Elizabeth Sun – Director, Corporate Communications Lora Ho – SVP, CFO and Spokesperson Morris Chang – Chairman and CEO

Michael Chou – Deutsche Bank Roland Shu – Citi Dan Heyler – Merrill Lynch Randy Abrams – Credit Suisse Donald Lu – Goldman Sachs Bill Lu – Morgan Stanley Andrew Lu – Barclays Mehdi Hosseini – SIG Rick Hsu – JP Morgan Steve Pelayo – HSBC Brett Simpson – Arete Research

(Interpreted) Welcome to TSMC’s Fourth Quarter 2012 Earnings Conference and Conference Call. This is Elizabeth Sun, TSMC’s Director of Corporate Communications and your host for today. The event is webcast live via TSMC’s Web site at www.tsmc.com. If you are joining us through the conference call, your dialing lines are in listen-only mode. As this conference is viewed by investors around the world, we will conduct this event in English only. The format for today’s event will be as follows: first, TSMC’s Senior Vice President and CFO, Ms. Lora Ho, will summarize our operations in the fourth quarter and for the full year of 2012, followed by our guidance for the first quarter 2013. Afterwards, TSMC’s Chairman and CEO, Dr. Morris Chang, will provide his general remarks and a couple of key messages. Then we will open the floor to questions. For those participants on this call, if you do not yet have a copy of the press release, you may download it from TSMC’s website at www.tsmc.com. Please download the summary slides in relation to today’s earnings conference presentation. Before we begin, I would like to remind everybody that today’s 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. Please refer to the Safe Harbor notice that appears on our press release. And now I would like to turn the podium to TSMC’s CFO, Ms. Lora Ho.

Thank you, Elizabeth. Good afternoon, everyone. Thank you for your participation today. My presentation will start with financial highlights for the fourth quarter and a recap of 2012 financial performance, followed by the guidance for the first quarter. In the fourth quarter, despite inventory correction in the IT supply chain, demand for our products was higher than we expected three months ago, resulting in above-guidance revenue and profit margins. On a sequential basis, our fourth-quarter revenue decreased 7% to TWD 131 billion. Gross margin was 47.2%, down 1.6 percentage points from the third quarter. This is mainly due to lower capacity utilization, while cost improvements and the favorable inventory evaluation adjustment offset some of the decline. Operating margin was 35.2%, down 2 percentage points from the third quarter. Operating expense as a percent of revenue increased 0.4 percentage points over a smaller revenue base. Non-operating items were small losses of TWD 7 million in the fourth quarter as we recorded an impairment charge for certain invested companies. Overall, our fourth quarter EPS was TWD 1.61; ROE was 23.8%. In terms of revenue by application, as I just mentioned, inventory correction in the IT supply chain has affected overall demand for TSMC’s wafer. However, demand for mobile computing devices remained firm, making communication the only growing segment in the fourth quarter. But our demand for computer, consumer and industrial-related products all declined by double digits. As a result, revenue contribution from communication-related applications further increased from 49% in the third quarter to 54% in the fourth quarter. On a full-year basis, communication increased 23% and that would be turned at 50% of our wafer revenue. The major contributing segment includes application processors, base vent, CMOS image sensor and wireless LANs, reflecting the strong demand for mobile computing devices. Another fast-growing application is industrial and standard which grew 42% year-over-year. The growth was mainly contributed by the increasing usage of Power IC data converter, touch controller and a flash controller within mobile devices. This also reflected our success in developing specialty technology businesses. If we look at our revenue by technology, thanks to customers’ strong demand for TSMC’s 28-nanometer technology and the excellent execution by the operation team, revenue contribution from this node jumped from 13% in the prior quarter to 22% in the fourth quarter. We see 28-nanometer as a very successful node for TSMC, which already accounts for 12% of our full-year revenue in 2012. Looking forward, we remain confident 28 revenue contribution will exceed 30% for the whole year in 2013 and margin will be at corporate level starting from this quarter. Taking a look at the balance sheet, on the asset side, cash and marketable securities ended the quarter at TWD 151 billion, slightly increased from last quarter. Long-term investment increased to TWD 66 billion, mainly due to the TWD 31.5 billion investment in ASML shares. This strategic investment will be recognized as available for sale in our balance sheet. On the liability side, current liability increased TWD 23 billion, mainly due to increase in payables to contractors and equipment suppliers as well as increase in short-term loans for hedging purpose. Long-term debt increased by TWD 4.4 billion to TWD 82 billion as we issued more corporate bonds in the fourth quarter. Our days of inventory increased by six days to 50 days, mainly due to higher work-in-process for 28-nanometer product in response to a strong market demand and an increase of raw material. On the cash flow side, we generated TWD 85 billion from operations in the fourth quarter and invested TWD 60 billion in capital expenditure. Overall, our cash balance increased TWD 5 billion to TWD 143 billion at the end of the fourth quarter. Due to higher operating cash flow and the lower capital expenditure, free cash flow improved from negative TWD 2 billion in the third quarter to positive TWD 26 billion in the fourth quarter. Now let’s take a look at the capital expenditure. We spent $2 billion on capital expenditure in the fourth quarter. As a result, full-year CapEx ended at $8.3 billion, in line with our prior guidance. Let me make some comments on our capacity plan. As we continued adding capacity for 28-nanometer process technology, our total capacity increased 4% to around 4 million 8-inch equivalent wafers in the fourth quarter. For the full year, our 12-inch capacity had increased by 21% and the total annual capacity increased by 14% to reach about 15 million wafers. We expect the total capacity to continue increase – to decrease slightly by 1.2% in the first quarter of 2013 due to fewer working days and scheduled maintenance. Now, I would like to give you a recap of our performance in the year of 2012. 2012 is a record year for TSMC. Our strength in technology and manufacturing made us well-positioned in the mobile computing markets. We are happy to mark a year with record sales and profitability, despite difficult macroeconomic environment. Compared with 2011, our revenue increased 18.5% year-over-year to reach TWD 506 billion. We continue to outperform semiconductor and foundry industries. As for profitability although the rising depreciation and fast ramp of 28-nanometer has indeed put pressure on our gross margin. Nevertheless, our gross margin has increased to 48%, a 2.7 percentage point increase from 2011, thanks to higher utilization of the capacity we invested in. Earnings per share increased 23.8% to TWD 6.41, and ROE for the whole year was 24.6% compared to the 22.3% in 2011. Before I dive in the first quarter guidance, I would like to brief you about the changes in our effective tax rate in 2013. TSMC’s tax rate is projected to be 14% in year 2013, which is significantly higher than 8.7% in 2012. The higher tax rate are due to the following reasons. First, the introduction of capital gain tax in Taiwan, coupled with the increase of the AMP rate from 10% to 12% will cause our effective tax rate to increase by two percentage points. Second, higher tax penalty on our profit on return earning as we are making more net income by keeping the same dividend. This will add 1.7 percentage points to our effective tax rate. Third, a 0.9 percentage point increase caused by an expiration of certain tax exemptions. Lastly, a 0.7 percentage point is attributed to the absence of certain subsidiaries’ loss carried forward. Under the current tax environment, we expect the tax rate for 2013 and 2014 will be around 14%. I have finished my financial report. Now, let me provide you our first quarter guidance. Based on our current business expansion and the forecast foreign exchange rate of 28.90, we expect our revenue to be between TWD 127 billion and TWD 129 billion. In terms of margins, we expect the first-quarter gross margin to be between 43.5% and 45.5%, and operating margin to between 31.5% and 33.5%. This concludes my remarks. Let me turn the podium to our Chairman and CEO, Dr. Morris Chang.

