Good afternoon, everyone. Welcome to TSMC's Third Quarter 2020 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. To prevent the spread of COVID-19, TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dialing lines are in listen-only mode. The format for today's event will be as follows. First, TMSC's Vice President and CFO, Mr. Wendell Huang will summarize our operations in the third quarter 2020, followed by our guidance for the fourth quarter 2020. Afterwards, TMSC's CEO, Dr. C. C. Wei and Mr. Huang will jointly provide the company's key messages. Then we will open the line for Q&A. As usual, 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 in our press release. And now I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang for the summary of operations and the current quarter guidance.

Thank you, Jeff. Good afternoon everyone. Third quarter revenue increased 14.7% sequentially in NT dollars, or 16.9% in U.S. dollars, as we saw strong demand for advanced technologies and special technology solutions driven by 5G smartphones, HPC and IoT-related applications. Gross margin increased 0.4 percentage point sequentially to 53.4%, mainly thanks to a much higher level of utilization, partially offset by the margin dilution from 5-nanometer ramp and unfavorable exchange rate. The operating expenses increased by NT$7.4 billion, mainly attributable to a higher level of development activities for N4 and N3 technologies and onetime expenses to facility expansion in Hsinchu. Therefore, operating margin slightly declined by 0.1 percentage point sequentially to 42.1%. Overall, our third quarter EPS was NT$5.3 and ROE was 31.3%. Now let's move on to the revenue by technology. 5-nanometer process technology contributed 8% of wafer revenue in the third quarter, while 7-nanometer and 16-nanometer contributed 35% and 18% respectively. Advanced technologies, defined as 16-nanometer and below, accounted for 61% of wafer revenue. In terms of revenue contribution by platform, smartphone increased 12% quarter-over-quarter to account for 46% of our third quarter revenue. HPC increased 25% to account for 37%. IoT increased 24% to account for 9%, automotive decreased 23% to account for 2%, digital consumer electronics decreased 24% to account for 3%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of NT$742 billion. On the liability side, current liabilities decreased by NT$27 billion, mainly due to the decrease of short term loans and the decrease of current portion of bonds payable. Long-term interest bearing debt increased by NT$146 billion, mainly as we raised NT$145 billion of corporate bonds during the quarter during the quarter. On financial ratios, accounts receivable turnover days decreased four days to 40 days, while days of inventory increased three days to 58 days, primarily due to N5 ramp. Regarding cash flow and CapEx, during the third quarter, we generated about NT$190 billion in cash from operations, spent NT$99 billion in CapEx and distributed NT$65 billion for a fourth quarter 2019 cash dividend. Short term loan decreased by NT$17 billion, while bonds payable increased by NT$136 billion, mainly due to the bond issuances. Overall, our cash balance increased NT$137 billion to NT$604 billion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $3.4 billion. I have finished my financial summary. Now let's turn to our fourth quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between $12.4 billion and $12.7 billion, representing a 3.4% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to NT$28.75, gross margin is expected to be between 51.5% and 53.5%; operating margin between 40.5% and 42.5%. Now I will hand over to the call to C.C. for his key messages. C. C. Wei: Thank you, Wendell. Good afternoon, everyone. We hope everybody is staying safe and healthy during this time. Now, let me start with our near-term demand and inventory. We concluded our third quarter with revenue of NT356.4 billion or $12.1 billion, which was above our guidance, mainly due to better demand across all our platforms in our forecast three months ago. Moving into the fourth quarter 2020, we expect our sequential growth to be supported by strong demand for our industry-leading 5 nanometer technology, driven by 5G smartphone launches and HPC-related applications. On the inventory front, we forecast our fabless customers’ overall inventory to exit the year above the seasonal level, as our supply chain continues to make efforts to ensure supply chain security and actively prepare for the new 5G smartphone launches. Looking ahead, we expect our customers’ our overall inventory to remain above the historical seasonal level for a longer period of time, given the industry\s continued to need to ensure supply chain security amidst the lingering uncertainties. For the full year of 2020, although COVID-19 continued to bring some level of impact to the global economies, we also observe that COVID-19 is accelerating digital transformation, while 5G and HPC-related applications continue to drive semiconductor content enrichment. We now forecast the overall semiconductor market, excluding memory to increase mid-single digit percentage, while foundry industry growth is expected to be close to 20% year-over-year. For TSMC, our technology leadership position enabled us to capture the industry megatrend of 5G and HPC. We expect to outperform the foundry revenue growth and grow by about 30% in 2020 in U.S. dollar terms. Next, let me talk about our N5 ramp up and N4 progress. TSMCs N5 is the foundry industry’s most advanced solution. With the best PPA, N5 is already involved in production, with good yield, while we continue to improve the productivity and performance of the EUV tools to further enhance our leadership in EUV technology. Due to the robust demand from 5G smartphones and HPC applications we reaffirm N5 will contributed about 8% of our wafer revenue in 2020, and we expect even higher percentage in 2021. N4 will never reach the strong foundation of N5 to further extend our 5-nanometer family. N4 is a straightforward migration from N5 with compatible design rules, while providing for the performance, power and density enhancement for the next wave 5-nanometer products. N4’s first production is targeted for 4Q 2021 and volume production in 2022. With our continuous technology enhancement, we expect our 5-nanometer family to be a large and long lasting node for TSMC. Now, I will talk about our N3 status. N3 will be another full node straight from our N5 with up to 70% larger density gain, up to 15% performance gain and up to 30% power reduction as compared with the N5. We have chosen FinFET transistor structure for our N3 technology to deliver the best technology maturity, performance and costs for our customers. Our N3 technology development is on track with good progress. N3 will offer compete platform support for both mobile and HPC applications which production is scheduled in 2021 and volume production is targeted in second half of 2022. Our 3-nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. Thus we are confident our 3-nanometer will be another large and long-lasting node for TSMC. Finally, I’ll talk about TSMC 3DFabric. TSMC has developed an industry-leading and comprehensive wafer level 3D IC technology roadmap to enhance system level performance. Our differentiated Chiplet and heterogeneous integration technologies drive better power efficient and smaller form factor benefits for our customers, while shortening their time to market. These technologies including chips stacking solutions such as SoIC, as well as advanced packaging solutions, such as InFO and CoWoS. We are consolidating this offering under one umbrella, and naming it TSMC 3DFabric. As the industry continue to seek innovations to enhance system level performance, 3DFabric, will complement our advanced technology to unleash our customers’ innovation. We expect revenue from our back end services, which include both advanced packaging and testing to grow at the rate slightly above the corporate average in the next few years. Now let me turn the microphone over to Wendell.

