Taiwan Semiconductor Manufacturing Company - Earnings Call - Q1 2012
April 26, 2012
Transcript
Speaker 0
Welcome to TSMC's first quarter 2012 results webcast conference call. This conference call is being webcast live via the TSMC website at www.tsmc.com and only in audio mode. Your dial-in lines are also in listen-only mode. I would now like to turn the conference over to Dr. Elizabeth Sun, TSMC's Head of Investor Relations.
Speaker 3
Thank you, Marianne. Good morning and good evening to everyone. Welcome to TSMC's first quarter 2012 conference call. Joining us on the call are Dr. Morris Chang, our Chairman and Chief Executive Officer, and Ms. Lora Ho, our Senior Vice President and Chief Financial Officer. The format for today's conference call will be as follows. First, Lora will summarize our operations in the first quarter and give you. For those participants who do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's quarterly review presentation. I would like to remind all listeners that the following discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements.
Information as to those factors that could cause actual results to differ materially from TSMC's forward-looking statements may be found in TSMC's annual report on Form 20-F filed with the United States Securities and Exchange Commission on April 13, 2012, and such other documents as TSMC may file with or submit to the SEC from time to time. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. I would like to turn the call over to Lora.
Speaker 5
Thank you, Elizabeth. Good morning and good evening to everyone. Thank you for joining us in the first quarter earnings conference call. Tonight, I will start with the financial results for the first quarter and give you the outlook for the second quarter, followed by some comments on the supply chain inventory. The first quarter 2012 was a stronger than seasonal quarter for TSMC. Compared to a normal seasonal decline, our revenue increased 0.8% to NT$105 billion. In U.S. dollar terms, the increase was 2.7% over the last quarter, which was slightly better than our guidance. During our last earnings conference call, we had expected the beginning of inventory replenishment in certain applications to drive first-quarter demand. On top of that, the better technology also contributed to the first quarter's strength.
On the margin side, first-quarter gross margin was 47.7%, or 3 percentage points higher than that in the fourth quarter of 2011. This is also about 3 points higher than our guidance, as the first-quarter utilization rate was a lot higher than we had expected. Reflecting the stronger demand in the first quarter and second quarter, the first quarter's gross margin also includes the negative impact from NT dollar appreciation and the temporary margin dilution effect from 28-nanometer, which takes place during the initial ramping stage of every technology node. Operating margin was 33.6%, up 2.2 percentage points. Operating expense increased about NT$1 billion, planning expense for Fab 15 in preparation for 28-nanometer ramp-up, as well as the increased R&D investment for 20-nanometer technology. Overall, our first quarter EPS was NT$1.29. ROE for the first quarter was 20.8%. Let's move on to revenue analysis.
By applications, computer, consumer, and industrial-related revenue benefited from the customer's inventory replenishment and increased by 11%, 17%, and 11% respectively. Whereas, communication decreased by 9% due to the product transitions in emerging markets. By technology, as we had expected last quarter, 28-nanometer contribution more than doubled to 5% of total wafer sales in the first quarter. This was the fastest ramp in foundry history, as we tried to chase customers' massive demand. Meanwhile, 40-45 nanometer continued to be solid and contributed to 32% of our total wafer revenue, exceeding 65-nanometer for the first time. Overall, contribution from 65-nanometer and below technologies increased 4 percentage points to 63%. Our days of inventory increased by 4 days to 39 days in the first quarter. The days of inventory increased by 4 days to 47 days in the first quarter.
The increase was mainly from the higher working parts of inventory in response to the strong second-quarter demand. On the cash flow side, we generated $57 billion from operations, invested $49 billion in capital expenditure, raised $17 billion through corporate bonds, and increased $9 billion in short-term loans for currency hedge purpose. As a result, our cash balance increased $27 billion to $171 billion at the end of the first quarter. Let me move on to our full-year capacity plan. We expect our total capacity to increase about 12% to reach 14.8 million wafers in 2012. The majority of the increase comes from a 17% increase in 12-inch wafers. Our third gigafab, Fab 15, begins 28-nanometer volume production this month and then ramps at the fastest speed in our history to reach about 50,000 wafers per month by the end of this year.