Good afternoon, ladies and gentlemen. I’ll make a few comments on last year’s achievements, on this year as a whole, and specifically on first quarter. And I will also comment on 28-nanometer technology and on 20-nanometer and the 16 FinFET, and then finally on CapEx, this year’s CapEx. Lora has already reported the financials of last year to you. Basically, last year was a year of achievements for us. Revenue grew 18% to reach $17.1 and EPS grew 24% to reach TWD 6.41 per share. 28-nanometer technology was a resounding success. The production in 2012 increased more than 30-fold, 30-fold over 2011. And we have enjoyed throughout the year, in spite of a lot of attempt to the competition, we enjoyed throughout the year close to 100% foundry market share in 28-nanometer technology. We have also, in the year 2012, further strengthened our R&D. Our R&D expenditure increased from TWD 33.8 billion in 2011 to TWD 40.4 billion in 2012. Our R&D people increased from 3,400 at the end of 2011 to 3,900 at the end of 2012. Now, a few words on 2013 and the first quarter of 2013. For the full year 2013, we are forecasting a global GDP growth of 2.6%, which is a bit higher than last year’s global GDP growth for 2.4%, now we’re forecasting 2.6% for next year – I’m sorry, this year. We are forecasting a world FTE market growth of 3%, we are forecasting a fabless company growth of 9%. We are forecasting a foundry industry growth of 7%, and we are forecasting a TSMC revenue growth much higher than 7%. So those are our forecast for the full year 2013. For first quarter 2013, I have some comments on supply chain inventory to make. Three months ago, in the last investors conference in October, we expected the supply chain inventory to decline from seven days above seasonal in fourth quarter to one day below seasonal in the first quarter. That was our expectation 12 months ago that the supply chain inventory will decline from seven days above seasonal in fourth quarter to one day below seasonal in the first quarter, all together an eight days decline. Now, because many mobile product manufacturers have accelerated their new product launch this year, and so late in the year they have now pulled ahead to earlier in the year. And therefore, they need IC supplies, IC inventories earlier. So, in – supply chain inventory now is forecast to decline only slightly from fourth quarter to first quarter. And so seven days above normal to one day below normal, we are now forecasting that the inventory will decline from six days above seasonal – well you know, in sort of seven days. Three months ago we thought the inventory was going to be seven days above seasonal. Now, we have better information and we think it’s six days above seasonal in the fourth quarter. So, the big change is that we are forecasting it to decline to only four days above seasonal in the first quarter, which is only a two-day equivalent, two-day decline, instead of the eight-day decline that we had forecast three months ago. Orders resulted in a higher first quarter than we thought three months ago. So now we expect the first quarter revenue to decline while in three months ago, we expected to decline. The first quarter revenue we expected to decline from the fourth quarter. We now expect the first quarter revenue to be essentially flat in U.S. dollars from the fourth quarter. Essentially flat from the fourth quarter in U.S. dollars. A few more words on 28-nanometer technology. After accomplishing a 30-fold increase in production, 28-nanometer capacity and output continued to ramp up aggressively this year. Production of 28-nanometer wafers in 2013 will triple that of 2012, adding the newcomers may ask we have customers. The old customers, I think, know us well enough not to ask that, if we have customers. High-k metal gate will surpass oxynitride. That’s in the 28-nanometer. We have, as you know, actually four types. Three of those are high-k metal gate, and the earliest type that we introduced was the oxynitride, and indeed last year, the majority of the production was the oxynitride. But the more advanced version high-k metal gate will surpass oxynitride in the third quarter this year. And in the fourth quarter, it will even surpass oxynitride even more. Gross margin percentage of 28-nanometer in 1Q ‘13, which is this quarter, will be slightly higher than corporate average, and is expected to remain so in 2013. This linear dragging the corporate average down more than pulling it up. Now, a few words on 20-nanometer and 16 FinFET. Both technologies are in progress in R&D. Both represent state of the art, leading-edge technology not just in foundry but in the whole SC industry. And enough discussions have taken place with enough customers with large requirements to lead us to believe that in both its first and second year of production, in both the first and second year production of 20 SoC and that first year will be next year, 2014. The second year will be a year after that, 2015. In both those years of 20 SoC production, the volume of 20 SoC will be larger than 28-nanometer in its first and second year of production, which were last year and this year. That’s a long sentence, but let me repeat it. In slides it didn’t work. We think that our volume of 20 SoC next year, 2014, will be greater than the volume of 28-nanometer last year and we think the volume of 20 SoC in 2015 will be greater than the volume of 28-nanometer this year. Our CapEx plan is, therefore, in accordance that belief. So, a few more words about CapEx. This year it will be about TWD 9 billion, give or take a few hundred million. TWD 9 billion. 88% of it will be for 28-nanometer, 20-nanometer, 16-nanometer, building facility equipment. But basically, 88% will be for 28, 20, 16, everything. We are building new buildings now, in fact, or we have been building new buildings for quite a while. Facilities and equipment. 5% will be for R&D equipment. That’s basically 10-nanometers and beyond and the co-laws or whatever. 2% for specialty technology equipment, and that is power, embedded flash, micro controller, imaging and so on. 2% of capital. And 1% is for the piece of land that we just acquired in Zhunan. I think I told you about it last time. Did I not? I think I told...