Thank you, C. C. Let me start by making some comments on our profitability. Our third quarter gross margin exceeded the high end of our guidance to reach 53.4%, mainly as we saw a much higher than expected overall capacity utilization rate in the third quarter. That helped to offset the margin dilution from the initial ramp up of our 5 nanometer technology. We have just guided fourth quarter gross margin to decline by 0.9 percentage point sequentially to 52.5% at the midpoint, primarily due to the margin dilution from the continued steep ramp up of our 5-nanometer and the less favorable foreign exchange rate in the fourth quarter. Looking to 2021, we expect a strong ramp of N5 to contribute a higher percentage of revenue as compared to 2020. The array [ph] of N5 continues to improve. Similar to prior nodes, we forecast N5's gross margin to take seven or eight quarters to reach the corporate average level. Thus N5 is expected to dilute our gross margin by about two to three percentage points for the full year of 2021. As a reminder, the following six factors determine TSMC's profitability, leadership technology development and ramp up, pricing, cost reduction, capacity utilization, technology mix as well as foreign exchange rate. Taking all these factors into consideration, we believe a long-term gross margin of about 50% is achievable. Now let me talk about our capital budget for this year. Our business outlook is supported by strong demand for our industry leading advanced technologies and specialty technology solutions driven by the industry megatrends of 5G and HPC-related applications. In order to meet this demand and support our customers’ capacity needs, we now expect our full year 2020 CapEx to be about $17 billion. Now I will make some comments on our corporate bond issuances and capital structure. The multiyear megatrends of 5G-related and HPC applications are expected to continue to drive strong demand for our advanced technologies in the next several years. Given the macroeconomic uncertainties this year, a current low interest rate environment and the ability to diversify our funding sources, TSMC's Board of Directors has so far approved the issuance of NT$120 billion in NT$-denominated corporate bonds, and $4 billion in U.S. dollar denominated corporate bonds. Year-to-date, we have issued NT$89.5 billion in NT$-denominated and $4 billion in U.S. denominated corporate bonds with favorable pricing terms. With our solid financial performance, strong balance sheet and cash position and capacity to take on debt, we are able to aggressively invest in our future to enhance our technologies and capabilities. This enables us to continue to outgrow the semiconductor industry through the cycles. With our disciplined capital management, we remain committed to a sustainable cash dividends on both annual and quarterly basis.