On the supply chain inventory, after the inventory adjustment through the second half of last year, supply chain DOI already dropped below seasonal level by the end of the fourth quarter. We estimate that the DOI exiting the first quarter will be even lower and then approach the seasonal level by the end of the second quarter. Before I turn to our next quarter guidance, I would like to talk about some dynamics in our second-quarter gross margin, including utility cost, exchange rate, production cost, and utilization. First of all, the utility rate in Taiwan will start to increase from the middle of next month. For TSMC, this means about a 38% increase in average utility rates, which will take out 0.4% from the second quarter's gross margin or 0.5% from operating margin.
For the second half of this year, the impact will go up to about 1% of operating margin. Moreover, the higher summer utility price will start to be applied in July and take about 0.3% from gross margin in the second quarter. As for the exchange rate, we anticipate a slight NT dollar appreciation to impact the second quarter gross margin by 0.2%. On production cost, Fab 15 will start to contribute revenue from the second quarter. Given the higher initial production cost of ramping 28-nanometer, particularly in the new fab, its margin impact is estimated to be negative 2.5%. Apart from 28-nanometer, other technology nodes will see efficiency improvements, which will contribute about 1% to our gross margin. Lastly, on utilization, thanks to the strong wafer demand driven by mobile computing devices, our utilization will continue to pick up and contribute about 2.8% to gross margin.
Overall, our second-quarter gross margin will increase slightly from the first quarter. Now, let me turn to outlook for the second quarter this year. Based on our current business expectation and the forecast exchange rate of NT$29.58, we expect our revenue to be between NT$126 billion and NT$128 billion, which translates into a sequential growth of 19% to 21%. In terms of margins, we expect the second-quarter gross margin to be between 47% and 49%, and operating margin to be between 34.5% and 36.5%. Now, I would like to turn the call over to Dr. Morris Chang, our Chairman and CEO, for his remarks.
Speaker 1
Hi, ladies and gentlemen. Good evening or good morning, as the case may be. The news in the last quarter has ranged from encouraging to exciting. Encouraging was the macroeconomic news from the United States and China, which are our largest end markets. Both economies seem to have averted a worst possible scenario and are playing out in a medium-good scenario. Encouraging was also the world semiconductor market trend. It now looks to exceed our earlier forecast of +2% growth this year. Exciting was that after two quarters of sequential decline, TSMC's business points to a solid growth year this year. In the first quarter, three months ago, we had estimated that the first quarter would be flat or a little down. It turned out to be a little up.
Not only that, the incoming orders were strong enough that allowed us to guide a very solid growth second quarter, as Lora has just done. Not only that, the orders forecast, which is our forecast of incoming orders in the next few months, is also very strong. That means that third quarter, in all likelihood, will be a continued growth quarter. Most exciting is that our 28-nanometer, which is being ramped up just now. In fact, the first quarter was the first ramp-up quarter. 28-nanometer is now turning out to be a roaring success. The success has exceeded the expectations of our partners, who have designed with our 28-nanometer technology, and the success, of course, has exceeded our expectations too. Let me talk more about 28-nanometer. Its performance and costs are both attractive. We are the only effective foundry supplier.
We are quite confident that we'll remain the only effective foundry supplier for quite some time to come. We are also confident that in the long run, which means many years, we will be the primary supplier. Demand of 28-nanometers has surpassed our customers' and our expectations, resulting in a supply shortage. I think the worst of the supply shortage is behind us. We expect that we'll be very close to catching up in the fourth quarter of this year. We expect to have completely caught up with demand by the first quarter of next year. We will not fall behind again. This supply shortage problem is not caused by yield problems, but by underestimate by both our customers and us of the capacity and ramp-up speed required this year. The D0 and yields are on plan and exceed those parameters in the early stage of 40-nanometer.