You did.

I told the conference about it. We bought a piece of land in Zhunan, which is about, I understand, 15 or 20 minutes driving from our Hsinchu headquarters. So those are the comments that I have prepared.

All right. That concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to limit their questions to two at a time to allow all participants an opportunity to ask questions. Questions will be taken both from the floor and from the call. Should you wish to raise your question in Chinese, I will translate it to English before our CEO or CFO answers your questions. (Operator Instructions) Now, let’s begin the Q&A session.

First question goes to Deutsche Bank, Michael Chou. Comes from Michael. Michael Chou – Deutsche Bank: Hi, Chairman. Could you give some update for your LED and solar business? Thank you.

Yes. Both LED and solar, our strategy is first to achieve a technological distinction, either better performance than current competitors or better cost than current competitors, anyway, a technological distinction before we start large-scale production, before we put a lot of capital money into it, et cetera. That’s the philosophy. That is the strategy, philosophy, for both solar and LED. At this point, I think we are perhaps a little further ahead in LED than in solar. I think the environment is a bit more friendly to the LED also. So in LED, we are forging our way ahead. And in fact, in the fourth quarter, last quarter, we already had some commercial revenue. By commercial revenue, I mean more than samples; a really real product, for real money too. We already have some revenue and we expect the revenue to increase pretty dramatically this year. I don’t know if it is going to be 30-fold or not, but it will increase pretty dramatically this year. Now, on solar, as I said, the environment is not as friendly because the world has a least silicon solar capacity gloves. And major countries are putting up incentives for more production. However, we think that our thin-film, our thicker CIGE technology is a pretty promising one. And we are spending a lot of R&D money to try to achieve a distinction with the thicker technology, but we are not in the commercial production, commercial revenue stage yet. Michael Chou – Deutsche Bank: Thank you. Follow-up question, would you really be based on silicon structure or traditional software structure?

I guess it’s – I guess, earlier.

We actually have both. We have both.

You answered the question. You answered the question there.

Yes, I think we have both. Michael Chou – Deutsche Bank: Thank you. Second question if...

I’m not sure her answer is right, but hopefully, yes.

I will verify this and let you know. Michael Chou – Deutsche Bank: Okay, thank you. My second question is what is your total capacity increase in 2013? And would you increase some capacity for 20-nanometer as well? Thank you.

With the TWD 9 billion CapEx, we expect to increase the total capacity this year versus last year about 10%. And we are putting money on 20-nanometer.

Yes.

Yes, we have with more pilot around 20-nanometer.

106 long distances accordingly. That means we are spending money on 20. We will be spending money on 20-nanometer capacity. Michael Chou – Deutsche Bank: Thank you.

Next question comes from Citi’s Roland Shu. Roland Shu – Citi: Hi, Chairman and Lora. My first question is to Lora. Under your TWD 9 billion CapEx spending this year, high spend depreciation increase this year?

With the TWD 9 billion, which is very much front end-loaded, about two-third front end-loaded in first half and one-third in second half, we expect depreciation will go up around 23%, 24% year-over-year. This is very similar to this year. This year, depreciation went up by 22%. Roland Shu – Citi: Okay. So this is I think a little bit bigger than 20% you got it at last quarter. So high region?

Yes. As I just said, it will be front end-loaded, so depreciation will happen earlier for the whole year. Roland Shu – Citi: Okay. So how about the first-quarter depreciation, third-quarter depreciation?

First-quarter depreciation will be only slightly higher than in fourth quarter. But starting from second quarter, it will increase faster. Roland Shu – Citi: Okay. I think my follow-up question relates on the IFRS actually the depreciation last year, actually can be envisaged every year by the company. So are you considering to change your depreciation here on your 20-nanometer, 30-nanometer or even 50-nanometer investment, since most of these investments on these certain liabilities increment actually can be shared. So that means that investment on the banking on Lifescience is basically are you considering to really depreciation here for the investment on this node?

Actually our economic life of our technology has always been longer in the depreciation year, which we use five years. We have no plans to make it longer, but for certain tour, actually the economic life might be lower than five years. For those part, we may consider to use lower deprecation years.

Okay. That’s the other way. I think he is suggesting that since a lot of equipment can be used for 20-nanometers, blah, blah, blah, blah, and 16 and so on, we can make the life longer. Thank you for the thought. We will think about it. Roland Shu – Citi: Okay. Thank you. My second question actually to the Chairman. I think the Chairman commented this year, will be much greater than 7% of the function. So can you comment about what the good drivers to drive such great growth? And also do you see any momentum change for the IT and outsourcing in this year? Thank you.

Well, first of all, let me say that I’m not trying to be coy when I say that growth will be much higher than 7%, without specifying a number. I’m not trying to be coy. It’s just that if I say – if I predict more specifically, I think that we’ll get a call from the Taiwan SEC and they will wanted so, So that’s the reason. So now, you asked about the driver. The driver is the 28-nanometer. And just a quick back-of-the-envelope calculation will show you that the growth of 28-nanometer this year will actually be greater than the total growth of the company if the total growth of company – even if the total growth of the company is much higher than 7%. With our stocking about what, this year’s production of 28 – tripled, yes. So that will be in line. And I think your question was originally on what customers, and I’m not going to comment on customers, but I will say that the driver is 28-nanometer technology. Roland Shu – Citi: So how about the IBM and how many contribution this year? Because the IBM – especially the Japanese IBM company.

Oh. You know the answer, or should I answer it? Should I answer with...

I don’t know the answer.

I think, yes, I do expect the IBMs in Japan to contribute more, but compared to the contribution that the 28-nanometer technology will make, the Japanese IBMs increase outsourcing to us. It will be very, very small. Yes.