Thank you, Wendell. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your questions to two at a time, to allow all participants an opportunity to ask questions. [Operator Instructions]. So now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line?

The first caller on the line is Gokul Hariharan, JPMorgan. Go ahead please.

Huang, congratulations on a great quarter and thanks for taking my questions. My first question is on CapEx and capital intensity. Looks like, this year we’ll come in around 36%-37% capital density. Could we talk a little bit about how we should think about capital intensity and absolute CapEx as well going -- looking forward at least on a directional basis? Seems like the investment cycle is still going to be pretty much intact going into next year, also looking at some of the financial options in terms of bond raise and et cetera that TSMC has undertaken. That is my first question. My second question is on N5. I think in previous calls, you had indicated that while N5 will be a long and large node, it may not have the same number of tape-out as N7 has had, which is probably a historical high. Is your view changing on N5, could we talk a little bit about, will N5 exceed N7 in terms of wafer capacity, absent that wafer revenue in the next two years or so? Thank you.

Okay, cool. Thank you very much. We'll take your questions one by one. Please allow me to summarize your question. Your first question relates to our CapEx and capital intensity. You pointed out that with the guidance that our capital intensity this year, in your estimation is probably around 36% to 37%. So your question is, how should we think about CapEx and capital intensity in the next few years? If we cannot give a quantitative number directionally, how do we see CapEx and capital intensity? And how does this tie in with our recent things like such as bond issuances and fundraising, how does that factor in? That's the first question. Maybe CFO, Wendell can address.

Yes. Gokul, our capital intensity, as you are right, this year will be lower than 40%. In the next several years, longer term, we expect the capital intensity to be around mid-30 percentage point. However, having said that, there may be years where capital intensity is higher if we see the strong demand for our technologies or capacity and we decide to invest.

Okay. And then your second question, Gokul, please allow me to summarize again is really regarding to our 5-nanometer, that we have said that it's a long and large node. But that the number of tape-out of N5 versus N7 may be lower. So your question is, can N5 exceed N7? Do we believe 5-nanometer can be a bigger node than 7 in terms of revenue and capacity? C. C. Wei: Well, let me take that, we don't comment on how many tape-outs so far, but we continue to see strong tape-out activities at N5 from both HPC and the smartphone applications. And the revenue for this year we just mentioned is at 8% of the wafer revenue and next year it'll be even higher than -- close to -- or 20 years something like that, the exact number we are still not able to comment. But I can assure you that our 5-nanometer family will be another deep and long lasting node for TSMC.

Okay. Thank you, Gokul. Why don't -- operator can we move on to the next caller please?

Next caller we have Randy Abrams, Credit Suisse.

Okay. Yes, thank you. My first question I want to ask Wendell, you raise the gross margin, originally was 50%. Could you discuss now where you're saying it could be above 50%, the factors driving that change? And could you clarify on the two to three point impact on 5-nanometer. I think you already have that impact. So does that apply for next year, pretty similar to the type of gross margin you're running now or potentially even better?

