ASE Technology - Q3 2020
October 30, 2020
Transcript
Ken Hsiang (Head of Investor Relations)
Hello. I am Ken Hsiang, the head of investor relations for ASE technology holding. Welcome to our third quarter 2020 earnings release. Thank you for attending our conference call today. Please refer to our Safe Harbor notice on page two. All participants consent to having their voices and questions broadcast via participation of this event. I would like to remind everyone on this call that the presentation that follows may contain forward-looking statements. These forward-looking statements are subject to a high degree of risk, and our actual results may differ materially. For the purposes of this presentation, our dollar figures are generally stated in new Taiwan dollars unless otherwise indicated. As a Taiwan-based company, our financials are presented in accordance with Taiwan IFRS. Results presented using Taiwan IFRS may differ materially from results using other accounting standards.
I am joined today by Dr. Tien Wu, ASE Holdings COO, and Joseph Tung, ASE Holdings CFO. For today's call, I will be going over our financial results. Tien will be providing a market overview, and Joseph will provide a recap and our guidance. We will have a Q&A session following the prepared remarks. As with the rest of 2020, the third quarter has proven that there is never a dull moment, especially in the electronics industry. The third quarter was remarkably eventful for us. Typical seasonality ran through August with run rates reaching historical highs. However, in September, the US Bureau of Industry and Security Export Administration Regulations, EAR for short, went into effect. As a result, for our ATM business, we commenced to replace capacities left open by exiting business. This process occurred much more quickly than anticipated, as our overall loading levels snapped back to full utilization.
During the quarter, we took two charges related to the EAR: one in cost of goods related to unused inventory, and one in non-operation for interface boards used specifically for EAR-impacted customers. We also experienced near-term highs in the value of the NT dollar relative to the US dollar. Meanwhile, our EMS business ramped up a bit later in the year in line with a deferred seasonal pattern. We don't believe the EMS business has yet peaked for this manufacturing season. In total, we ended the quarter strong, with strength across our core SiP, advanced packaging, and wire bond products. Please turn to page three, where you will find our third-quarter consolidated results at the holding company level. In this section, we will generally defer business explanations to our ATM and EMS P&L discussions. Intercompany transactions between our ATM and EMS businesses have been eliminated during consolidation.
For the third quarter, we recorded fully diluted EPS of TWD 1.54 and basic EPS of TWD 1.57. This means that on a year-to-date perspective, we have fully diluted EPS of TWD 4.01 and basic EPS of TWD 4.12 exceeding full-year 2019 EPS already. Consolidated net revenue was TWD 123.2 billion, representing a 15% increase quarter-over-quarter and a 5% increase year-over-year. We had a gross profit of TWD 19.7 billion, with a gross margin of 16%. Our gross margin declined by 1.5 percentage points quarter-over-quarter and 0.3 percentage points year-over-year. The sequential margin decline is primarily the result of EAR impact, a stronger NT dollar environment, and a higher EMS business mix. The year-over-year decline is primarily the result of EAR impact and the strong NT dollar.
Our operating expenses increased by TWD 0.2 billion during the third quarter to TWD 10.6 billion as a result of higher operating expenses in our EMS business unit, offset in part by lower operating expenses in our ATM business unit. Despite the increase, our operating expense percentage declined 1.1 percentage points sequentially and 0.5 percentage points year-over-year to 8.6%. This amount is currently trending below our 2018 operating expense percentage. Operating profit was TWD 9.1 billion, up TWD 0.7 billion sequentially and year-over-year. Sequentially, operating margin declined 0.4 percentage points to 7.4% while increasing 0.3 percentage points year-over-year. During the quarter, we had a net non-operating loss of TWD 0.1 billion. This amount primarily consists of net interest expense of TWD 0.7 billion and an EAR-related tooling impairment of TWD 0.7 billion. This amount was offset in part by net foreign exchange investment and sale of equipment gains.
Tax expense for the quarter was TWD 1.8 billion. The effective tax rate for the third quarter was 20%. Net income for the quarter was TWD 6.7 billion, representing a decline of TWD 0.2 billion sequentially and an improvement of TWD 1 billion year-over-year. We believe it important to note the operating margin impact of the strengthening NT dollar and the EAR-related write-down. Removing the inventory charge while using the second-quarter exchange rate, we estimate an operating margin of 8.6%. And similarly, using the third-quarter 2019 exchange rate, we estimate an operating margin of 9.7%.
Without inclusion of the EAR-related inventory and equipment write-down totaling TWD 1.6 billion, we would have basic EPS of TWD 1.84 during the quarter. On the bottom of the page, we have again provided key P&L line items without the inclusion of PPA-related expenses. Consolidated gross profit excluding PPA expenses would be TWD 20.6 billion, with a 16.7% gross margin.
Operating profit would be TWD 10.3 billion, with an operating margin of 8.3%. Net profit would be TWD 7.9 billion, with net margin of 6.4%. Basic EPS excluding PPA expenses would be TWD 1.84. On page four is our ATM P&L. It is worth noting here that the ATM revenue reported here contains revenue eliminated at the holding company level related to intercompany transactions between our ATM and EMS businesses. The third quarter for our ATM business was incredibly busy. Usually, that's good. We do a lot of work, and we get a lot of revenue for it.
We had a different kind of busy this quarter, in which we were busy stopping EAR devices, retooling factory lines, and restarting replacement devices. This happened at a frenzy pace. As a result, despite the EAR disruption, we still saw measured growth. That's actually a significant achievement given the size of the business lost.
More about that later from Dr. Wu. After the third quarter finished, our ATM business outperformed our initial expectations rather significantly. In retrospect, we are somewhat surprised at the efficiency of the supply chain and the pace at which our capacity refill has happened. The refill was not the linear recovery we had initially anticipated. Instead, business snapped back, with new products rushing to replace vacated products. During the quarter, our ATM business continued seeing a strengthening NT dollar environment in which the NT dollar appreciated 1.6%. Given that our orders are generally denominated in U.S. dollars while our factory costs are mostly denominated in NT dollars, a strengthening NT dollar brings a higher cost structure for us. If the NT dollar stays strong for a longer term, we believe that we may be able to adjust pricing to compensate and purchase relatively cheaper U.S.-denominated machinery and equipment.
Shorter-term movements are more difficult to position. For the third quarter 2020, revenues for our ATM business were TWD 71.8 billion, up TWD 2.3 billion from the previous quarter and up TWD 3.9 billion from the same period last year. This represents a 3% increase sequentially and a 6% increase year-over-year. Our ATM revenues came in somewhat ahead of our expectations due to stronger snapback of revenue post-EAR impact. Gross profit for our ATM business was TWD 14.5 billion, down TWD 0.5 billion sequentially and down TWD 0.2 billion year-over-year. The sequential and year-over-year gross profit decline was primarily related to a one-time inventory write-off of EAR-related customer substrate of TWD 0.9 billion and a stronger NT dollar. Gross profit margin for our ATM business was 20.2%, down 1.5 percentage points sequentially and year-over-year. Margin decline was primarily attributable to EAR and NT dollar impact.