All right. I think somehow this time there are quite a few analysts who used to attend our conference in person here, are actually overseas this time, and they are on the call. So I think we will now take our next question from the call. Operator, please proceed with the first caller.

The first question on the line today comes from the line of Daniel Heyler from Merrill Lynch. Daniel, please go ahead. Dan Heyler – Merrill Lynch: Thanks for that. Thank you, Elizabeth. I’m sorry that I couldn’t be there this time. Just a quick question, I guess two, first, relates to Dr. Chang’s growth outlook. As you mentioned, foundry growth up 7%, tablets up 9% in 2013, TSMC much bigger than that, and you did mention 20-nanometer. I wanted to ask and maybe talk a little bit more in terms of some of the end markets, because I did notice that your computer and consumer businesses were pretty good in 2012, showing a pretty strong growth. I’m wondering in the non-communications business what your prognosis is for your businesses in 2013.

I didn’t get it.

If we exclude the communication-related applications, what will be the growth for TSMC’s non-communication-related business.

Well, I think that almost all the 28-nanometer is communications-related, right?

There are some computers, too.

There are some computers.

Yes.

But what would you say? I mean, I’m here – you, Dan. So I think that maybe one-third is computers. One-third of the 28-nanometer growth is computers. So, that leaves two-thirds communications-related. So with that growth, then we try to answer your question now. The rest I think is almost the same. It doesn’t change very much. Dan Heyler – Merrill Lynch: Okay. Great. So it’s fair to say you don’t need to see significant...

Yeah, so now not very clear. So if you maybe slowed down a little bit, Dan, and pronounce each word more clearly, maybe you will help. Dan Heyler – Merrill Lynch: Thank you. Thank you. I’m trying to save time for my colleagues. Okay. So fair to say that the growth this year that you’re bullish about, you really don’t need to see necessarily a big recovery in consumer or computer to achieve your bullish forecast, that you can pretty much generate that kind of growth singularly from communications. Is that a fair summary?

Yes, that’s a fair summary, but I think really a more basic answer is that we intend to generate our growth with new technology. Dan Heyler – Merrill Lynch: Great. Okay. My second question relates to the cost of 28-nanometer, as many companies, fabless included, have obviously again – concerned that perhaps 20-nanometer cost per transistor would see a pretty significant uptick. You have a pretty bullish forecast as well and outlook for that. Do we need to see pricing increase either by chip companies and others to pay for this, or do you think Moore’s law is pretty much intact at 20-nano?

Moore’s law is what?

I think Dan’s question is some customers are saying that when we get to 20-nanometer, the cost per transistor actually is higher. Will TSMC pass on the cost to our customers?

I’m not going to answer that. I will just repeat what I said earlier in the statement, that enough discussions have taken place with enough customers who have large requirements to lead us to believe that the volume will be very large. Dan Heyler – Merrill Lynch: No, that’s fine. No, I’m actually wondering if some of the chip companies have said they may need to increase their prices and they’re willing to try to do that. The expectations are that costs will be higher generally, I think, from your customers. So I just wanted to get your perspective on that.

Well, again, you’re asking me to say something about price and I really am not going to say anything about price. But I would just say that enough discussions have taken place with enough customers. I mean, of course those discussions involve price discussions too, Dan. They’re not just technical discussions. Dan Heyler – Merrill Lynch: Yes. Yes, not so much about price, just the kind of the economics, but obviously the design ecosystem is getting very, very good and manufacturing is getting better. I just wondered how things are progressing. Thanks.

Thank you.

Okay. We will continue on the call. Next question will also be coming from the call. Operator, please proceed to the next caller.

The next question on the phone, I might say, comes from the line of Randy Abrams from Credit Suisse. Randy, please go ahead. Randy Abrams – Credit Suisse: Okay, thanks very much. My question first is on competition. You mentioned in your prepared remarks a near 100% share on 28-nanometer last year. Could you talk about how you’re viewing the effective capacity in competition on 28-nanometer as it matures this year and whether you’re seeing competitors ramp up? And if you could give an early view on your market share in the early stage of 20-nanometer?

I don’t know what the 28-nanometer capacity is. Incidentally, when I said 28, I meant 28, and I don’t include 32-nanometer. If you include 32-nanometer, which is not 28-nanometer, by the way, but if you include that, then you will cause – we have a lower market share than almost 100%, and the capacity will be correspondingly a lot bigger. Yes. Randy Abrams – Credit Suisse: Okay. But could you say if you’re seeing more competitors on, say, 28/32 as the node matures this year? And as you look at the tape-out activity on 20, do you believe that same...

We don’t group them together. 32 is not 28, Randy, isn’t it?

Yes, Randy. Randy Abrams – Credit Suisse: Okay.

Yes. Now, can I say something about competitors in general, the advanced technology competitors? Well, you know who they are as well as I do. So I think every one of them is a formidable competitor, but I also think that we are ready to tackle, to fight every one of them, as we have always been ready to fight every new competitor. I remember all the querying that I went through when we had UMC, we had Snake, and we had global foundry, and now we have Samsung and we have Intel. Well, every one of those I think – everyone was a formidable competitor at that time. Everyone was. And we take every one very, very seriously, but we also plot with everyone in the past, and with the current competitors that have just appeared on the scene, we have always felt that we have a lot of strength. And I think in the past I have gone over our strengths and I – if you want me to repeat them, I’ll be very happy to repeat them, but I’m just afraid of boring you. Randy Abrams – Credit Suisse: Okay. They’re good. If I could follow up on the R&D investment where you had significant growth in 2012, could you talk about whether you expect the same growth in R&D and OpEx as a percent of sales, or as you accelerate your sales growth rate, do you think there’s a bit of operating leverage?

