TSMC China SHR Orders Surge; Clients Pay 40% Premium
Industry insiders report that TSMC has received an influx of Super Hot Run (SHR) orders from Chinese mainland clients, who are willing to pay a 40% premium for expedited services. This surge in orders has positively impacted TSMC's gross margin in Q2 and has set an optimistic outlook for Q3.
Chinese mainland chip manufacturers have increased their orders with TSMC to mitigate uncertainties stemming from the upcoming U.S. presidential election and potential shifts in U.S.-China relations. Insiders suggest that barring severe tightening of U.S. sanctions and exchange rate fluctuations, TSMC's revenue and gross margin for Q3 and the entire year might exceed expectations. In Q2 2024, TSMC's gross margin and operating profit margin both surpassed previous forecasts.
Exceeding Gross Margin Expectations
Initially, market expectations were conservative, doubting TSMC's ability to reach the upper limits of its Q2 gross margin guidance. This skepticism was due to anticipated impacts from an earthquake in April and rising electricity costs, which were expected to affect margins by 0.7 to 0.8 percentage points, and the earthquake by 0.5 percentage points.
Despite a slow economic recovery and rising costs, TSMC’s Q2 gross margin reached 53.2%, exceeding the target range of 51%-53%. Additionally, TSMC raised its Q3 gross margin guidance to as high as 55.5%, attributing the favorable results to effective cost management and higher utilization rates in production.
TSMC observed a significant increase in demand for high-end smartphones and AI chips. Utilization rates for its 3nm and 5nm fabs are expected to continue improving in the latter half of 2024. Consequently, the full-year performance forecast has been adjusted upward, anticipating substantial growth for 2024.
Strong Demand for 3nm and 4nm/5nm Chips
Demand for TSMC’s 3nm and 4nm/5nm chips remains robust, prompting the company to raise prices for these processes earlier this year. Industry insiders report that visibility for TSMC’s 3nm and 4/5nm chip orders has extended into 2025.
To meet this strong demand, TSMC plans to increase its monthly production of 3nm chips to 130,000 wafers and 4nm/5nm capacity to 160,000-170,000 wafers. TSMC intends to pass on inflationary pressures within its equipment and materials supply chain to both local Taiwanese suppliers and international partners like ASML, Applied Materials, and Tokyo Electron. Notably, ASML has compromised on conditions, including pricing and maintenance, especially for expensive EUV lithography machines.
Surge in Orders from Chinese Mainland
TSMC’s impressive Q2 gross margin was unexpectedly driven by a significant volume of orders from the Chinese mainland, many of which were SHR orders. Although TSMC declined to comment on specific clients and orders, it disclosed that in Q2 2024, revenue from Chinese mainland clients accounted for 16% of total wafer sales, up from 9% in the previous quarter.
Industry insiders suggest that due to escalating U.S.-China tensions and uncertainties around the upcoming U.S. presidential election, Chinese mainland clients are rushing to stockpile chips. Key Chinese mainland clients of TSMC include Bitmain, Alibaba's T-Head, and ZTE Microelectronics Technology Company.