During the third quarter, operating expenses were TWD 7.7 billion, down TWD 0.1 billion sequentially and TWD 0.6 billion year-over-year. The sequential and year-over-year declines were driven by lower administrative costs. Our operating expense percentage was 10.8%, down 0.5 percentage points sequentially and down 1.4 percentage points year-over-year. During the third quarter, operating profit was TWD 6.8 billion, representing a decline of TWD 0.4 billion quarter-over-quarter and an improvement of TWD 0.4 billion year-over-year. Operating margin was 9.5%, declining 0.9 percentage points sequentially and improving 0.1 percentage points year-over-year. For gross and operating margins, the one-time EAR inventory write-off had a 1.2 percentage point impact. We estimate that the strengthening NT dollar also had a 0.8 percentage point impact to gross margin sequentially and a 2.7 percentage point impact year-over-year.
Without the impact of PPA-related depreciation and amortization, ATM gross profit margin would be 21.5% and operating profit margin would be 11.1%. On page five, you'll find a graphical presentation of our ATM P&L. On page six is our ATM revenue by market segment. Not much has changed here. On page seven, you will find our ATM revenue by service type. As stated earlier, capacity snapped back to running near full outside of certain capacities requiring longer NPI time, and those NPIs are in process. From this chart, you can see here that our wire bonding business is performing particularly well. We believe that our wire bonding business is seeing a resurgence of demand. More about this from Dr. Wu later. On page eight, you can see the results of our EMS business and its associated revenue by application.
For our EMS business, the third quarter usually represents the peak quarter in terms of seasonality. However, we anticipated a somewhat delayed manufacturing cycle. With that in consideration, demand for our EMS business was stronger than anticipated, driven by strong SiP demand. During the third quarter, we had revenues of TWD 53.1 billion, increasing 34% sequentially and 5% year-over-year. EMS revenues increased quarter-over-quarter primarily because of our seasonal business ramp. EMS revenues increased year-over-year primarily as a result of stronger demand for SiP products offset by a somewhat later seasonal product cycle. Our EMS gross profit was TWD 5.1 billion, improving TWD 1.4 billion sequentially and TWD 0.7 billion year-over-year. The sequential and year-over-year gross profit improvements were driven primarily by stronger customer demand for SiP-related products.
Gross profit margin for the EMS business came in at 9.7%, an improvement of 0.3 percentage points sequentially and 0.8 percentage points year-over-year. The margin improvement is primarily the result of product mix changes. Our EMS business unit's third quarter operating expenses were TWD 2.8 billion, increasing TWD 0.3 billion sequentially and TWD 0.4 billion year-over-year. Operating expenses increased primarily as a result of increased employee profit sharing. Operating expense percentage was 5.3%, dropping one percentage point as compared with 6.3% last quarter and increasing 0.5 percentage points year-over-year. Our EMS operating profit for the quarter was TWD 2.3 billion, representing a TWD 1.1 billion improvement sequentially and a TWD 0.2 billion improvement year-over-year. The sequential operating profit improvement was primarily due to increased seasonal demand.
Our EMS operating margin was 4.4%, which is a 1.3 percentage point improvement sequentially and a 0.3 percentage point improvement year over year. On the chart on the bottom half of the page, you'll find a graphical representation of our EMS revenue by application. Our consumer segment picked up seasonally, and this season we expect to add an incremental SiP product. We would expect that this segment continues to pick up into the fourth quarter. It is again worth noting that our EMS business unit runs under the name Universal Scientific Industrial and is traded as an A-share on the Shanghai Stock Exchange under the ticker number 601231. We currently own 75% of the company, which translates roughly to TWD 5.9 billion. In regards to our regulatory filing to complete our acquisition of Asteelflash, the current COVID-19 resurgence in Europe is impacting the duration of our regulatory reviews.
As of yesterday, France announced its second countrywide lockdown. As a result, we currently expect the completion of our combination with Asteelflash to be somewhat delayed. We now expect for the regulatory process to complete before year-end. On page nine, you will find key line items from our balance sheet. At the end of the quarter, we had cash, cash equivalents, and current financial assets of TWD 61.8 billion. Our interest-bearing debt increased TWD 7.1 billion to TWD 224.6 billion. Total unused credit lines amounted to TWD 255.6 billion. Our EBITDA for the quarter was TWD 23.2 billion. We continue to target a net debt-to-equity ratio of 60%-65% by the end of 2021. On page 10, you will find our equipment capital expenditures.
Machinery and equipment capital expenditures for the third quarter in US dollars totaled TWD 415 million, of which TWD 288 million were used in packaging operations, TWD 73 million in testing operations, TWD 52 million in EMS operations, and TWD 2 million in interconnect materials operations and others. 2020 is providing us an unusual situation. We understand that there is an expectation of perfect fungibility where replacement business uses entirely the same package types or tester platforms and requires no incremental tooling. In such a perfect scenario, incremental capital investment becomes completely unnecessary when replacement business comes on board. Unfortunately, this perfect scenario almost never happens. One customer may have used a fan-out process when another one uses bumping and flip chip. Customers may even use the same model tester but with different instruments or configurations.
As a result, in many cases, we have to make smaller investments on tooling or instruments to load previously purchased larger investments. In addition to facilitating the refill, we are seeing a significant pickup in our demand in wire bond-related capacities. As a result, we do see the need to invest in our wire bond lines. Tien will speak shortly on this also. On page 11, we have a brief year-to-date recap. All information here is presented on year-to-date terms. Holding company revenue grew 15% year-over-year on U.S. dollar terms. ATM revenues grew 19% year-over-year on U.S. dollar terms, with gross margins improving 1.9 percentage points. Removing the impact of currency and EAR-related expenses, gross margins improved 4.2 percentage points. EMS revenues grew 12% year-over-year in U.S. dollar terms. Year-to-date EPS is TWD 4.12.
For an update of the overall market environment, I'll now turn the microphone over to Dr. Tien Wu.
Tien Wu (COO)
Hi, this is Tien Wu. I would like to offer you a business environment. If you look at page 12, the assembly capacities are tight. In particular, wire bond capacity is extremely tight. The tightness situation, we expect that to last at least until Q2 of next year. In this particular environment, because we're seeing the tightness in wire bond as well as in all other assembly capacities, we believe the ASP environment will be friendly in 2021. In fact, we will start seeing the margin improvements starting Q4 this year, but we do expect the ASP environment to be more friendly in 2021 comparing to the previous years. Let me talk about the sectors from our perspective. In the communication sector, we have 5G driving a portion of the growth.
We also have a lot of Wi-Fi 6 standards driving the multiple upgrade cycles in communication as well as in automotive. We have seen a slowdown in automotive in Q1 and Q2. In Q3, we're seeing a remarkable recovery and strength in the automotive sector. We believe this will be reflected in Q4 as well as next year. Computing and consumer demands have been strong, and they remain strong for Q4. We also believe the computing and the consumer demands will be strong for 2021. A lot of investors are asking us about the COVID-19 effect, and I would like to share our perspective with you. The COVID-19 has created new values for technology products. Namely, the technology products are viewed to be an alternative to reduce medical risk, which I will elaborate a little bit more. Also, facilitating social connectivity in addition to the traditional value of digital efficiencies.
What I was referring to is because of work from home, because of learn from home, people are buying IT products to minimize and reduce the medical exposure and the medical risk because of COVID-19. Because of COVID-19, the social connectivity will be augmented by the IT products. So in this scenario, we're seeing two fundamental changes in consumer behavior. First, more people tend to buy IT products. Second, people are willing to pay a higher price to buy IT products with performance. It is in this regard we believe we are seeing during the COVID-19 days why the IT products in almost all sectors are showing particular strength, especially the communication products.