Well, we expect a great deal from our increased R&D spending from our strengthening of the R&D, more and more strengthening. First of all, I said a little earlier that the growth engine in the next few years is going to be technology. Our growth engine is going to be technology. And we have proven it now already with 28-nanometer, and we are going to improve it with 20, with 16 and then a little later with the 10. So why have we so dramatically increased our R&D effort in the last few years? Number one, all right, because slow – technology is going to be our growth engine, and I have said, more than once, more than two or three times, in fact, that as far as Moore’s law is concerned, if anyone is going to pursue Moore’s law to the end, we will be there. So a large part of the money is being spent on the further pursuit of Moore’s law. And that, of course, also includes really the investment that we have made in ASML, and it also includes the more path-finding type of R&D to improve transistor performance. So, now, a smaller part will be spent on cores and then another part, which is perhaps a bit later than what’s spent on cores, will be spent on specialty technologies and embedded flash and imaging, power, power management, and all those specialty technology, that we expect to fill our more mature capacities. On new technology and we stay profitable, both with the new technology and with the backfilling of the capacity by specialty technologies. I guess those are about the main uses of R&D fund, R&D money. Those are the biggest reasons for us to expand R&D. First, relentless pursuit of Moore’s law, all facets of it, performance as well as costs as well as density, and including and the transistor performance improvement. Second, cores and specialty technologies. So those are the main uses.

Chairman, I think Randy’s question also includes with all these increases in R&D, whether R&D as a percent of revenue will go up?

No. Well, I mean, I am not going to predict for the very distant future, but for this year, my plan now is to see it at about 8%, because as I said, the next few years will be neither growth years or strong growth years. Each one of the next few years will be either a growth year or a strong growth year. Well, by strong, I mean double digits. By growth year, well, I mean, I don’t consider a 1% growth for the year. So, 1% to 10% is a growth year. And strong growth year is double digit. So the next few years I expect that every one of them will be either growth or strong growth. And so R&D expenditure will go up, even though the percent of revenue is not going to change very much. I don’t think it’s going to decrease. Randy Abrams – Credit Suisse: Okay. Thank you, Dr. Chang.

Okay. We’ll come back to the floor now. Our next question comes from Donald Lu from Goldman Sachs. Donald Lu – Goldman Sachs: (Foreign Language) My first question is, if I hear correctly, Chairman you said fabless growth is 9%, foundry is only 7%. Why foundry yearly growth even faster than others?

I think it must have to do with the inventory change and all that stuff. Yes, I saw the numbers and I really had the same question. but it wasn’t important for me to ask. I didn’t see what the importance enough to ask the guy that gave me the numbers. So the guy who gave me numbers is our veteran forecaster who is sometimes right and sometimes wrong. Donald Lu – Goldman Sachs: Okay. So it’s not very important.

I think it has to do with the inventory change, yes. Donald Lu – Goldman Sachs: Okay. Just a follow-up on that, the communication in terms of demand is growing really strong in the last few quarters. How much is your revenue from smartphone and tablets today?

How much from smartphone and tablets?

32%.

Why don’t you say it?

It’s about 32%. Donald Lu – Goldman Sachs: 32. Okay. My next question is more on the...

You mean our total revenue, 32% is from smartphones and tablets?

Mobile. Donald Lu – Goldman Sachs: You mean for the whole year last year?

Yes, and for 2013. Donald Lu – Goldman Sachs: In 2013, 32% of smartphones and tablets. And that’s including like a touch controller or those kind of things? Okay.

Right. Donald Lu – Goldman Sachs: My next question is on structural profitability.

Yes. My favorite subject. Donald Lu – Goldman Sachs: Oh, great. The first part is the currency is moving in an adverse kind of direction. What’s the impact of the currency on gross margin in Q4 and Q1, so we have an idea on apple-to-apple basis?

Every 1% of FX change, we have 0.4 percentage point of our margin impact. Donald Lu – Goldman Sachs: Okay. And for the whole year, would we expect structural profitability to cut in in either direction?

Actually, our structural profitability this year will be slightly better. I mean, about one percentage point better than last year. 100 basis points better than last year. On the other hand, we have a couple of uncertainties; one quite large and one not so large. The quite-large one is the molding of the more – the mature – all the technologies except 28. 28-nanometer, we are quite confident will have a utilization rate of around 100%. But all the other technology lines may have a lower utilization than last year. Now, keep in mind that last year was a tough comparison. Last year, everything was low close to 100%. And so, I’m not saying at all that this year, our utilization will be bad, but I’m saying that last year was a tough comparison. And so, even though our definition of our structural profitability is leaves utilization to one side, so our structural I would rate this year will be better than last year, no less than one percentage point better than last year. But if you start to talk about actual profit margin, then you have to take into account the utilization, and as I said, the uncertainty, the large uncertainty, is the relation. And you’ve mentioned – we have hold the numbers before.

Yes. It’s 1% utilization translated to about 0.35 to 0.4 percentage point.

Almost like exchange rate. Every percentage less utilization means 0.35 to 0.4 percentage point less gross margin. So, anyway, utilization is the greater uncertainty. And then exchange rate, of course, is uncertainty too. But here, I say, it’s perhaps not as big – I sure hope that the exchange rate doesn’t vary or wouldn’t. Okay.

Okay. Next question, we will also stay with the floor, and will come from Morgan Stanley’s Bill Lu. Bill Lu – Morgan Stanley: Yes, hi, Dr. Chang. Hi, Lora. Dr. Chang, if I hear your comments today, it seems like you are positive for the next multiple years, and not just this year, whether it’s the CapEx comment, whether you’re saying that 20-nanometer is going to be bigger than 28. It all points towards several good years ahead of us. Now, for that to happen, I think obviously technology, you need to migrate. And I think we can also predict about that. But the end margin also has to be growing at a much bigger – a faster pace than before as well. I’m wondering if you could talk about what gives you the confidence in multiple years out, because it’s a very different comment than you say forecast for additional couple of quarters? And then secondly, what signs are you looking for that things aren’t going to be that good?

I think, Bill, your question is what will be the growth drivers for the end market. Bill Lu – Morgan Stanley: Yes.

Right? End market.