Significantly, this is the first time that mobile product customers have played a big role in our leading edge node. Now, we're anticipating that in 20-nanometer, the next node, the mobile product customers will perhaps play an even more important role. It is now clear that 28-nanometer, the biggest and most successful nodes, if not the biggest, turning to 20-nanometer. The development is on track with very good yield on SRAM. Compared with 28-nanometer, 20-nanometer is 1.9 times the density and has significant performance improvement in both speed and power. We have engaged with more first-wave customers than even the 28-nanometer. If you recall, a year or two ago, I told you that we were very pleased with the number of engagements on the 28-nanometer. Now, this time, on the 20-nanometer, we're engaged with even more customers than in the 28-nanometer.
Also, this early engagement with a large number of customers on 20-nanometer means earlier collaboration so that when the ramp-up starts, it will be faster and smoother. We plan to roll out 20-nanometer at the end of this year. Now, FinFET for significant performance gains. We're going to introduce FinFET after the 20-nanometer planar. We've been working on FinFET for more than 10 years. We're quite confident that we will have a robust FinFET technology. Now, turning to subsystem integration. I mentioned a year or so ago in more than one of these conferences that we are working on things like CoWoS, which stands for Chip on Wafer on Substrate; BOT, which stands for Bond on Trace; and Wafer Level Fan Out. All those are reported on more than once. All those are under our subsystem integration program.
We do plan to provide system or subsystem solutions, and they are innovative solutions consisting of CoWoS, BOT, and Wafer Level Fan Out. We will also provide manufacturing capacity to better capture value. We also are building an ecosystem with key partners in memory, EDA tools, IP, and substrates. Now, I'd like to say a few words about our capital expenditures. Our company mission is to be the trusted provider of technology and capacity to the global logic IC industry in years to come. We will provide our customers with capacity and technology. We are going to back them 100%. With 28-nanometer and the subsystem, sorry, with the 28-nanometer and the subsystem and system technology developing, 28-nanometer is being rapidly ramped up. 20-nanometer and specialty technologies as well are being developed actively. We see very strong growth for the company in the next few years.
The strategy we outlined to you two or three years ago is going to bear fruit. It has already borne some fruit, and it is going to bear even more fruit. The fruit will be a period of very strong growth for the next few years. Keeping our mission in mind and looking forward to the very strong growth for the company for the next few years, we have increased the estimate of capital expenditure of this year from $6 billion to $8 to $8.5 billion. Of the increase of $2 to $2.5 billion, $1.3 to $1.5 billion is for 28-nanometer. $700 million is for 20-nanometer pull-in. We originally had planned to spend the first large increment of 20-nanometer capacity next year. Now, we are planning to pull in that investment to this year. About $200 million is for BSI and the embedded flash.
About $100 million is for backend, which is the system and subsystem integration that I just talked about. Therefore, after the sequential decline of the second half of last year, I'm very happy that we now have bright news. It's not just a cyclical movement because the outlook is based on primarily technology progress. 28-nanometer, 20-nanometer, some specialty technologies, embedded flash, CMOS image sensor, and then in the slightly longer-range future, subsystem integration. Thank you very much.
Speaker 3
All right. This concludes our prepared statements. Operator, please open the floor to questions.
Speaker 0
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your touch-tone phone. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, please press the pound sign or hash sign. Please limit yourself to two questions at a time, with one follow-up to allow all participants an opportunity to ask questions to the management members. Please hold for your first question. Your first question comes from the line of Daniel Hyler of BofA Securities, Maryland.
Speaker 2
Thank you, Bob, for taking my question. I had a follow-up on the FinFET question, Dr. Chang. Today, in your opening comments, you mentioned that FinFET would be introduced after the 20-nanometer planar version. I don't know if I'm reading into this too much or not. It sounded like maybe a little bit of a different tone than previously. I believe last time you said that FinFET would be most likely on 14-nanometer. Just to clarify that, would FinFET possibly be on 20-nanometer, or is it still embedded in the 40-nanometer ramp?