So in that regard, with the 5G, with the Wi-Fi, with all of the upgrade cycles which were permeated through the cell phone, the automotive as well as PC, Bluetooth, and all of the IoTs, we believe there are fundamental changes in the way people are willing to spend money to buy IT products. Also, in the product mix, we're clearly seeing the product mix as well as product complexity increasing. In particular, in the wire bond, the number of stacked dies that we're doing now is more than before. The type of product we're doing for RF, for analog, that we're seeing more multiple dies require wire bond, which we have not seen before. So in this particular cycle, it's not just the volume. It's also the number of dies, the number of wires, as well as the complexity.
On top of that, because some are going to medical devices and automotive, the kind of quality requirement is also different from the consumer. That is why for quality wire bond service, we can command a premium in this year and I believe in 2021 as well as years going forward. Let me comment about the OSAT, overall CapEx expenditure. If you go back to 2018, 2019, as well as the 2020 number, which we do not have the complete view, you will see that the overall OSAT industry, we believe, has been underinvested. In that particular scenario, ASE has been spending CapEx in 2018 and 2019 as well as in 2020. Going forward, we will accelerate in spending in Q4 such that we can put more capacity in place in anticipating as well as the fulfilled commitment based on our customers' demand.
Going into 2021, we will be moderating on the CapEx, which Joseph, our CFO, will talk a little bit more. Based on the new design wins as well as all of the long-term contracts and forecasts, as of today, we believe we will have a strong 2021, and we're quite optimistic about that. Once again, which I'll be happy to talk to you about our growth as well as market share gain, in our calculation, if we exclude the EAR impact, we believe ASE is gaining shares in all sectors, in all package types. Please turn to the next page, page 13. Ken already talked about the painful experience and the sudden nature of the EAR action. The EAR affected ATM revenue in Q1 and Q2, were about 20% comparing to our overall ATM run rate. In Q3, it was down to about 13%. In Q4, it will be zero.
Greater than 75% of the lost revenue and the lost capacity has been backfilled, which Ken already talked about it, by many other customers with the help through all of our partners throughout the supply chain and customers. The remaining 25% will be backfilled by end Q1, 2021. So as of today, we're confident that our year-over-year growth in 2021 will still be positive. In other words, all of the tooling, all of the asset disposition has been completed either in Q3 or the latest will be completed by Q4 of this year. Ken already talked about it. We had a one-time write-off, which was included in the Q3 number that we just reported. With all of the additional work in Q4 or Q1 of next year, there will not incur any additional charges. With that, I will turn the floor to our CFO, Joseph Tung.
Joseph Tung (CFO)
Okay. Good afternoon, everybody. This is Joseph. Before I get into the further comments on the financials, I would like to give a very brief comment on quarter three. Certainly, we have successfully managed through a very chaotic third quarter and came out with much stronger than expected quarterly results. It was with close collaborations among different operating units that we can substantially reduce the negative impact of the EAR restriction and quickly regain our momentum going forward. Now, with that, I want to take a few minutes to update on the progress we are making on some of the financial targets we set out to achieve at the beginning of the year. First, on OpEx ratio, our target is to go back to 2018 level of 9.4%. In quarter three, it had come down to 8.6% from 9.7% a quarter ago, way below the target level.
Now, with continuous effort going into Q4, I strongly believe that we will not only reach our target but are more likely to exceed that. Second, on OPM or operating margin, we stated we shall see 2% improvement in the year. I believe we are ahead if we take out the negative impact from NT dollar appreciation and EAR-induced inventory write-down. Although it is difficult to quantify, the overall improvement of operating margin came from synergy. Part of the overall operating margin improvement came from synergy created between ASE and SPIL through increasing coordination. Going forward, we will further deepen and broaden such coordination on various parts of our operation, including capacity alignment, business development, procurement, and R&D. Thirdly, on CapEx, after heavy investment in the past three years to support our strong business momentum going forward, our CapEx in 2021 should start to moderate.
At this point, I believe 2021 CapEx amount should fall between 2018 and 2019 level while more leaning toward 2018 level. With the improved profitability and reducing CapEx, our cash flow position in 2021 will see good improvement. Therefore, it will allow us to increase our cash dividend payout to no less than TWD 3 per share while still reaching our leveraging target of 60%-65% net debt to equity ratio by end of 2021. Okay. Now, with that, let me give you our fourth quarter guidance. Based on our current business outlook and exchange rate assumptions, management projects overall performance for the fourth quarter of 2020 to be as follows. In NT dollar terms, ATM fourth quarter 2020 business should be similar with first half 2020 level. ATM fourth quarter 2020 gross margin should be similar with first half 2020 level.
On EMS, in NT dollar terms, fourth quarter revenue, the business sequential growth rate should be similar with the average of second and third quarter 2020 levels. While EMS fourth quarter 2020 operating margin should be slightly better than the average of second and third quarter 2020 levels. It is a bit complicated, but I'm sure everybody will figure that out. Thank you very much. Now, I would like to open the floor to Q&A.
Operator (participant)
Yes. Thank you. Ladies and gentlemen, we are now in Q&A session. If you have any questions to pose, please press zero one on your telephone keypad. After your name is announced, please ask your questions. If you would like to cancel your questions, please press zero one. Now, please press zero one on your keypad if you would like to ask questions. Thank you. The first to ask questions, Gokul Hariharan, JPMorgan. Go ahead, please.
Gokul Hariharan (Managing Director)
Yeah. Hi. Congrats on managing through the situation in Q3 and the good results. Quick question on IC ATM. Could we talk a little bit about we talked about some price adjustments potentially, and could we talk a little bit more in detail about what are the discussions you are having with customers? And given that this year, currency has clearly affected margins and taken away a fair bit of the margin improvement, could we talk about the conversations that you're having with customers on potential price adjustments for the currency side? That is my first question. Second is we do hear that there is some degree of capacity shift happening towards non-China OSATs. What does ASE see in terms of your customer base, both for advanced packaging as well as wire bond?
How should we think about capacity build for ASE given that you also sold a small fab in China while announcing meaningful investments in Kaohsiung? Thank you.
Tien Wu (COO)
All right. To answer the first question, we will not comment on any specific customer engagement. However, in the overall scenario, the wire bond gap as of today is anywhere between 30%-40%. It is not a 3%-4% gap. The gap is quite substantial. ASE today, we have the largest installed base in wire bond as well as the best efficiency and quality. A lot of customers, either they're moving business from somewhere else or just based on organic growth or the new product ramp, the demand is very, very strong.
The kind of conversation that we're having is, for example, there is a lead frame and substrate cost increase and the gold price, and there's a gold price, gold adder. And whenever there is an expedite delivery, that cost will be reflected. Particularly, we are engaging with multiple customers in a much longer service contract. For example, we would talk six months, one year, and in some cases, we're talking about two years take-or-pay. In other words, all of the capacity we have put in place since 2018 has been put to use. Right now, we're cautious in terms of adding capacity because we understand the tightening situation. We need to be a little bit more cautious. But all of the capacity right now we're adding do have long-term service contract behind it. And we believe now, even with the pace that we're adding, the industry supply. Excuse me.
I'm sorry. I'm sorry. Are you asking a question or are you making a comment?
Gokul Hariharan (Managing Director)
No, no. I'm on mute.
Ken Hsiang (Head of Investor Relations)
I don't think that was Gokul. That was the operator. Operator, can you put yourself on mute?