The multiple years, I mean, four years. Last year, I meant five years, and now, I mean four years, okay? So it’s not multiple, multiple, multiple years. It’s four years, okay? And you are concerned that the world may end in the next four years? Anyway, it would be same. No, of course, we are not predicting anything like that and we are just following the conventional, consensual economic scenario, which is that the developed countries, U.S. and Europe, will grow very slowly. Well, actually, U.S. will grow sort of medium slowly, 2.5% perhaps, and Europe will do worse and Japan, also, will do worse than the United States. Of course, one never knows what the new Prime Minister is going to do when those – what he has already done seems to be a bit on the positive side. But anyway, we’re assuming that, and we are also assuming that the developing economies will do quite well, China principally, but also a lot of other countries that China now exports to. Now, all these smartphones and some tablets that China makes are not for Chinese consumption. They go to other countries. They go to other developing countries. And we believe that those developing economies will do quite well. So that’s our macroeconomic scenario. As far as the market is concerned, the application market is concerned, we predict that the mobile products will be the dominant new product on the computer scene. And I think that they will continue to eat into the traditional notebook PC market. And I think these are really not – they are pretty conventional assumptions. And those are the assumptions that we are making when we say that we are going to grow quite strongly in the next four years, four years’ time, 2013, 2014, 2015, 2016. Yes. Bill Lu – Morgan Stanley: I’m also wondering if there is anything that you’re looking at that might change your mind.

A lot of things could change my mind. A lot of things could change my mind, yes. Well, what do you have in mind that will change my mind? I think a lot of things can change my mind. I’ve been here for – if the U.S. economy suddenly falls apart, then actually that would be a very big change, a pretty significant change. It won’t change everything, but it will be a significant change. Bill Lu – Morgan Stanley: Second question is maybe for Lora. We’re now in, I guess, well, the fifth or sixth quarter of 28-nanometer production, and typically, you would expect to see pricing kind of come down a little bit. But this year, there’s also a move from poly to ploy. So, could you help me with how we should think about pricing for 28 this year versus how it forecasted to the previous nodes?

We look at the structural profitability, other than just looking at the pricing. So we have to work both on the pricing and also for the cost end. I think Chairman and I just said, from this quarter, the 28-nanometer with high utilization will track to corporate-level margin. And going forward, we’ll keep on maintain like that. I think on a longer term, that’s what we also intend to do; to maintain the similar level or even slightly higher than the gross margin.

Bill, as you know, that we cannot talk about specific prices. All right, thank you for the understanding. Now, we will go back to the call. Operator, please proceed with the next caller.

Your next question on the phone comes from the line of Andrew Lu from Barclays. Andrew, please go ahead. Andrew Lu – Barclays: Thank you. Dr. Chang and Lora, thank you for taking my question. My first question is regarding earlier, Dr. Chang mentioned year 2014, the 20-nanometer volume will be higher than 12, and the 15 will be higher than 13. Is that including 16 – year 2015 as well?

No, it does not. Andrew Lu – Barclays: So only 20 high scheme located?

Right. Andrew Lu – Barclays: Okay. Thank you.

If you go to 2016, then I would tell you something different, but let’s not go there for the time being. Yes. Andrew Lu – Barclays: So, do you suggest that what we know – production year 2015?

I think it will be very, very small. Andrew Lu – Barclays: Thank you. My second question is the cores of the 2.5D packaging. If you are charging customer $5,000 for wafer, if you are doing the 24 per customer on cores what additional value you can get from this customer basis?

Well, I think the advantage that a customer will get is that we will be in charge of everything. I mean, we will be responsible for the whole thing until it’s all packaged. And so if we – if he uses another old set, then who is going to be responsible for the new? I think it will be a more difficult situation. And so, our advice to our customer is to not assemble the old thing. Now of course, we have to be competitive and fight all that, and of course we’re willing to do all that. At the end, I think that it will be advantageous for the customer to have us handle the whole thing. Andrew Lu – Barclays: Yes. Dr. Chang, we made some revenue – for example, if we sell the customer $5,000 wafer, can we get additional $2,000 to $3,000 on this kind whole thing back in?

Well, things are getting little expensive, aren’t they? But then, applications still grow and I think that, of course, in free market economy, every price finds its equilibrium, so there needs to be enough demand and enough supply for there to be a purchased. So, that’s how it works. Then we feel quite confident that we can find this equilibrium and we’ll make it worthwhile for both the customer and for us to do this. Otherwise, yes, it won’t be a business, and we think it will be a business. We think it will not be a significant business until 2015, 2016, as I said earlier. Even a year ago, I said that it will not be a TWD 1 billion or more business until 2015 or 2016, and I still feel that way. Andrew Lu – Barclays: Thank you.

We will continue with the call and, operator, please proceed with the next caller on the line.

The next question on the phone comes from the line of Mehdi Hosseini from SIG. Mehdi, please go ahead. Mehdi Hosseini – SIG: Yes. Thanks for taking my question. I have one question for Dr. Chang and one for Lora. It was interesting to hear Intel as a part of your competitors. Dr. Chang, can you please elaborate at what technology note and what kind of end-market application or segments you view Intel as becoming a more fierce competitor?

So, Mehdi, your question is according to TSMC’s view, at which technology node will Intel become a more fierce competitor to us, is that right? Mehdi Hosseini – SIG: Yes.

Okay.

Did we use the word “fierce”?

Yes.

Intel is very fierce to me now already, whether they are a competitor or not. At what node? Well, my goodness, I think they are a competitor to us, though it may have at least two foundry customers already. Is it two or is it more? Two, yes. So they are a competitor. And I do believe that – well, I think Intel said it themselves, and I believe them, that they will be very selective and they will not go out in a general way. They’re not going to be like a TSMC. I don’t know whether they’ve said it complimentarily or ethically. I imagine it’s the latter, actually. But anyway, I believe it, yes. They are going to. They are not going be a like a TSMC, which means that they will be selective and they will not be a general – cannot be a general competitor. Now, as a selective competitor, I think they’re already a competitor. And I think they intend to be a bigger competitor in the future and they can do that any time they become qualified. Mehdi Hosseini – SIG: Got it. And then my follow-up has more to do with the P&L. If R&D is going to stay around 8%, how should we think about SG&A for 2013? Is that also going to stay in the 4% to 5% range?

SG&A is in the 4%, roughly 4% range. Mehdi Hosseini – SIG: 4%, thank you.

Revenue gets higher growth, it can maybe 3.5% to 4% in that range. Mehdi Hosseini – SIG: Okay. And then one final question, is there any way you can elaborate the number of tape-outs at 20-nanometer, or if you can elaborate or quantify how many customers or anything that will give us a sense how the early demand looks like?

Well, Lora, you want to answer that question? Or you don’t want to answer that question? It’s up to you.

