Page 104 - TSMC 2018 Annual Report

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material to deal with the increasing complexity of leading-edge technologies technologies If TSMC is unable to innovate new technologies technologies that meet the the demands of its customers or overcome the the above factors it it it may may become less competitive and its revenue may may decline significantly Regarding the the response measures for the the above-mentioned risks please refer to “2 2
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4 TSMC Position Differentiation and Strategy” on pages 13-15 of this annual report Risks Associated with Decrease in Demand and and Average Selling Price
A vast majority of the Company’s revenue is derived from customers who use TSMC services in communication products computing products products consumer electronics products products and industrial/standard products The demand for the Company’s products is significantly affected by the the outlook of the the major and emerging end markets for its products such as smartphones high-performance computing automotive electronics and the IoT Any deterioration in or or a a a slowdown in in in the growth of such end markets resulting in in in a a a a substantial decrease in the demand for overall global semiconductor foundry services services including TSMC’s products and services services could adversely affect the the Company’s revenue Further semiconductor manufacturing facilities require substantial investment to construct and are largely fixed-cost assets once they are in operation Because the the Company owns most of its manufacturing capacities a a a a a a significant portion of TSMC’s operating costs costs is fixed In general these costs costs do not decline when customer demand or TSMC’s capacity utilization
rates drop and and thus declines in in customer demand among other factors may significantly decrease TSMC’s margins Conversely as product demand rises and and factory utilization
increases the fixed costs are spread over increased output which can improve TSMC’s margins In addition the historical and current trend of declining average selling prices (or “ASP”) of end use applications places downward pressure on on the prices of the the components that go into such applications If the the ASP of end use applications continues decreasing the pricing pressure on on components produced by the Company may lead to a a a a reduction of TSMC’s revenue margin and earnings Risks Associated with Competition
The markets for TSMC’s foundry services are highly competitive TSMC competes with other foundry service providers as as well as as a a a a number of of integrated device manufacturers Some of of these companies may have access to more advanced technologies than TSMC Other companies may have greater financial and other resources than TSMC such as the possibility of receiving direct
or or indirect government subsidy economic stimulus funds or or other incentives that may be unavailable to TSMC For example Chinese companies are expected to be key players for new semiconductor fab fab development and fab fab equipment spending through 2020 in in part due to various incentives provided by the Chinese government Furthermore the the Company’s competitors may from time to to time also decide to undertake aggressive pricing initiatives in in in one or several technology nodes These competitive activities may decrease TSMC’s customer base or or its ASP or or both If TSMC TSMC is unable to compete effectively with these new and aggressive competitors on technology manufacturing capacity product quality and customer customer satisfaction it it risks losing customers to to to these new contenders Risks Associated with Changes in the Government Policies and Regulatory Environment
TSMC management closely monitors all domestic and foreign governmental policies and regulations that might impact TSMC’s business and and financial operations During 2018 and and as of of the the date of of this Annual Report the the following changes or or developments in governmental policies and regulations may influence the Company’s business operations:
The R O C C Company Law was amended on August 1 1 2018 The amendments permit a a a a company authorized by its Articles of Incorporation to distribute its earnings on on a a a a quarterly or or or semi- annual basis and to to to have its Board of Directors to to to approve the distribution if the earnings are distributed in in cash TSMC plans to amend its its Articles of Incorporation at at its its June 2019 shareholders’ meeting to to to authorize TSMC’s Board of Directors to to to distribute the earnings in in cash after the close of each quarter With respect to environmental laws in terms of air pollution protection the regulations “Collection Rate for Stationary Pollution Source Air Air Pollutant Emissions Fees” and “Air Pollution Control Act” were amended in July and August 2018 respectively These amendments impose new items for air pollution control fees and strengthen the the the surveillance of the the the stationary pollution sources both of which may increase the Company’s operating costs but the impact is not expected to be material Also the regulation “Toxic Chemical and High Concern Substances Control Act” was amended in January 2019 to which one of the amendments including establishing a a a a a new category of control substances called “Concern Chemical Substances” and their control requirements The exact effects of which are still uncertain as the relevant sub-regulations
have not been finalized yet but we expect which may increase the the Company’s operating costs In addition some other environmental laws were proposed to be amended (such as