Operator (participant)
Yes. I'm sorry. I apologize for the interruption.
Tien Wu (COO)
Okay. Right. So in that particular scenario, we believe the assembly equipment lead time right now is quite long. And I don't believe we are overbuilding capacity in any stretch of the imagination, which is why I made a comment that tightness situation will last at least until Q2 of next year. All right? So that answered the first question. For the second question, I can't really comment which one of our customers could be moving from China. I believe the movement is both sides. Obviously, we do have customers who intended to have more of the supply chain outside of China.
We do have seen those cases. But I believe we also have other cases.
Gokul Hariharan (Managing Director)
Thanks, Dr. Wu. Just one confirmation. So 30%-40% is the supply-to-demand gap in wire bonding, right?
As of today, that is correct. But I am making a comment on behalf of ASE.
Tien Wu (COO)
Understood. Thank you very much. And I'll go back to the queue. Thank you.
Operator (participant)
Next one to ask questions, Bruce Lu from Goldman Sachs. Go ahead, please.
Bruce Lu (Managing Director)
Hi. Hi, Prof. Tien. So my question is mainly for Tien. I think that from our perspective, we are happy to see that the management is commenting on some of the dollar content growth for the packaging. Can you elaborate more? Because what we saw here is that, for example, 5G smartphone chip, we see a lot of dollar content growth from the wafer side, from the production side.
But for the packaging and testing, maybe a little bit for the testing, but the entire dollar content for the packaging is not growing or is growing a lot slower than the wafer at the foundry side. So can you comment a little bit more about what kind of dollar content growth for the packaging moving forward as an industry basis?
Tien Wu (COO)
That really is a very difficult question because I think, in general, people are complaining that the packaging is becoming a higher percentage of cost within the total. I believe if you comment based on the automotive, clearly see more semiconductor. In the latest, the 5G phones, you've seen the AiP. You have seen the front module. You have seen the PA. You're also seeing more semiconductor content.
But in terms of the packaging versus the overall increasing semiconductor content, my perspective is you will see that percentage going up. I don't believe the packaging cost should be going up as fast as foundry because the foundry, the investment versus return, the business model are completely different. But I do believe because of the complexity and the nature of the heterogeneous integration, you will see the packaging content. When you normalize things, I do believe that trend is going up.
Bruce Lu (Managing Director)
Yeah. But what's difficult for us to see that from the revenue growth side because, for example, a smartphone chip is so clear for the wafer side, but it's not clear at all for the packaging side. So it's difficult for us to can you give us certain quantitative analysis for that?
Tien Wu (COO)
I don't think I have that number. My apology.
Bruce Lu (Managing Director)
No worries.
So the next question—I'm sorry?
Tien Wu (COO)
Yeah. Go ahead.
Bruce Lu (Managing Director)
Okay. So the next question is that one of your supply chains got a serious fire a couple of days ago. What kind of impact to your business? Because one of the key customers is your key customer as well. So what kind of business impact you included in your forecast for the fourth quarter?
Tien Wu (COO)
Well, thank you for asking that question. We will not comment on the particular incident because they're still going through the clarification. So we're waiting for further report. But having said that, we do have multiple important customers who are affected by this particular fire. But just like all of the supply chain scenario, when you have a position, chances are it is easier for us to go through the supply chain and get replacement as well as get priority.
During the last two days, we have collaborated with all of our customers. So I can tell you with confidence, in Q4, our revenue has already been factored, and the impact is less than 1%. So that has already been factored in. Today, we're working on the alternative supply for all of the key customers in our global, the substrate suppliers. We believe the situation is complicated. But like everything in the past, this is not the first time we encounter supply chain disruption. We had a much worse scenario, and we handled that pretty well. In this round, I hope our particular partner in Taiwan can recover soon. But as of today, the situation is manageable.
Bruce Lu (Managing Director)
Okay. Can I ask you one more question, which is for the ASP? Management was talking about ASP will be friendly in 2021.
Does that friendly situation only happen in wire bond or it happened in flip chip testing or overall? And what about the SiP pricing environment?
Tien Wu (COO)
All right. I guess the best way to answer is more friendly in wire bond. But the other product is also friendly compared to last year. All right. My apologies. That's pretty much all I can tell you.
Bruce Lu (Managing Director)
How about SiP?
Tien Wu (COO)
SiP, same. Because chances are when you have an allocation in a particular package type, it basically cascades down to all other products.
Bruce Lu (Managing Director)
Okay. Thank you. I'll go back to the queue.
Tien Wu (COO)
All right.
Operator (participant)
Now, the line is open to Szeho Ng, China Renaissance. Go ahead, please.
Szeho Ng (Managing Director)
Hi. Good afternoon, gentlemen. My first question is regarding the CapEx. You mentioned that next year's CapEx will be going back to the 2018 level. That would represent quite a sharp drop compared with this year's level.
So I just wondered, which areas are you holding back the investments for next year?
Tien Wu (COO)
Well, I already made a comment. If you look at the ASE in 2018, we started a major investment ramp. We called it a super cycle. In 2018, we invested. 2019, when everybody backed off, I forgot the number, but I think our number is TWD 1.4 billion-TWD 1.5 billion. We ratchet up. And if you go back to the 2019 total, all of the other 19 OSAT combined, they spent TWD 700 million less. I think ASE spent TWD 400 million or TWD 500 million more. As a result of that, in 2020, even in the early days when people were not exactly sure, we just got another super cycle. That's why in Q1, Q2, Q3, we managed to spend a good amount of dollar. I'm not sure we have reported the number, but we did.
In Q4, we will continue to spend. Now, after the three years of the super cycle, we believe we have all of the technology. We have all of the basic elements in place. Of course, what we can do is we can continue to expand in 2021 and beyond. But another alternative is just look at all of the capacity based on what we have and then look at it from a synergy perspective, look from a customer-based perspective, and how do we optimize and maximize the capacity that we already put in place. Also, mind you, over the last three years, a lot of the CapEx are going to the automation. So as of today, ASE has 18 lights-out factories. And we're trying to explore and trying to expand the efficiency advantage of those lights-out factories.
So between all of these things, our current view is we should probably more moderate. We're not really reducing CapEx. We're reducing CapEx back to the normal level, but we're not doing the super cycle anymore, if that helps you. But of course, any business environment can change. If our customers are demanding, "We need to do more," then we do more. All right? But this is just based on and we also believe our OSAT competitor will probably realize this again, and they might spend more in 2021 going forward. So it really depends on how other. I mean, you just do a contrarian approach. When people are not investing, we invest. And we just want to stay ahead of the curve. But if we don't invest, then we'll continue to invest.
Szeho Ng (Managing Director)
Okay. Got you. And.
Joseph Tung (CFO)
A little bit of backdrop of the moderating CapEx in 2021 is that we are actually upping our CapEx this year, going into Q4 because of the overall retooling, realignment, and also we're trying to fill the gap that exists today on wire bonding. So the overall CapEx for this year is actually going to exceed our original target.
Szeho Ng (Managing Director)
Okay. Got you. And second question, when we go to the heterogeneous testing level. Yeah. So what role are we going to play in that area?
Ken Hsiang (Head of Investor Relations)
I apologize. You're asking the testing. Can you repeat the first part because it wasn't very clear?