Speaker 1
I'm not saying that. I'm not saying either, Dan. I think it could still be the 14-nanometer, but it can also be a later version of 20-nanometer. At this point, I'm not going to predict or commit either way.
Speaker 2
Great. Thank you for that. With regard to the huge growth that you're seeing in 2Q, it seems like pretty good visibility, as you said, likely growth into the third quarter for this year. Maybe walk us through the sustainability of that. There's clearly a lot of smartphones getting introduced by handset companies across the world and tablets. Beyond the product introductions in 2Q and 3Q, what are your thoughts on sustainability of the fourth quarter into next year?
Speaker 1
I think that there may be some cyclicality in the one-year, two-year term. As far as the long term is concerned, I'm talking about three, four years. I am quite confident that our three or four-year growth is sustainable because we are not just talking about the handheld products, the mobile products sector, although we do depend quite a bit on it. In addition to the strong growth of the mobile product sector, which benefits us, we are also talking about leadership, technology leadership, capacity leadership in the entire global logic IC industry. Of course, I'm talking about leadership of leadership as a foundry. That's getting to be more important in the whole scheme of things also. I'm banking on leadership, technology, and capacity leadership, plus trust from our customers, which we have had for a long time, and we plan to maintain in the future.
I'm banking on our leadership in those areas, plus the strong growth of the mobile products.
Speaker 2
Thank you for that.
Speaker 1
Yeah.
Speaker 2
You sure have. Thanks very much. If I may ask just one more, then I'll get back in the queue. Today, you had mentioned that it's quite difficult to predict the mix of 20-nanometer, which is exceeding your expectations for the fourth quarter. I think over 20% of revenue by fourth quarter, which is a very steep ramp. Predicting the mix between the bulk version or the so-called polysion version and the higher performance, lower power version, the high K Metal Gate version, predicting the mix between those is difficult and I understand somewhat customer-driven. Once the high K Metal Gate kicks in, are there ASP implications for that? Is that a higher commanding ASP variety of the 28?
Speaker 1
Yes. Actually, it does command a higher price than the LP version.
Speaker 2
Is it meaningful?
Speaker 1
I think it's meaningful.
Speaker 2
Is it a meaningful price difference? I mean, given the performance and the power envelope is, I believe, materially better, I'm just wondering whether you would be capturing any meaningful ASP lift from the high K.
Speaker 1
I think I would call it a meaningful one. Yeah.
Speaker 2
Okay, thank you very much.
Speaker 0
Your next question comes from the line of Mehdi Hosseini of Susquehanna Financial Group.
Speaker 4
Yes. Thanks for taking my question. Going to Dan's question, Dr. Chang, can you please help us better understand or evaluate the 28-nanometer high K Metal Gate coming out of Taiwan versus competitors, Gate Last versus Gate First? We do know that Gate Last is sustainable, but is there anything from your end that you can offer to better help us understand the differences and how it is going to help you keep the leadership? I have a follow-up.
Speaker 1
Now, as far as Gate Last versus Gate First is concerned, that battle is over, and Gate Last has won. I think two to three years ago, when I first resumed the CEO responsibilities, that was a very controversial issue. At that time, I think I took some time to explain to the investors what the technical differences were. Basically, both have their advantages. Gate Last and Gate First have their advantages, and both also have their disadvantages. Just to put it very simply, Gate First appeared to be easier to implement. However, in the actual implementation, you could run into serious difficulties. We anticipated that perhaps better than the people who decided to use the Gate First approach. We felt that ultimately, Gate Last would be the correct route.
I say the battle is over because even though I have continued to pursue Gate First on the 28, 32-nanometer, they have also decided to switch to the Gate Last route in their 20-nanometer. I don't think that it's an issue anymore.
