Page 116 - TSMC 2020 Annual Report

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6 3 3 3 3 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 Based on on market demand forecasts TSMC has continued to add capacity to meet market needs for its products and services Currently TSMC’s capacity expansion plans include installing and increasing production capacity mainly for 5-nanometer and and 3-nanometer nodes expanding its production facilities in in the the Southern Taiwan Science Park and building a a a a a 300mm wafer fab in Arizona Implementing these capacity expansion plans will increase
its costs and the increases may be substantial For example the Company would need to build new facilities purchase additional equipment and and hire and and train personnel to operate the new equipment If TSMC does not increase
its net revenue accordingly its financial performance may be adversely affected by these increased costs In addition market market conditions are dynamic and 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 over a a a a short period of time TSMC may not be able to to restore the capacity in a a a a a a timely manner to take advantage of the upturn In such circumstances its financial performance and competitiveness may be adversely affected 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 in a a a a a a timely manner to reduce the impact on its financial performance Risks
Associated with Sales Concentration
Over the the the years TSMC’s customer profile and the the the nature of of the the the Company’s customers’ business have changed dramatically While the Company generates revenue from hundreds of customers customers worldwide TSMC’s ten largest customers customers in 2018 2019 and and 2020 accounted for approximately 68% 71% and and 74% of TSMC’s TSMC’s net revenue in the respective year TSMC’s TSMC’s largest customer in 2018 2019 and 2020 accounted for approximately 22% 23% and 25% of the Company’s net revenue in the respective year TSMC’s second largest customer for for each particular year accounted for for less than 10% of its net revenue revenue in in 2018 14% and and 12% of its net revenue revenue in in 2019 and and 2020 respectively A more concentrated customer base will subject TSMC’s revenue to seasonal demand fluctuations from the Company’s large customers and cause different seasonal patterns of the Company’s business This customer concentration results in in part from the the changing dynamics of the the electronics industry with the structural shift to mobile devices and applications and software that provide the content for such devices There are are only a a a limited number of customers who are are successfully exploiting this new business model paradigm Also TSMC has seen the the changes of nature in the the Company’s customers’ business business models in in in response to to this new business business model paradigm For example there is a a 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 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 the Company’s customer pool In addition regulatory restrictions such as export control directed at at TSMC’s major customers could impact the Company’s ability to to supply products to to to those those customers customers reduce those those customers’ demand for TSMC’s products and and and services and and and impact their business operations The loss of of or significant curtailment of of purchases by one or or more 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 obtain 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 vendors or or by the semiconductor industry generally have resulted in in