Szeho Ng (Managing Director)
Oh. I'm talking about advanced assembly. It's necessary in the heterogeneous packaging. What roles are we playing when we go to the heterogeneous packaging industry or the packaging?
Ken Hsiang (Head of Investor Relations)
All right. When we talk about the heterogeneous integration, it's such a generic term. Everyone uses it. All right?
For the packaging industry, what we're referring to is silicon, passive, sensors, optical, audio, all kinds of intrinsic different components and functionality. We will call that the heterogeneous integration. Now, if you really look at all of the SiP products that we're building, whether it's in the optical space, in the audio space, or consumer space, we tend to have a very diversified functionality and integrate it through packaging. So this is slightly different from the SoC approach. Or when you put memory chips and logic chips and passive together, that's also HI, but it is slightly different because the chips are chips. It's large chips, small chips, and different functionality of chips, but it's the two chips. The mechanical and physical behavior will be very, very similar, which is why it is expensive, but it's easier to do integration.
For the packaging, you really have to think about generically, intrinsically, different material side, different physical, different mechanical material characteristic, and we put that together. I think that's what packaging HIR was referring to.
Szeho Ng (Managing Director)
Okay. All right. Got you. And my last question maybe on the financial part, what is the company's gross margin sensitivity to the FX? Any ballpark indication would be helpful.
Joseph Tung (CFO)
Oh. For each percentage point appreciation of NT dollar, that will have a on the ATM side, we'll have a 50 basis point impact on our gross margin. But at the holding level, such impact would be 30 basis points. Oh.
Szeho Ng (Managing Director)
Okay. All right. Okay. Thank you very much, Joseph. Yeah. Thank you.
Joseph Tung (CFO)
Thank you.
Operator (participant)
Next one to ask questions, Roland Shu from Citigroup. Go ahead, please.
Roland Shu (Analyst)
Hi. Good afternoon. I think my first question is you talk about for your EAR, all the impact.
75% of the demand has been backfilled, and the 25% will be backfilled in first quarter next year. So question is, what kind of demand has been delayed, backfilled to the first quarter next year? And how confident are you that this demand will be backfilled in first quarter next year? Thank you.
Tien Wu (COO)
Okay. We're seeing strength from all sectors, which I've reported. But given the nature of the capacity that became available after September 15th, we are entertaining a lot of the customers from communication sectors. Now, we have also done a retooling. For example, a lot of the bumping facility capacity can be retooled to serve customers in other sectors. The 75% has already been backfilled. We have very high confidence the remaining 25% will be backfilled by end Q1 of next year because we are currently in a capacity constraint.
It's a matter of how fast can we retool, how fast can we do the CapEx, upgrade the card. There's a lot of details that we're doing through. So I think we have been extremely busy for the last few months just trying to work with all of our customers. But the customer demands are strong, and all of them have given us very strong indication, either by contract or by firm commitment, that this will be the case.
Roland Shu (Analyst)
Understood. Thank you. So this is mainly a constraint by the capacity. I think my second question is similar to this. When I look at your 4Q guidance, especially for IC ATM, and I combine your 4Q IC ATM revenue with 3Q together, I think the second half total IC ATM revenue increased about a low single-digit percentage point year-over-year.
However, if we compare with TSMC and UMC, I think TSMC's second half revenue is growing by 17% year-over-year. For UMC, its second half revenue is growing by 13% year-over-year. But for your revenue, ATM revenue only grew by low single-digit percentage point. So is this because of the capacity constraint, or is this because of the competition, or you have other reasons have this lower growth in second half this year?
Tien Wu (COO)
The capacity and the well, let me answer it this way. I talk about the EAR impact. The run rate in Q1, Q2 was 20%. In Q3, it dropped to 13%. In Q4, it dropped to 0. So literally, in Q4, we have 13% run rate taking out. And we're trying to compensate that revenue by changing the capacity in real time. And that has been a challenge for the operation unit.
The customer qualification, given the complexity and also the quality requirement, that also requires the timing. So overall, if you look at the full-year performance, I think we are reasonable comparing to the OSAT industry. If you take the EAR effect out, I think our revenue was higher than all of the other competitors, especially the way we count the SIP revenue. We will count the assembly portion of the SIP revenue. Where the higher material content of the SIP revenue, we will include that in the USI unit. So when you combine all of these facts, then you will understand from the assembly perspective, we are gaining shares, and we're not lacking behind. The EAR does cause a one-time headache, but we're behind that right now. Now, when you ask comparing to TSMC and UMC, I don't think that is an apple-to-apple comparison. Technology content is different.
The investment is different. So I will not compare directly between the foundry and the OSAT. Yeah. But I think in the past, there's a high correlation of the foundry and the OSAT business or revenue, especially for UMC. I think for most of their product, I think they definitely need to go to the OSAT for the backend assembly and testing. So I think for UMC's number, I think probably this actually is relevant. Okay. Well, let me just repeat again. Excluding the EAR, the second half of 2020 were up 20% in U.S. dollar term. And I'm not exactly sure the UMC number, but you can make that a comparison.
Joseph Tung (CFO)
Yeah. I think that's more of an apple-to-apple comparison between us and UMC.
Roland Shu (Analyst)
Understood. Okay. May I ask, how about the utilization in 3Q and 4Q for old product line?
Joseph Tung (CFO)
In Q3, in terms of assembly or in terms of packaging, we're about 80% plus. And in terms of testing, it was around 80%.
Roland Shu (Analyst)
Yeah. How about the Q4?
Joseph Tung (CFO)
And going into Q4, I think packaging-wise, it will remain at 80% plus. Well, tests will come down a bit to about 70%-75%.
Roland Shu (Analyst)
What's the reason for test revenue utilization to go down? Because we have more testers or.
Joseph Tung (CFO)
I think part of the EAR impact is that the EAR-impacted customer has a higher turnkey ratio.
Roland Shu (Analyst)
Understood. Okay. Okay. Thank you. My last question is, one of your key customers has been a delayed launch is a smartphone by several weeks. So how do you look at your EMS seasonality in first quarter next year now? EMS Q1?
Joseph Tung (CFO)
I think overall, I think Ken mentioned that there's kind of a delay in terms of getting for EMS to get to its peak quarter. And so with that as a backdrop, I think quarter four, we will see a very strong quarter in the EMS. And quarter one, of course, there will be a seasonal decline, which is the normal pattern. But all in all, it's still going to be a very relatively speaking, a very strong first quarter comparing to previous years.
Roland Shu (Analyst)
But the decline or the seasonality you said will be similar as the previous years. Is that right?
Joseph Tung (CFO)
No. I think for quarter one, coming off a very normally strong fourth quarter, the seasonal movement will be very similar to previous years.
Ken Hsiang (Head of Investor Relations)
Are you speaking about EMS or EMS?
Roland Shu (Analyst)
Yeah. Yeah. Yeah. Talking about EMS specifically.
Joseph Tung (CFO)
Yeah. That's all we have there. Okay. Okay. Yeah.
Roland Shu (Analyst)
Okay. So similar, right? Yeah.
Joseph Tung (CFO)
For the decline, you will be a similar type of movement, but coming off a very strong, abnormally strong fourth quarter.
Roland Shu (Analyst)
Okay. Okay. Understood. Okay. Thank you. Yeah. Thank you very much.
Joseph Tung (CFO)
But just to add on to that, it's also a little bit early on the EMS side for the first quarter. So at least from the ATM side, we do see probably an improved environment, better than typical seasonality. But for the first quarter on EMS, we don't have as much visibility on that front.
