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TSMC struggles portend chip troubles

The contract chip manufacturer says its business will struggle through the current quarter, in what may be a bleak sign for the processor industry.

Taiwan Semiconductor Manufacturing Co., the giant contract chip manufacturer, said its business will struggle through the current quarter, in what could be a bleak sign for the processor industry.

TSMC said average selling prices will decline about 5 percent from the second quarter to the third quarter. Also, factory utilization, or the percentage of facilities used to produce chips, will fall from 85 percent in the second quarter to close to 70 percent this quarter. Wafer shipments are expected to decline to the low single-digit-percentage range sequentially. TSMC reported second-quarter earnings on Thursday.

Capital spending will be cut from $2.5 billion to just under $2 billion for the year. TSMC's stock price fell $2.06, or more than 18 percent, to $9.08 on the news.

TSMC's troubles are, in many ways, a sign that the chip industry could be in for even tougher times. Most semiconductor companies no longer make their own chips, but instead outsource manufacturing to foundries such as TSMC or rival United Microelectronics Corp.

For TSMC and UMC however, 2001 was a difficult year as factory utilization dropped near 40 percent. Since then the situation has improved for TSMC somewhat, with factory utilization climbing to 67 percent by the first quarter of this year.

In June, TSMC deputy Chief Executive F.C. Tseng said in an interview that factory use would continue to grow and exceed 85 percent by the fourth quarter of this year. Instead, the numbers have dropped. The declines were attributed to softening demand and an increase in factory capacity, according to the company.

Analysts were concerned that the dour outlook would spill into other areas of the technology industry.

"My guess is that after the TSMC news, investors have now come to the conclusion that 2002 is shot, although the companies haven't entirely capitulated yet," said Justin McNichols, a portfolio manager for San Francisco-based Osborne Partners Capital Management, which owns semiconductor and chip-equipment stocks.

Second-quarter revenue totaled $1.3 billion, a 68 percent increase from the same period last year. TSMC's net income was $282 million.

Despite the setbacks, the company said growth would continue. TSMC Chairman Morris Chang described the results as a "temporary pause," according to Taipei wire reports.

Reuters contributed to this report.