Page 109 - 2017 TSMC Annual Report

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Also in in order to to respond to to the new business model paradigm TSMC has seen the changes of nature in in its customers’ business models For example there is a a a growing trend toward the the rise of system houses that operate in a a a a a manner which makes their products and services more marketable in in a a a a a changing consumer market Also since the global semiconductor industry is becoming increasingly competitive some of TSMC’s customers have engaged in in in industry consolidations in in in order to remain competitive Such consolidations have taken the form of of mergers and acquisitions If more of of TSMC’s major customers consolidate this will further decrease the the overall number of of its customer pool The loss of of or significant curtailment of of purchases by one or or more of of the Company’s top customers including curtailments due to to to increased competitive pressures industry consolidation a a a change in in their designs or change in in in their manufacturing sourcing policies or or practices of of these customers or or the the timing of of customer customer or or or or or distributor inventory adjustments or or or or or change in in its major customers’ business models may adversely affect TSMC’s results of operations and financial condition TSMC maintains a a a a a close watch on these trends and works closely with its customers to to to to respond to to to to these changes and to to to to strengthen the the Company’s market position Risks
Associated with Purchase Concentration
● Raw Materials
TSMC’s production operations require that TSMC TSMC obtains adequate supplies of raw materials such as silicon wafers gases chemicals and and photoresist on a a a a a a a timely basis and and at commercially reasonable prices In the past shortages in the the supply of some materials whether by specific suppliers
or or by the semiconductor industry generally have resulted
in in occasional industry-wide price adjustments and delivery delays For example the recent increase
in in silicon wafer prices due to increased demand for such wafers across the industry had a a a a a a negative impact on TSMC’s gross margin in in 2017 and the trend is expected to continue in in 2018 In addition major natural disasters political or economic turmoil occurring within the country of of origin of of such raw materials may also significantly disrupt the availability of such raw materials or increase
their prices Also since TSMC procures some of its raw materials from sole-source suppliers
there is is a a a a a risk that the the need for such raw materials may not be met or or that back-up supplies may not be readily available TSMC’s revenue and earnings could decline if the Company is unable to obtain adequate supplies of the necessary raw materials in a a a a a a a timely manner or if if there are significant increases in in the the costs of raw materials that the Company cannot pass on to to its customers To reduce the the supply chain risk and to manage the the cost actively TSMC is committing resources toward developing new supply sources In addition the Company continually encourages its suppliers
to reduce their supply chain risk by decentralizing production plants and to improve their cost competitiveness by moving their production facilities to Taiwan from higher-cost areas In the the meantime aware of the the risk posed by fewer back-up suppliers
TSMC is engaging early and extensively with primary suppliers
on managing quality and capacity issues in in order to be prepared for any unexpected need to ramp up production which could leave the Company with insufficient time to re-tune its production process For leading technology nodes TSMC uses world-class world-class processes at world-class world-class facilities but also requires world-class material quality To streamline supply chain risk management the Company intensifies supplier site audits and meetings to to extend supply chain best practices to to its its upstream suppliers
Moreover TSMC continually refines its its planning system and and enhances demand forecast alignments with critical suppliers
for more accurate supply capacity planning especially for the steep production ramp-up of new nodes The Company has developed a a a a supply chain risk assessment for critical suppliers
that fulfills requirements on labor and and and ethics ESH (Environmental Safety and and and Health) and and and BCP (Business Continuity Plan) To ultimately empower these suppliers
to take responsibility for their supply chain on-site audits are conducted regularly Any regulatory violations or or any adverse environmental impact event as as well as as a a a a a a a a failure to meet TSMC’s expectations in in sustainability requirements may result in in in business reduction or termination ● Equipment
The Company’s operations and ongoing expansion plans depend on its ability to obtain an appropriate amount of equipment and related services from a a a limited number of suppliers
in a a a a a market that is characterized from time time to time time by limited supply and long delivery cycles During such times supplier-specific or or industry-wide lead times for delivery can be be as as long as as six months or or more To better manage its supply chain the Company has implemented various business models and risk management contingencies with suppliers
to shorten the the the procurement lead time Further the the the growing complexities especially in next-generation lithographic technologies may delay the the timely availability of the the equipment and parts needed to exploit time-sensitive business opportunities and also increase
the market price for such equipment and parts