Don’t.

Up to you. I said it’s up to you whether you answer the question or don’t answer the question.

Sorry, I will not answer this question.

He’s asking how much of...

Tape-outs in 20-nanometer.

How much of the CapEx?

Tape-outs.

Tape-outs?

Tape-outs.

For 20-nanometer? Okay, for 20-nanometer, no. I guess I will just limit myself to the comment that I already made; that we have had enough discussions with enough customers who have large requirements that lead us to believe that the volume required in 2014 and in 2015 will be bigger than the 28-nanometer volume in 2012 and 2013, respectively. Did you get that this time? Mehdi Hosseini – SIG: Yes.

Thank you.

Okay. Mehdi Hosseini – SIG: Thank you.

Okay. Now, we are coming back to the floor. Any – okay, next question comes from JP Morgan’s Rick Hsu. Rick Hsu – JP Morgan: Yes. Happy New Year, Chairman.

Likewise to you. Rick Hsu – JP Morgan: Thank you. Just one question for me. You’ve mentioned about – earlier, your customer inventory is going to be still four days as of December in Q1.

Supply chain inventory. Rick Hsu – JP Morgan: All right, supply chain inventory, yes, rather than one date for low season Q1. So would that negatively affect your second quarter gain, it does not meet your customer may exit Q1 still with assets inventory?

That’s pretty smart...

Rick.

Rick, yes. I think it means that the second-quarter growth may not be quite as strong because first quarter is higher than we’re talking about. Our scenario three months ago, six months ago, was that the first quarter will be low and second quarter – I think six months ago I even used the word “strong rebound”, did I not, Rick? Rick Hsu – JP Morgan: Yes.

Yes. But three months ago, I deliberately omitted the word “strong”, but I said there’ll be rebound. So now, I can maintain my words that I used three months ago. There will be rebound. Yes. But it would not be a strong rebound as we thought it was going to be six months ago. Six months ago, we thought this quarter would be quite low. In fact, six months ago, we thought the fourth quarter and first quarter will be quite low. And it has now turned out that the fourth quarter was quite a lot stronger than we anticipated six months ago. And the first quarter is also stronger than we anticipated six months ago. But then second quarter, the strong rebound that I referred to six months ago in the second quarter will not be quite as strong as we thought six months ago. I mean, all of this came about because I said too much, I guess. So maybe a thing to do is not to say very much and keep your mouth shut, but then I think it’d be a less interesting conference. Rick Hsu – JP Morgan: Thank you.

Yes.

If there’s no more questions – oh, there he is. Okay. Next one – well, the next comes from HSBC, Steven Pelayo. Steve Pelayo – HSBC: Just two quick questions. One kind of longer-term concern to follow-up Bill’s question. I think we are in the steepest part of this transition now to the smartphone revolution. I think maybe it’s even majority smartphones are shipping today than feature phones. So, it’s the glory days, I guess, you could say, and we were talking a year or two ago about how much your dollar content increased with the silicon content increase. So this is a billion-unit market, maybe a 2 billion-unit market, even in a couple of years. But clearly, we are passing that threshold of kind of now 50%, so we do worry two years from now, three years from now, where maybe smartphones are...

Is that a dead-end TWB 2-billion market? Steve Pelayo – HSBC: It’s in unit.

Units. Yes, yes, yes, yes. Steve Pelayo – HSBC: And so do you worry what’s that next billion-plus unit market that’s going to have the same kind of silicon content increase that we’ve enjoyed in the smartphone revenue?

I wish I knew. I wish I knew. Does that answer your question? Steve Pelayo – HSBC: I don’t know as well. The one follow-up I will say is that I think the math says that your 28-nanometer revenues now are bigger than all of UMC. So congratulations. That formidable competitor’s a distant image in the rear-view mirror.

I think a lot bigger than UMC actually. Steve Pelayo – HSBC: But I do want to talk a little bit about the surrounding nodes, I guess, first going up to 40-nanometer, because a lot of guys are still there and it is still more than 20% of revenues per year. Is there any more intense pricing environment or intense competition? Are people picking up second source in 40-nanometer here?

I think that our 40-nanometer market share has dropped. I know it has dropped. We are just – and we anticipate that and we certainly were not going to just fight to in order to lower our price below what we intended to lower it to. We had our price strategy and we are not going to do anything different on price in order to keep the market share. But we do try to let it drop in a controlled manner. And the way we do fight to make the job a sort of controllable one is to backfill the capacity with specialty technologies. Specialty technologies are actually migrating upwards. They are just two or three or four generations behind the latest graphics, the latest APEs and so on. Images were still at – they are still at which generation?

90.

90-nanometer.

90, yes. But they will be migrating to...

65.

65, yes. And that they have migrated from 0.13 earlier. I mean, that’s using one example. And another example is all these microcontrollers and so on. They’re still at what?

0.18.

0.18.

0.18. And they’ll be migrating into 0.13 and so on. And the power stuff is...

0.25, 0.18.

0.25, yes. And they’ll be migrating into 0.18 and so on. So, that’s the strategy. That’s the picture. That is the strategy, and as I said earlier, when I said a small part of R&D money is being spent, and a small part is really not that small. It’s quite a large group. It’s of course much smaller than the more slow pursuit, but it’s important to us to develop – to let them migrate into the older technologies. Very important for us. Steve Pelayo – HSBC: Can I just do two quick follow-ups to that? I really appreciate you guys commenting on 28-nanometer mix for the full year and corporate average gross margin. Could you just help us think if we were trying to forecast the bottoms-up gross margins for you by node? So, what is the 40-nanometer relative to your corporate average? What is the mature node relative to your corporate average gross margins? You don’t have to be specific, but help me understand, because I’m trying to think about bottoms-up gross margin forecast.