Speaker 4
Got it. One follow-up on the operating margin. The last time, it peaked at 42% in Q4 of 2005. Given the improving blended ASPs and the challenges with increasing utility costs and everything, do you think that you can meet or exceed that 42% operating margin from Q4 of 2005?
Speaker 1
Let me ask our CFO, Lora Ho, to answer that one.
Speaker 0
Q4 of 2005 actually was a long time ago. Yeah.
Speaker 4
I'm just trying to understand how better blended ASP is going to help offset some of the higher costs associated with electricity. Would you be able to capitalize on it and actually be able to continue to expand operating margin going forward?
Speaker 5
Let me comment your Q4 of 2005 first, and I'll go to the utility cost impact to our margin. Before 2008, actually, the profit-sharing expense in Taiwan was not expensed.
Speaker 1
Bonuses, yeah.
Speaker 5
Employee bonus. After 2008, it was expensed. That actually has quite a significant impact to our profitability. Now we have allocated about 13.5% of our net income to employee as an employee bonus. If I remember correctly, the impact to operating margin is about 5% each point. That's the major difference. Nowadays, utility cost will go up. In the second quarter, we anticipate the utility cost for TSMC will go up by 38% in average. That will cost the 0.5% operating margin decline in the second quarter. Going forward to the second half, the impact will be bigger, will be about 1% point. Other than that, we also have foreign exchange impact. NT dollar has appreciated pretty much in the recent few years. If you remember, we have a rough estimation for every percent of exchange rate change, the impact to our gross margin was about 0.4% point.
That's another factor that's beyond our control.
Speaker 4
Given the trend in 20-nanometer ramp and better ASP contribution, would that be enough to offset some of these headwinds on the margin front?
Speaker 1
Let me take up the question now. I think you understand that, did you hear Lora's explanation of the employee profit-sharing, which was not expensed until 2008? The period that you mentioned, the last quarter of 2005, did you say? Yeah, last quarter of 2005, the employee bonus, the employee profit-sharing was not expensed. If you normalize the profit margin, the operating profit margin at that time to the present-day situation, you will lose 5 points right away there. You said 42%, did you not?
Speaker 4
Yeah. Yes.
Speaker 1
You lose 5 points right there. It's 37%. Lora then went on to explain the power cost and exchange rate and so on. If you're asking whether one day we'll get back to 37% again, operating profit, 37% operating profit, my answer is yes, yes. I would like to see that day come. I don't see, and I see no intrinsic reason why we can't.
Speaker 4
Got it. Thanks so much. I'll go back into the queue.
Speaker 0
Okay. Your next question comes from the line of Randy Abrams of Credit Suisse.
Speaker 4
Yes. Hi, good evening. I want to see if I could ask on what are the factors that prompted the decision to pull in $700 million to accelerate 20-nanometer. If you could talk about with the pull-in, would this pull the volume inflection so it comes back to the two-year cadence so that second half 2013, it would ramp up rather than early 2014?
Speaker 1
I got the first part of the question. Let me now, the two-year second half 2013. Yeah. Let me answer the first part of the question first. What were the factors that caused us to pull in the 20-nanometer, let's say, pilot line? Actually, the motivation was quite tied to the experience we have, we are having on 28-nanometers. Now, in the 28-nanometer node, 28-nanometer is the first time when the mobile product IC customers played a big role in the ramp-up. They are very big users. Right now, we are having to ramp very fast, faster than we ever have previously. Previously, we did not have big users that needed a lot of chips, wafers at the initial stage of the ramp-up. We anticipate that in the 20-nanometer, we will have big users just as we have them now in 28-nanometer.
In 20-nanometer, we will have to ramp up very fast, perhaps even faster than we are doing, or I think will be faster than we are doing in the 28-nanometer. It will be much to our advantage to shorten the learning cycle. The $700 million capital expenditure was just pulled in. We were originally going to do it a bit later in next year. Now, we feel that it will be to our advantage to learn faster, sooner. That's why we want to pull in this $700 million capital expenditure into this year. Now, the second, the two-year cadence, what does that mean?