Roland Shu (Analyst)
Okay. Thank you. Yeah. That's all my questions. Thank you.
Operator (participant)
Next one to ask questions, Randy Abrams, Credit Suisse. Please ask your questions.
Randy Abrams (Analyst)
Okay. Yeah. Thank you. Good afternoon. Actually, maybe one quick follow-up on that point. You mentioned the new consumer SiP project.
Just curious when we should factor that in because I think you just mentioned seasonal decline. But is that a product coming in early? And is it mature enough when it comes in it could allow you an incremental boost beyond seasonality?
Joseph Tung (CFO)
I think we're having a very strong year for SiP, both in terms of overall volume as well as obtaining new projects. I think we set out to say we have a target of a new project incremental revenue to be TWD 100 million a year. It seems that we will more than triple that target this year. And momentum continues to be strong. We'll continue to get or engage in some of the new projects going forward. And although we are not giving any numerical numbers at this point, I think in the sense of overall SIP momentum, it remains to be strong.
Randy Abrams (Analyst)
Okay. Great. I guess there's been a lot of questions on competition midterm. But your initial view pipeline, do you still see expansion and that target TWD 100 million? But I guess at this stage, how do you see project momentum and also second source risk on existing pipeline into next year?
Tien Wu (COO)
I think we will always have when a product becomes more volume-oriented, naturally, the customer will like to have second source. And I think that's just the nature of the electronic industry. So if I can give you two indicators. First, on the major customer that we started SiP with, we have been growing our SiP overall revenue with that particular customer. And the result is obvious now with all of the reporting that we have given. The second indicator is how fast can we enable other customers with meaningful revenue? And we have been struggling with this since day one.
Today, we're reporting we have 15 projects, eight customers other than the major one with revenue in the range of TWD 300 million. We're looking at TWD 100 million last year, and we would like to exceed TWD 200 million this year. I think we're slightly ahead of the target. Now, going forward in 2021 and beyond, how can we enable more customers? How do we grow revenue? That remains to be a challenge. But in that front, we continue to explore SIP, new projects, the new ideas with all customers including the original one.
Randy Abrams (Analyst)
Okay. That's great. To clarify, so TWD 100 million last year, so you added TWD 200 million this year to get over TWD 300 million? I just want to clarify. So you're at.
Joseph Tung (CFO)
Okay. Great. That is correct.
Randy Abrams (Analyst)
Okay. Hey. The second question, I want to ask a little more on the wire bonding because you have such a large industry base. But to go 30%-40% short, it I guess gets back into the question of how you're assessing the overbooking because demand may I guess on applications doesn't seem to be growing that fast to open up that much of a shortage. But if you could give a sense how much wire bonders you're adding and maybe if because wire bonding's so broad-based, are there a few major applications within that that's really contributing to the shortage right now?
Tien Wu (COO)
All right. When people understand this is the nature of the industry. When people understand there's a capacity constraint, everybody will come in and try to secure their share.
So if you're asking me out of the total demand versus the capacity we have installed in place, we have a 30% gap, how much of that is overbooking? I can't really answer that question. But I'm telling you, I'm pretty sure when the customers are pushing us for the capacity commitment, there's a naturally overbooking or exaggeration built in. Having said that, the kind of phone calls that we're getting right now are not about overbooking. It's not about forecast upside. In multiple situations, we're talking about line down situations. So we understand the line down, and our job is to make sure there is absolutely no line down situation. Otherwise, the impact is much greater. So you take that portion out. Then you look at the real demand cycle based on all of the end market sell-through or product based on the historical, all of the adjustment.
That would take another portion out. With all of the exercise that we have gone through, we believe the wire bond shortage is real. Whether it's 30%, I do not know. But based on today, the gap is indeed 30%. That will lead to a more friendly environment when people talk about ASP. That's real. But how fast can we compensate the gap, whether it's 30%, 40%, or 20%, or 15%? That needs to wait until at least Q2 of next year because the capacity delivery based on tooling and all of the other line balance, that's how long it will take to get to a meaningful level. That meaningful level, in my view, is not 30%-40% gap.
However, it will take a physical amount of time to get to a line balance situation where we can see the things a little bit more clear. But right now, it's clearly everyone's fighting for capacity.
Randy Abrams (Analyst)
Okay. And the follow-up to that, I think you got a next-year range. Maybe I missed it. Do you have the range where fourth quarter to get to the full year this year and if you have the bonders that you expect to add at this stage?
Tien Wu (COO)
Can you say it again? I'm sorry. I lost you.
Randy Abrams (Analyst)
Oh, yeah. Yeah. I was curious. The fourth quarter this year CapEx because you mentioned you're pulling in spend. So where you'll end up this year on CapEx and then how many bonders you plan to add?
Joseph Tung (CFO)
Our overall CapEx last year is closer to about TWD 1.6 billion. I think this year will be roughly TWD 200 million above it.
Randy Abrams (Analyst)
Okay. Okay. Then I just want to ask one other question on the balance sheet. I think you talked about meeting target raising dividends. Is there within that a monetization? I think a couple of calls ago, you talked about monetizing balance sheet. So I'm curious if you have any efforts or that's part of or any other type of fundraising you need to do.
Joseph Tung (CFO)
We don't have any plans for any further fundraising. But in terms of it really depends on the cash flow situation. I believe that it will greatly improve next year. But having said that, monetizing some of our assets is still one of the options that we have if we need to go to that route.
Randy Abrams (Analyst)
Okay. Great. Okay. Great. Thanks a lot, everyone.
Joseph Tung (CFO)
Thank you.
Operator (participant)
Next in line is Rick Hsu from Daiwa Securities.
Rick Hsu (Analyst)
Yeah. Hi. Good afternoon, guys. This is Rick. Thank you for taking my questions. So my first question is on the wire bonding demand, which you guys said is very strong. Can you elaborate that a little bit more in terms of demand drivers, in terms of what kind of key products and applications that are driving your very strong demand for wire bonding?
Tien Wu (COO)
All right. We're seeing the wire bonding strength from almost all sectors. And I can give you a few examples. For example, on the Wi-Fi, we used to deal with single-chip Wi-Fi or two-chip Wi-Fi. And right now, they're becoming the three or four chips. And I guess the notion is now when there's a new Wi-Fi standard like Wi-Fi 6, 6E, or 6E+, the easiest way is just to add another die.
That will inevitably require adding more wires. All right. Now, in the industry, when gold becomes very expensive, to use copper wire, even though everybody claims they can do copper wire bond. But when you want to do stacked die, fine pitch, 1,000-wire range, the short wire loop, it becomes a quality issue how many people can really do this. The automotive guys in the RF analog space, when the Wi-Fi infotainment goes into automotive or go into the autonomous driving, the quality requirement based on traceability also becomes different. So how many lines that has been automatically qualified using copper wire to do multiple stacked die? And that becomes an issue. When I was referring to a 30%-40% gap, I was only talking about ASE.
I was not referring to the industry because some of the devices, obviously, based on customer input, ASE is the preferred supplier mainly because we have the base. We can ramp up more readily. We also have the original IP on the copper wire bonding. And we also have the first of its kind, which is a wire bond light-out factory where we can do fully traceable, data-oriented in terms of reporting, also the algorithm analysis. So the automotive and the medical customers tend to favor this type of wire bond. Given the complexity and also the quality requirements and also the sudden increase in 5G upgrade cycle and Wi-Fi upgrade cycles, that's why we're seeing this demand increase. And I'm pretty sure there's double booking somewhere along the line.
