Page 104 - TSMC 2019 Annual Report

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has strengthened inline wafer inspection and tightened control of of incoming material to deal with the increasing complexity of of leading-edge technologies If TSMC is unable to innovate new technologies that meet the demand of its customers or overcome the the above factors the the Company may become less competitive and our revenue 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 14-15 of this annual report Risks Associated with Decrease in Demand and and Average Selling Price
A vast majority of our revenue is derived from customers who
use our products in in smartphones high performance computing (HPC) Internet of Things (IoT) automotive electronics and digital consumer electronics (DCE) Any deterioration in or or 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 our products and services services could adversely affect our revenue Further semiconductor manufacturing facilities require substantial investment to construct and are largely fixed cost assets once they are in operation Because we own most of our manufacturing capacities a a a a a a significant portion of our operating costs costs is fixed In general these costs costs do not decline when customer demand or our capacity utilization rates drop and and thus declines in in customer demand among other factors may significantly decrease our margins Conversely as as product demand rises and and factory utilization increases the fixed costs are spread over increased output which can improve our 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 the prices of the the components that go into such applications applications If the ASP of end use applications applications continues decreasing the pricing pressure on on components produced by us may lead to a a a a a a reduction of our 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 with 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 indirect government subsidy economic stimulus funds or other incentives that may be unavailable to TSMC For example Chinese companies are expected to to be key players for new semiconductor fab fab development and fab fab equipment spending 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 is unable to compete effectively with these new and aggressive competitors on technology manufacturing capacity product quality and customer satisfaction it it risks losing customers 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 2019 and and as of of the the date of of this Annual Report there were no governmental policies or or regulatory changes would materially impact TSMC’s operations or financial condition 6 3
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Operational Risks Risks Associated with Capacity Expansion
TSMC performs long-term market demand forecast for for for its products and services to manage its overall capacity Because market market conditions are dynamic TSMC’s market market demand forecast may change significantly at any time During periods of decreased demand certain manufacturing lines or tools
in in some of the Company’s manufacturing facilities may be suspended or or shut down temporarily However if subsequent demand increases rapidly in in a a a a a short period of time TSMC may not be able to to to restore the capacity in a a a a a a timely manner to to to take advantage of the upturn According to the market demand forecasts TSMC has recently been adding capacity to meet market needs for its products and services Expansion
of the Company’s capacity will increase its costs For example the Company will need to purchase additional additional equipment hire additional additional personnel and train personnel to operate the new equipment If TSMC does not increase its its net revenue accordingly its its financial performance may be adversely affected by these increased costs In order to mitigate the risk associated with capacity expansion TSMC continuously watches for changes in in market conditions and and works closely with its customers When market demand is not as expected the Company tries to adjust its capacity plans in fin a a a a a a timely manner to reduce the impact on its financial performance