Speaker 2
Yeah. What I was implying by that is 65-nanometer ramped up second half 2007, 40-nanometer second half 2009. 28, instead of the second half 2011, you're getting a much faster ramp first half of 2012. I wanted to see if that gets you back so that second half of 2013, we should start the real volume inflection on 20-nanometer now.
Speaker 1
Oh, I don't see the real volume of 20-nanometer in the second half of 2013 yet. I see the real volume in the first half of 2014, perhaps starting from the first quarter of 2014. As far as the cadence is concerned, the two-year cadence or the Moore's Law 18 months, I really think that it may slow down a little bit.
Speaker 2
Okay. Maybe the following question, I wanted to see because capacity will take a few quarters to ramp up. I think you mentioned first quarter of 2013, you'll be fully caught up. Is the shortage opening the door a bit to some multi-sourcing or a bit more than you might have wanted? I guess I just wanted to see what you're seeing from customers, if they're trying to do that or you can keep up with most of the business.
Speaker 1
Yes, it has. At the end, we believe that those or he who has the best and the most will get to be the primary supplier.
Speaker 2
Okay, thanks a lot.
Speaker 1
Yeah.
Speaker 0
Your next question comes from the line of Steven Paleo of HSBC.
Speaker 4
Yes. Thank you. A question for Lora first. Just a little explanation on the March quarter results, especially the gross margin upside. Revenue grew about NT$800 million, but gross profit grew about NT$3.5 billion. A huge incremental margin there. I'm struggling to understand what were the drivers behind that. It was quite the step function improvement in gross margin than what I was looking for.
Speaker 5
Steven, you were talking about the first quarter?
Speaker 4
Correct.
Speaker 5
Can you repeat your question again?
Speaker 4
I'm struggling to understand why the incremental gross margin in the first quarter was so strong. You had a little bit of revenue growth, but a very big gross profit growth. What were really the drivers behind that?
Speaker 5
Okay. The driver is the utilization for the first quarter associated with the strong second quarter. Because we have seen that demand will come in very strong for the second quarter, we start to build a working process in the first quarter that helps to the Fab overall utilization. We gain utilization from that point.
Speaker 4
Yeah, I guess I'm not a little clear with the, wouldn't the cost raise up with building up that WIP?
Speaker 5
Yeah. The WIP costs go up, and I explained the DOI went up by 4 days mainly because of the WIP.
Speaker 4
Okay. I'll follow that up later. That's fine. A question for Dr. Morris Chang. I asked earlier today about the capital intensity ratio, this kind of 40% to 50% of revenues. It looks like you're going to spend for three years here. I asked if that's the new norm, and you said you didn't think necessarily that was the norm as part of the cycle. I guess I'm thinking out just over the next two, three years, FinFET is going to be pretty expensive, and I assume there's going to be a 450-millimeter Fab investment sometime in the next few years as well. Isn't there a risk that we actually do have to sustain this kind of high level of capital intensity?
Speaker 1
I really can't answer your question in one or two sentences. It all comes back to having to integrate all the financial factors into the business equation. All I can do is to say that before we commit the kind of capital, we must have the potential returns, meaning potential profit and the potential return on investment, in pretty good grasp before we commit the capital. In a strong growth period, I do not think that the 40%, 50% capital intensity per se bothers me. In the long run, I don't really think that it's permanently sustainable. I think that you have to run huge gross margins in order to justify a 40%, 50% capital intensity.
In a short burst, and by short burst, I mean a three, four-year burst, I really think that as long as we have the potential returns in grasp, I really think that just 40%, 50% capital intensity per se does not bother me. We had history to prove that. We had experience to prove that. We had experience to prove that in several years, in periods of several years, we could sustain 40%, 50%. For again, a pretty long period of time, we had only 25%, 20% capital intensity. Those happened to be low growth years too. The 20%, 25% capital intensity years happened to be low growth years too. It's a question, I think it's a question of seizing an opportunity, a growth opportunity when it presents itself.