But the end result is we're having a lot of demand in wire bonding, which we have not seen before. I think it's mainly because of product upgrade as well as automotive going into the autonomous driving range. I think there's a lot of new demand. I also comment on the COVID-19. I really believe there's a behavioral change because of COVID-19. People no longer look at IT product only as a digital efficiency because if you can buy a better TV, a better Wi-Fi system, now you tend to stay home a little bit more. And when you stay home, you reduce the risk for any COVID-19 or any kind of virus attack. Now, from that regard, people's willingness to buy IT product at a premium, it is different. Also, the age tends to expand.
I've heard the very, very old people and very young people are buying premium IT product. And those are the behavior that we have not seen before. And I think this behavior because COVID-19's going to be here for a while. But even with COVID-19 subsiding, I think this behavior change will last much longer.
Rick Hsu (Analyst)
All right. Okay. Yeah. That's a very helpful and very comprehensive answer. Thank you so much. The second question, that goes through, I think, your revenue guidance, ATM revenue guidance for Q4. If I did a math correctly, I think your Q4 ATM revenue would be down by around a mid-single-digit quarter-on-quarter, right? So if I look at the revenue guidance from the foundries who already reported, TSMC and UMC combined, they're talking about still quarter-on-quarter growth.
So I wonder whether this disconnect between the front end and back end like yourself is mainly because the customers try to build more with the backend than the die bank. And if that's the case, if the inventory risk hit the industry, you guys will be safer relative to the foundry guys. I mean, this is my second question.
Tien Wu (COO)
I will not comment on that. But what I'm telling you is in Q3, the EAR affected revenue 13%. In Q4, that 13% is gone. So we are recovering based on 13% minus, work our way back. So there is real growth if you exclude the EAR. Unfortunately, we have to talk about this for the last time, right? But Q1, we will not talk about this anymore, all right? Now, with that, I think we're comparable.
Joseph Tung (CFO)
Okay. I think also, I think on the margin side, in Q4, after the EAR issue is behind us, I think that we will see further margin improvement in Q4.
Rick Hsu (Analyst)
All right. Thank you so much. Yeah. And I think that would be a pleasant surprise. Now, I think the ASP environment partially will be reflecting Q4. And also, the write-off will be completed. So we're just optimistic about the resetting in Q4 because, honestly, the first nine months of this year have been very, very painful for all of us. Okay. All right. Thank you so much again. And that's all I have. Thank you.
Operator (participant)
Next to ask questions, Sebastian Hou, CLSA.
Sebastian Hou (Managing Director and Head of Technology Research)
Thank you, gentlemen, for taking my questions. My first question is on the pricing outlook. Sorry, not pricing outlook. It's actually the friendly pricing environment for wire bonding.
I'm curious about how much of this is simply due to the supply situation. How much of that is to reflect the higher material cost that you have mentioned earlier?
Tien Wu (COO)
Well, in the discussion, you have to cover both. And I won't be able to give you a percentage, the material cost versus the assembly value add. But I can only tell you they're both. And by the way, each customer's different. And if you recall, I think it was 2017 or 2018, we called it a recalibration of our portfolio. Some of the SIP was not generating the kind of return, and we sort of dropped that. I think in the wire bond, we're actually going through a similar exercise too.
But anyway, based on the capacity that we have and the customer engagement plan as well as the return profile, this is a great opportunity for us just to look at it. What type of business we want to have a longer engagement plan? What type of business we do not want to have a long-term engagement plan? But that overall effect, we will see better in Q4 as we're going forward in Q1 and Q2 next year. But this is the exercise that we're going through.
Sebastian Hou (Managing Director and Head of Technology Research)
Okay. So by transferring some of the higher cost to customers plus some of the undersupply benefit on that pricing, no negotiation, so the margin will be equitable from Q4 onwards. Is that right?
Tien Wu (COO)
That is correct. Yeah. Hopefully, we can give you a better percentage in Q4 guidance in terms of the quantitatives. What is that percentage out of?
Sebastian Hou (Managing Director and Head of Technology Research)
Okay. Okay. Thank you. Follow-up on that is, do you remember or can you remind us when's the last time wire bonding had such a big undersupply gap?
Tien Wu (COO)
Year 2000.
Sebastian Hou (Managing Director and Head of Technology Research)
Okay. The Y2K?
Tien Wu (COO)
Yes.
Sebastian Hou (Managing Director and Head of Technology Research)
Okay. All right.
Tien Wu (COO)
And this time's worse than 2000.
Sebastian Hou (Managing Director and Head of Technology Research)
All right. But how would you compare the I think the different background, the story is all different. But how would you compare in terms of the customer mix, applications, and customers' overbooking behaviors, also part of this? And how do you think that how long this will last based on your best estimate?
Tien Wu (COO)
All right. It's interesting that you're asking this question. I'm not sure how much time do you have for me to answer. But in year 2000, you have to remember that was a very strong IDM captive environment. ASE revenue at the time was less than TWD 2 billion.
Our installed base was much smaller compared to today's environment. In 2020, the outsourcing percentage has greatly increased in the last 20 years. ASE's ATM position improved from TWD 2 billion to TWD 9 billion plus. Our installed base right now, our wire bond in the outsourcing market, I believe, is way over 50%. On a global basis, also a percentage. So when I talk about the supply-demand imbalance in year 2000 versus today, it's quite a different scenario. So I think year 2000, if ASE is short by 30%, that means something. Today, if I'm short by 30%, that means something else. I'm not exactly sure how is the other OSAT capacity constraint. I don't believe they're short as much as I did. Chances are, I always get the fully loaded first.
Over the last few years, even when business is going up and down, my loading situation has always been quite full. In this kind of undercapacity situation, the other guys will get filled. But long-term competitiveness, you got to go back to product complexity, quality, and also the liability you can accommodate with respect to all of your end customers. So I do believe all of these business terms will come into play. People want to look at somebody who's highly reliable, who's got R&D pipeline, and who's also got the investment appetite should they need it to ramp up new products. So for the wire bond, I do believe there is an upgrade cycle because of 5G, because of Wi-Fi, because of the electric car.
Now we're seeing a lot of the analog devices, as a matter of fact. If you look at the 8-inch wafer demand, it's going through the roof. The fact that people are talking about ASP adjustment on 8-inch, and you will understand that, I mean, there's something fundamentally different this round.
Sebastian Hou (Managing Director and Head of Technology Research)
Got it. Very insightful sharing on that. But on the supply side, do you see any constraints on the capacity? I think the 8-inch wafer, they have their supply constraint given the secondhand equipment availability. But how about the wire bonding side? Do we have the similar constraint or that's not a significant issue?
Tien Wu (COO)
Well, the wire bonder is only one component of the wire bond line. You also have other instruments.
That's why when you talk about line balance, that's why I said that it will at least take six months to get the industry capacity to a level where people become more comfortable and can talk more rationally. And I will not go into detail what the wire bond line consists of. And a lot of vendors will be involved. But the industry throughput in terms of ramping up this kind of equipment are very slow. So that becomes the bottleneck. So in a way, it is actually helping all of us to regulate the water level. We're not adding capacity in such an accelerated base. I think intrinsically, the industry has a built-in buffer, a regulator in the whole supply chain sanity. And I think ASE is playing a portion. Unfortunately, we are the bottleneck. The wire bond capacity is also part of the bottleneck.