I will give you a general philosophy, all right? It was the philosophy that I started 27 years ago, when TSMC was starting. My philosophy then and my philosophy now is I want all the products we make to be within a pretty narrow gross margin range. So, it does remain true to today. I don’t want – I mean, the reason I started that philosophy was because I hated that you have to pick because of the gross margin. Well, capacity becomes tight. We make more of this because it’s higher margin, and that was such an unnecessary burden on the manager’s mind. I mean, I didn’t want that. And now, I still don’t want that. I don’t want to have to pick between the various opportunities like this because of gross margin. So, a simple answer to your question is we charge and keep the margins on all products within a pretty narrow range, I would say, as a 10-point range. Well, not even that big. I would say it’s a seven, eight-point range. Steve Pelayo – HSBC: And my last question was just on some of the expanding your addressable market into things like LED, solar, packaging. If I try to corner you and ask you, when do you think those would be 5% of revenues? Would you give me a year?

Solar, did you say? Steve Pelayo – HSBC: Your new market, solar, LED and packaging, when do you think there could be 5% of total TSMC?

Well, I’m not even commenting on solar and LED. Those we have already spun out. Packaging, as I said, will be TWD 1 billion in 2015, 2016. By then, it’s only a few percent. Yes. Steve Pelayo – HSBC: Okay. Thank you.

Yes.

All right. I see there’s still one caller on the line who has been waiting for a long time so, operator, let’s open the line to the next caller.

Your next question on the line comes from the line of Brett Simpson from Arete Research. Brett, please go ahead. Brett Simpson – Arete Research: Yes. Thanks very much. Dr. Chang, you mentioned this year, wafer capacity for 28-nanometer will triple for TSMC, but how do you assess the total industry supply at 28-nanometer this year for foundry? And what level of increase do you see overall? So what level of increase do you see overall and what market share do you think might be achievable for TSMC at 28-nanometer this year?

All right. Brett, your question is what is our view on the overall supply of 28-nanometer this year and what TSMC’s market share is going to be on 28-nanometer this year. Is that correct? Brett Simpson – Arete Research: That’s right. Thanks.

Overall supply, supply demand...

Capacity of 28.

What is the number?

Yes. Like since we will be tripled, what will the other sections?

I don’t think we give – I can give the capacity, but then our CFO told me that we don’t do that. Now, market share – since our CFO didn’t tell me not to do it, so I will venture forth and say that – I said that the last year was almost close to 100%, so I do expect that it will drop slightly from there. But I think that this year, maybe we’ll be close to 90%, okay. Brett Simpson – Arete Research: Okay. That’s helpful. And can you talk a bit about the 20-nanometer ramp schedule? So when specifically might we start to see first revenues for TSMC at 20-nanometer?

When will we see 20-nanometer revenue? When? Brett Simpson – Arete Research: Yes.

When?

Next year.

We are going to see part of it in 2014. Didn’t I say that 2014 will be bigger than 2012?

That’s right.

Yes. 2014 will be bigger than 2012. Our – yes. Brett Simpson – Arete Research: Okay. Right. And then maybe just final question on inventory. Dr. Chang, you mentioned supply chain inventories aren’t falling as aggressively in Q1 as you first thought. How do you assess the situation beyond Q1? Do you think that the industry’s inventory levels get back to normal levels in Q2, or do you think it will take longer before this equilibrium takes place?

Well, you’re asking me about second quarter. And really, we aren’t ready to give our second quarter guidance yet. But I will say that our current view of second-quarter inventory, supply chain inventory in the second quarter, is also going to be higher than our previous view. Yes. In other words, to change from our previous view of inventory is that the previous view forecasted a pretty steep decline of inventory in the fourth quarter, in the first quarter and in the second quarter. And our current view is that the inventory will stay a lot flatter. Brett Simpson – Arete Research: Great. Thanks very much.

Okay. We are coming back to the floor. Next question comes from Goldman Sachs’ Donald Lu. Donald Lu – Goldman Sachs: My first question is on tax. We have a new tax rate this year which is quite taxing, in a way.

You are right. Donald Lu – Goldman Sachs: And, I mean, there are various ways you might be able to give that, for example, going to a less taxing jurisdiction, like Intel has done. For example, Intel built tab need through Ireland and Italian, et cetera. Was TSMC considering that, given the change in taxes?

I think we may consider that not only for the – not purely on the tax reason because tax outside of Taiwan, it’s a big thing. You have to look into the efficiency, the costs and the local environment, et cetera. So currently, we are now thinking just for the tax reason to go offshore. Maybe for the overall growth reason and any other reason such reason we may consider that.

I think Donald was thinking about Cayman Islands and so on. I believe he’s not thinking of...

No.

He’s not thinking of moving our factory offshore. I don’t think, right?

He’s talking about that. Donald Lu – Goldman Sachs: I think both, yes. Whatever works so that in the future years, maybe we can model the tax rate. It might decline again at some point.

I’m not very optimistic about that. Yes, we are paying 14% this year and I think you just said that you expect to pay 14% next year also, right?

Yes.

But basically, the Taiwan corporate income tax rate is still not very high. I mean, 17%. The United States has a 35% income tax rate. And now, actually, I looked up – looked up Intel’s effective tax rate for me, right? What was it? Do you remember? Yes.

Something like 27%.

No, no, no. You looked up for me. It was a lot lower than that, I think. Well, nobody knows. Yes.

27.

Only 27% for the year?

Yes. We looked at the number.

I thought it was lower than that, but yes.

20?

I thought it was lower, at least in the – second. Well, anyway, it was all right. But the United States has a corporate income tax rate of 35%. So anyway, we do have a lot of things to consider, yes. I agree with you that the 14% – a jump of 5-point-something points between last year and this year, I think that’s certainly not a good thing for us. Donald Lu – Goldman Sachs: Okay. Second question is on the treatment for ASML investment. You just said you are putting that all in the investment already for sale. But there are two portions of that. One is for the staff. One is for R&D investments. But the later part, I mean, what kind of sale – give ASML to help its R&D?

That R&D support will be expenses, will be our R&D expense when it comes. Yes. Donald Lu – Goldman Sachs: And that would be expensed over certain years or...

Five years.

Five years. Donald Lu – Goldman Sachs: Five years.

Starting this year, right?

Yes. Donald Lu – Goldman Sachs: Okay. So that’s part of the R&D. Okay, great. Thank you.

All right, if there’s no further questions, I think we’ll conclude this quarter’s investors’ conference. Thank you very much for joining us and I hope we will see you next quarter.

Ladies and gentlemen, that does conclude the conference for today. Thank you all for your participation. You may all disconnect.