Speaker 4
Okay. I understand. If I could just sneak in two housekeeping questions here. Your tax rate is a little bit lower than I expected, Lora. I'm curious what the outlook is for your tax rate. Secondarily, I didn't see that you gave any guidance on where you thought the segment growth rates were going to be. What was going to be the relative outperformers or underperformers in the second quarter? I get help with those two last questions. That's it for me.
Speaker 5
Okay. The tax rate, the tax rate is like last year, it's about 7% to our net income before tax. This year, we expect it's going to be around 8%. The reason being it's lower than the corporate Taiwan is because we have some tax credit. We also grandfather by the sunset of encouragement of tax incentive, we still enjoy that, and we will continue to enjoy that for several years. Before that happened, our tax rate will not be as high as 17%. It will be like 8%, and it will gradually go up to 10%, 11% in the coming two years. Your second question is about the segment growth for the second quarter. In the second quarter, we see across-the-board growth for all segments. The three segments will grow above seasonal. There are industrial and others, communication and computer.
For consumer, we expect the growth will be lower than seasonal.
Speaker 4
Thank you.
Speaker 0
Your next question comes from the line of Michael Cho of Deutsche Bank.
Speaker 4
Thanks for taking my question, Dr. Chang. My question is, do you expect a continued shortage of 20-nanometer high K Metal Gate in 2013, given the financial challenges for K2 foundries? Thank you.
Speaker 1
20 nanometer?
Speaker 4
28.
Speaker 1
Do I anticipate a 28-nanometer high K Metal Gate shortage in 2013?
Speaker 4
Yes.
Speaker 1
Is that the question?
Speaker 4
Yes.
Speaker 1
No, I don't.
Speaker 4
Okay. Thank you. I have no further questions. Thank you.
Speaker 0
Your next question comes from the line of Satya Kumar of Credit Suisse.
Speaker 4
Yeah. Hi. Thank you for taking my question. Dr. Chang, I was wondering if you could comment on your current process development plans for 14-nanometer. Specifically, I was wondering if you could comment on whether you're starting this development with multiple patterning lithography or with EUV, and by when you will sort of make up your mind on what lithography process to use.
Speaker 1
Yes. On the 14-nanometer, there's still a choice, two possible routes: EUV or immersion. Our equipment supplier is working very actively on both immersion and EUV. It's not certain yet which one will be better. It's all a question of throughput. Immersion throughput, there are plans to increase it pretty dramatically. EUV throughput has improved quite a bit just in the last six months, but it's still pretty far from being acceptable in production. We're going to wait and see. I think that the next, let's say, 12 months or 14 months, I'm thinking of the middle of 2013. The next 14 months will be quite critical in our making a choice, making a decision of which way to go, faster immersion or faster EUV.
Speaker 4
As a quick follow-up, you mentioned that you're adding some extra capacity at 28-nanometer. I was wondering if you could let us know what your original plan was in wafer start capacity at 28-nanometer and what the new plan will be at the end of this year. You also mentioned that you expect 28-nanometer may be the biggest load that you have had. I was wondering, from a high-level perspective, do you expect that the rate of capacity additions at 28-nanometer to be comparable next year compared to this year, or this year is the peak year for capacity additions at 28-nanometer? Thank you.
Speaker 1
Sorry, I missed the last sentence of your question. Do I expect the latest addition of 28-nanometer to be what?
Speaker 4
The question was, what were you previously expecting to ramp 28-nanometer capacity to, and what do you now plan to ramp 28-nanometer capacity to by the end of this year? The second part was, you said 28-nanometer would be the biggest node for TSMC. I was wondering if the amount of capacity additions on 28-nanometer is going to be higher, lower, or comparable next year compared to this year.
Speaker 1
Laura, Laura.
Speaker 5
I will take the first question. The capacity was originally built with the current incremental capital expenditure. That will give us 10K more, 10K per month, I mean, in terms of overall capacity for 28-nanometer for this year. Your second question is to talk about, will we have enough capacity for 2013?
