Page 105 - TSMC 2019 Annual Report

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Risks Associated with Sales Concentration
Over the the the years TSMC’s customer profile and the the the nature o of the the the Company’s customers’ businesses have changed dramatically While the Company generates revenue from hundreds of customers customers worldwide TSMC’s ten largest customers customers in 2017 2018 and and 2019 accounted for approximately 66% 68% and and 71% of TSMC’s TSMC’s net revenue in the respective year TSMC’s TSMC’s largest customer in 2017 2018 and 2019 accounted for 23% 22% and 23% of the the Company’s net revenue in the the respective year year TSMC’s second largest customer for each particular year year accounted for less than 10% of the Company’s net revenue in 2017 as as well as as 2018 and 14% of the Company’s net revenue in 2019 A more concentrated customer base will subject TSMC’s revenue to to seasonal demand fluctuations from our large customers and and cause different seasonal patterns of the Company’s business This customer concentration results in in part from the changing dynamics of the the electronics industry with the the structural shift
to mobile devices and and applications and and software that provide the content for such devices There are only a a limited number of customers who
are successfully exploiting this new business model paradigm Also in in order to to respond to to the new business model paradigm TSMC has seen the the changes of nature in in the the Company’s business models For example there is a a a growing trend toward the the system companies developing their own designs and working directly with semiconductor foundries which makes their products and services more marketable in in a a a a a changing consumer market market Also since the global semiconductor industry is becoming increasingly competitive some of TSMC’s customers have engaged in industry consolidations in in in order to remain competitive Such consolidations have taken the form of mergers and acquisitions If more of TSMC’s major customers consolidate this will further decrease the the overall number of the the Company’s customer pool In addition regulatory restrictions such as export control directed
at TSMC’s major customers could impact the Company’s ability to to to supply products and services to to to those those customers reduce those those customers’ demand for TSMC’s products and and and services and and and impact their business operations The loss of or significant curtailment of of purchases by one or or more of of the Company’s top customers including curtailments due to increased competitive pressures industry consolidation changes in in applicable regulatory restrictions product designs 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 Risks Associated with Purchasing Concentration
Raw Materials
TSMC’s production operations require that it obtains adequate supplies of raw materials such as 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 the past shortages in the the supply of some materials whether by by specific vendors or or or by by the the semiconductor industry industry generally have resulted in in in occasional industry-wide price adjustments and delivery delays Moreover major natural disasters trade barriers and 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-sourced suppliers there is is a a a a a risk that the Company’s needs for such raw materials may not be met or or that back-up supplies may not be readily available In addition recent trade tensions could result in in increased prices or even unavailability of raw materials due to tariffs export control or or other non-tariff barriers TSMC’s revenue and earnings could decline if the Company is unable to obtain adequate supplies of the the necessary raw materials in a a a a a a timely manner or if there are significant increases in in the costs of raw materials To reduce the the supply chain risk and to manage the the cost effectively TSMC commits resources toward developing new supply sources sources In addition the Company continually encourages its suppliers to reduce their supply chain risk by decentralizing production plants and to improve their their cost competitiveness by moving their their production facilities to Taiwan from higher-cost areas Given that qualified backup suppliers are hard to obtain TSMC engages early and extensively with primary suppliers on managing quality and capacity issues to be prepared for any unexpected need to ramp up or curtail production when the Company lacks sufficient time to re-tune its production process For leading technology nodes TSMC not only adopts world-class processes and facilities but also requires world-class materials To streamline supply chain risk management the Company has increased supplier site audits and meetings to extend supply chain best practices to its upstream suppliers In addition in in in response to the rapid increase or decrease in in in production capacity of new products TSMC has continued to improve its inventory monitoring system to to to achieve more accurate demand forecasts and ensure that the supply chain maintains sufficient inventory levels The Company has established a a a a a supply chain risk assessment to ensure critical suppliers meet standards in labor ethics ESH (Environmental Safety and and Health) and and BCP (Business Continuity Plan) Onsite audits are conducted regularly to to empower these suppliers to to take responsibility for their supply •