gain. Early 5nm tape-outs are less than those for 7nm at a similar stage, but TSMC believes that they will equal 7nm at high-volume.

Capital intensity for the year will be lesser than 40% and drop in-between 30% - 35% next year as TSMC establishes the foundations for future process technologies. It cleared out unsold wafer inventory in 2019's first half in its fourth quarter, and it states that for 2020, a mid-single-digit capacity increase should be expected.

TSMC forecasts double-digit backend revenue growth this year, it predicts that 7nm process technology family revenue will grow to 34% in 2020 driven by mobile and HPC demand and that the 5nm ramp will indeed free up capacity allocation for 7nm.

The Taiwanese fab is under pressure from the United States government to shift the production of components vital for national security interests either to America or provide an equally acceptable solution. To that end, TSMC states that costs for plant construction are the lowest in Taiwan, and these low costs are in the best interest of all of its customers.

TSMC's Vice Chairman and Chief Executive Officer Dr. C.C. Wei refuted media reports that China's Semiconductor Manufacturing International Corporation is cutting into his company's 14nm orders. Dr. Wei expects more sub-6Ghz 5G base stations as opposed to mmWave for 5G, and he refused to comment on any new customer additions by TSMC for both N7 and N5 process technology families.

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