Okay. Randy, I summarize your question. Your first question is in regards to I believe our gross margin and long-term gross margin. I think you're asking that we raised our target. But I think we -- as Wendell said, 50% is achievable for us. But you're also asking as part of that, the dilution from 5-nanometer. How will that impact our gross margin next year? And where should we, I guess be thinking about gross margin for 2021?

Okay. Randy, maybe I -- let me answer this like this. We have a very high gross margin in the third quarter. And we believe we will continue have a pretty high margin in the fourth quarter. And main reason is that we are enjoying a very high utilization across almost all the nodes at this moment. But the high -- this very high utilization may not continue forever. So our long-term growth target, our long-term growth goal for our gross margin continues to be about 50%. In terms of dilution from N5, we see the dilution of N5 for next year to be around two to three percentage points similar to previous nodes. And remember that the N5 will count for a much bigger percentage of our revenue next year. So as we ramp up quickly, the dilution will continue to exist. However, we are still expecting that it will reach the corporate margin in seven to eight quarters.

Okay, great. Thanks. I misunderstood. I thought I heard the word above. Thanks for the clarification. Second question on the recent U.S. restriction on SMIC. I'm curious if you're seeing any additional diversification or inquiries for business? And given they're more on the mature nodes, how you’re positioned if you are seeing those to take on business on the mature nodes.

Okay, Randy. Let me just summarize your second question. Your second question is regards to the recent restrictions on SMIC. And Randy is wondering whether we are seeing any types of diversification or inquiries from customers in regards to business and especially at the mature nodes? C. C. Wei: Randy, maybe I answer the question. Actually we are still evaluating the impact to the semiconductor industry due to the ban on SMIC. But let me say that our capacity planning, on our CapEx continue based on the long-term demand profile. That is underpinned by the industry megatrends such as 5G-related and HPC application. All right. Does that answer your question?

Yeah. Maybe just one quick, for the mature nodes which are running tight across the industry, just if it so that, there's an incremental surge, how well could you handle incremental business from this type of piece, if it were to come through?

So Randy is asking if we were to see a surge in demand at the mature nodes, how ready or do we have capacity to take on or handle this type of surge demand? C. C. Wei: Well, we continue to work with our customer dynamically. And we try our best to meet their demand. That's all I can see for today.

Okay, great. Thank you.

Okay. Thank you, Randy. Operator, can we move on to the next caller, please?

The next one is Sebastian Hou from CLSA.

Thank you. Good afternoon, gentlemen. My first question is, I think besides the higher than usual inventory, which may be a new norm because of this supply chain disruption, how -- I'm curious about how does TSMC assess customers overbooking or pulling behavior and the magnitude, in particular, based on the recent smartphone OEMs aggressive procurement assuming Huawei's going to be dead next year, how do you assess that kind of potential overbuild inventory reach, that may potentially lead to destocking correction sometime next year? This is my first question. Thank you.

Okay, Sebastian. Let me repeat or try to summarize your question. Your question is basically related to the inventory. And you want to ask, how does TSMC assess the risk that there is overbooking in light of the restrictions on Huawei? And therefore, what type of levels or magnitude of inventory overbuild is there? And does this create the risk of inventory correction sometime next year? C. C. Wei: Let me share with you our view on this inventory-related issues. First, I want to say that due to the pandemic, actually the digital transformation has been accelerated. And that create a demand on 5G and HPC-related products and so for the long-term -- longer term beat basis we do expect our customers’ overall inventory to remain above the seasonal level for a longer period of time, majority partly because they have some concern on industries supply chain security, and due to the uncertainties. And so that will be the inventory -- high level inventory will sustain -- continue for a longer period of time. That we can say that.