But in a way, I think this is really helping everybody in which substrate is not a bottleneck. So there are actually multiple bottlenecks right now for the back end. So we'll see. We'll see how this is heading to.
Sebastian Hou (Managing Director and Head of Technology Research)
Got it. Thank you. Last questions from me is just very small questions on CapEx side. I remember in the beginning of the year, I think the capacity expansion and CapEx focus was mainly geared toward the testing side. So going into next year, given that our testing utilization rate is affected more by the EAR-affected customers, so can we it's fair to assume that in next year, the mix will gear toward assembly?
Tien Wu (COO)
I think it's too early to say because we are working very hard to convert those testers for the other customers right now. Just give us another quarter.
Sebastian Hou (Managing Director and Head of Technology Research)
Okay. It's fair. Thank you.
Operator (participant)
Next one to ask questions, Gokul Hariharan, J.P. Morgan.
Gokul Hariharan (Managing Director)
Yeah. Thanks for taking my follow-up. Just to follow on Seb's question on the testing side, I think previously, you had indicated that your long-term goal is to increase the turnkey test ratio from 1/6 or 1/5 to 1/6 right now to 1/3. Obviously, the EAR-affected customer was one of the biggest turnkey customers. So could you talk a little bit more in terms of what are the efforts ongoing to kind of increase or expand the list of customers who are using turnkey test at ASE? And could you also talk a little bit about what is the initial feedback from those customers and any change in that plan in terms of getting to that 1/3 turnkey test ratio? And Dr. Wu, if you could also say, what is the timeline by which you get to, let's say, one-third of test revenues for your total ATM business?
Tien Wu (COO)
The testing remains to be a major initiative at a group level. So we understand that there is an EAR setback, and we accept that. Very painful, but we have very little choice. However, that doesn't alter the strategy that we want to increase our turnkey percentage as well as our test percentage as part of our overall revenue portfolio. So because of the assembly capacity is short right now, it happens to offer us a better leverage. So when we talk to our assembly customer, we naturally would like to propose. We also perform testing for them. The EAR is giving us a short-term setback, and we have to go through different test platforms.
Or even in the existing test platform, we have to do a lot of operation. Then we need to have some time. But it remains to be our major initiative to increase our test revenue and the turnkey ratio.
Gokul Hariharan (Managing Director)
Any timeline on when you would reach that target? Is it like a five-year target, a three-year target?
Joseph Tung (CFO)
Gokul, that was never really a target. That was just kind of a normal turnkey test occupies 1/3 and packaging occupies 2/3. That's just a theoretical concept.
Gokul Hariharan (Managing Director)
Okay. Thank you.
Tien Wu (COO)
You're giving me a good hint. Well, I'm going to go back to talk to my team. We need to have a target.
Gokul Hariharan (Managing Director)
That's great. Thank you. Next one, we have Bruce from Goldman Sachs.
Bruce Lu (Managing Director)
I want to switch gear for the question for the advanced packaging. So if you look at your advanced packaging, the revenue growth is somehow similar to the corporate average. On the other hand, TSMC is reporting that their packaging business is growing like 30%+ this year. So obviously, they are gaining market share. So what do you think about your future growth outlook for your advanced packaging? What kind of growth rate we can expect there?
Joseph Tung (CFO)
Okay. First of all, I'm really happy that TSMC is growing, and I'm happy TSMC is growing their packaging part of business, right? I think the first and the most important clarification I would like to make is we have to understand what OSAT market really is. In order to do OSAT service, we have to qualify for three situations. My apology for this elongated answer because I really need to speak this out. Many people ask me the same question.
I just want to clarify this with all of you. If this is a captive market, it is not OSAT. The central memory is captive. That is not part of our serviceable available market. Intel microprocessor is a captive market. Therefore, we never attack the Intel microprocessor business per se. TSMC, packaging part of the business, focused on leading-edge lithography, completely captive. That is not part of the OSAT market. Yes, it is a packaging assembly revenue, but that will be in the same category as central memory as was Intel microprocessor. Now, the overall packaging revenue, which I will give you a more clarification Q1 update next year, continues to grow. As semiconductor grows, as he already said it, the packaging and test value will continue to grow.
However, the partition and the division between the IDM captive vertical versus OSAT fragmented outsourced service provider based on merit, compete based on value efficiency. That has never changed, all right? Having said this, now, another way that you would do is the packaging revenue and test revenue. We're talking about the value-added service. You really have to look at the overall revenue content. How much of that is silicon-based? How much of that is memory? How much of it is everything else? Then you're trying to dissect that and understand what is the particular assembly value-add versus test value-add versus material contribution versus silicon contribution versus interposer versus all of the detail. Then you will understand that some of the business, not only we cannot do, it is just out of our business model. This is not part of the OSAT engagement that we would do.
Bruce Lu (Managing Director)
Can I be clear about this? That when we used to talk about the OSAT market, sometimes for the advanced technology, OSAT would do the second wave of business. So once the technology is mature, OSAT can do the business. But Ken was mentioning that at a certain node, it will be the captive market by the foundry. Can you tell us where is the borderline for that or from which node we can expect that will be the captive market for the foundry?
Ken Hsiang (Head of Investor Relations)
We had the same conversation about Intel microprocessor. I mean, as long as I remember, I had this conversation for 30 years. We also had a similar conversation about the central memory. When do you think central memory will go to OSAT? When do you think Intel microprocessor will go to OSAT?
But finally, we're talking about Intel might outsource their advanced wafer, either in graphics chip or whatever, to the foundry. And that will become non-captive. I do not know the line, the division. I don't think we have a clear view about in which node, which lithography, that will become the OSAT market. Even when that becomes the OSAT market, you still need to look at the value-added content versus material content. You still have to look at it out of the value-added content and the material content, whether it's foundry to do it cheaper or OSAT to do it cheaper. So once you understand all of this fundamental thesis, then we can decide which business is suitable for OSAT, which business is suitable for IDM, which business is more suitable for foundry, for captive market. I mean, it's a very interesting conversation.
We can talk for hours about all of the details. But I really get confused because everybody asks me the same question, and I couldn't understand where that question is coming from.
Tien Wu (COO)
I think the question and answer are very complicated. That's why people were asking every time. So I mean, maybe next time we can come up with somehow the quantitative addressable market, at least for the coming two years, which is easier for the investor to understand.
Ken Hsiang (Head of Investor Relations)
Okay. So I'll be happy. Well, yeah, we should prepare something.
Bruce Lu (Managing Director)
Okay. Thank you.
Ken Hsiang (Head of Investor Relations)
Thank you.
Joseph Tung (CFO)
Okay. I think we're at the end of the conference call. Let me sum up what we have out of this call. I think, first of all, we had a good third quarter, and we are seeing improved situation getting into Q4 now that EAR is largely behind us.
Business continues to be strong, and we are in a pricing-friendly environment. Over the past three years, we have been making pretty heavy CapEx investment. That puts us in a better position to capture whatever growth opportunity going forward. We're seeing synergy being created as reflected in our improving margin and lowering OpEx ratio. We remain optimistic. Business prospect for 2021, and we will see improving cash flow and our financial standing going forward. Thank you very much. That concludes the conference call today. Thank you.