Speaker 4
Yeah. 2013, do you expect that the capacity addition will be higher in 28, or would it be similar compared to 2012?
Speaker 5
Okay.
Speaker 1
We'll be adding a lot more 28-nanometer.
Speaker 5
We will continue adding in 2013 as 2013 will be a continued growth in the demand of 28-nanometer overall.
Speaker 1
When I said that it will be the biggest node, I am measuring it in terms of the peak or the leveled off or the saturation output per month. If you look at the past, we had the records, and it's the best nodes. The highest node so far was 65-nanometer. I believe, if my memory serves me correctly, the mountaintop output was in the order of 120,000 or 130,000 per month.
Speaker 5
Month, correct.
Speaker 1
I say that 28 will be the biggest node. I mean that I expect 28 will top that.
Speaker 4
Got it. Thank you.
Speaker 3
All right. In the interest of time, I think we'll only accommodate two more callers' questions. The next one, please.
Speaker 0
The next question comes from the line of Dan Malkin of Viking Global.
Speaker 4
Hi. Just a quick question on one of the slides on this capacity slide that you guys have. It looks like for Fab 14, you've got wafer capacity declining in the second quarter and then ramping back up again in 3Q and 4Q. Could you just explain what's going on there? I assume that's just a transition to a different process node.
Speaker 5
Okay. The reason Fab 14 capacity goes down for next quarter is because we are migrating 65-nanometer to 28-nanometer. Currently, we have more 65, which can be used. Most of the equipment can be used for 28. We are doing a migration.
Speaker 4
Perfect. Thanks. On the last comment from Morris about 28-nanometer being a bigger peak than the 65-nanometer peak, what's the timeframe when you expect to hit that? Is that this year, or do you expect that would happen sometime next year?
Speaker 1
I think it will possibly be 2014, I think.
Speaker 4
Okay. When you surpass it, have you said what you guys think?
Speaker 1
When we reach the peak, when we surpass it.
Speaker 4
When you see the 120, the 130 that you were.
Speaker 1
Yeah, when we surpass the 120,000, 130,000. You're right, yeah.
Speaker 4
Okay. Have you said what you expect your wafer capacity on 28-nanometer to be in total this year, by the end of this year?
Speaker 1
The what?
Speaker 0
Total capacity of 28-nanometer.
Speaker 1
20?
Speaker 4
28.
Speaker 1
28.
Speaker 5
It will be ranging from 350,000 to 400,000 for the whole year.
Speaker 4
For 28?
Speaker 5
Yes.
Speaker 4
Okay, 350,000 to 400,000 total for the year.
Speaker 5
Yes.
Speaker 4
Thank you very much. Appreciate it.
Speaker 3
Last question now.
Speaker 0
Yes, your last question comes from the line of BNP.
Speaker 4
Oh, hi. Good evening, Dr. Chang. For 20-nanometer, would TSMC still offer both Polysilicon and High-K Metal Gate solution, or just High-K Metal Gate?
Speaker 1
For 20-nanometer, just High-K Metal Gate.
Speaker 4
I see. Got you. What percentage of the 28-nanometer equipment will be upgradable to 20-nanometer? Just want to get a feedback from you.
Speaker 5
About 70% of 28-nanometer equipment is upgradable to 20-nanometer.
Speaker 4
You said dollar value, right?
Speaker 5
70%. Yes, dollar value.
Speaker 4
Okay. All right. Okay. Great. Appreciate it.
Speaker 3
Okay. Thank you. This concludes our Q&A session. Thank you for joining us today. We hope you will join us again next quarter. Goodbye.
Speaker 5
Bye.
Speaker 0
Before we conclude TSMC's first quarter 2012 results webcast conference call today, please be advised that the replay of this conference call will only be accessible through TSMC's website at www.tsmc.com. Thank you all. You may now disconnect.