Okay, Sebastian, do you have a second…

Yes, okay. All right anyway, but that isn't actually what I'm looking for. But anyway, thank you for that, C. C. And my second question is on the HPC business, apparently I think C. C. you mention in your prepared remarks, that you see a lot of the growth this quarter and also continue through the next quarter, and driven by the acceleration in digital transformation you just said, led by the pandemic and work from home demand likely to stay for longer, and also the continued market share gain [ph] from TSMC against IDM, when do you expect your HPC revenue exposure to crossover with smartphone revenue percentage? Are we going to see that by the end of next year or 2022? Thank you.

Okay, Sebastian, let me just summarize your question, which is regards to our HPC platform business. You point out that there is the trends of the accelerating digital transformation and the work from home and also market share gains versus IDM. So you want to know when do we see our HPC platform revenue crossing over with smartphone and others to become the primary. C. C. Wei: Okay, let me answer the question. We do see HPC platforms of course rate is higher among our four platform, which is smartphone, HPC, automotive and IoT. And in the next few years we continue to expect, or we forecast our HPC’s growth will be higher than the corporate level. When we’ll crossover, I don't make any comment right now.

Okay, thank you.

Okay, thank you, Sebastian. Operator, can we have the next caller, please?

Next one, we have Bruce Lu from Goldman Sachs. Go ahead, please.

Hi. So I want to ask for the 5G penetration rate. What is the latest forecast for the total smartphone growth and 5G penetration rate in 2020 and maybe a little bit color on 2021 as well? So we also see some of the telco is slowing down their 5G installation. What kind of impact we see at this moment?

Okay, Bruce, your question is regards to 5G and smartphones. You want to know what is the smartphone growth and 5G penetration rate for 2020 as well as 2021. And then in light of the telecoms potentially slowing down the deployment, correct?

Yes.

Okay. Let me answer the question. We continue to expect the faster penetration of 5G smartphone as compared to 4G. And for this year, we still forecast a high-teens penetration rate and next year even higher, much higher, let me say that. And that's all we have today.

And any impact on the telco business level?

I think all countries and all regions are preparing to build up the infrastructure right now and I believe next year, even not 100% completed, but all the region, all the countries will have a lot of 5G phone being introduced and that create a higher percentage penetration rate.

Okay, understand. My next question is that, a lot of it [Indiscernible] but China revenue is contribution only increased slightly from 22% to 23% in third quarter. So which region where we see the strongest growth in the fourth quarter?

Okay, Bruce, your question is regards to our revenue by geography. And you want to know for the fourth quarter which region will contribute the most growth in the fourth quarter?

Okay, Bruce, we're not prepared to comment on geographic allocation among revenues in the fourth quarter. I can share with you that we expect the platforms that will grow in the fourth quarter will be smartphone and automotive. And the other two are likely to be down.

Understand it. Thank you.

All right. Thank you, Bruce. Operator, can we move on to the next caller please?

From the line of Sunny Lin from UBS.

Hi, good afternoon. Thank you for taking my question. So my first question is on 5-nanometer demand. So into next two to three years, what do you think our revenue split could be smartphone, HPC, et cetera? Do you think the mix could be a bit different from our 7-nanometer?

Sorry, can you repeat your question, Sunny? You broke up a little bit.

Sure, no problem. Sorry about that. So I wonder for 5-nanometer demand in the next two to three years, what does the management think the revenue mix could be by smartphone, HPC, et cetera. And will the product mix be a bit different from 7-nanometer?

Okay. All right. Let me summarize. Thank you, Sunny. Your question is regards to 5-nanometer. And then when we look out over the next three years, how do we see the demand of 5-nanometer, the mix changing in terms of smartphone, HPC different platforms? And then how does this compare to 7-nanometer, correct?

That’s right. Thank you, Jeff.

Hi. We don't break it down or disclose the platform mix of certain nodes. But we can share with you as C. C., just mentioned, in the next several years, we expect HPC to be the largest contributor of our growth. So that should give you some idea and these guys use advanced technologies.

Sure, I got it. And my second question is that for this year, a key part of your growth in smartphones is driven by higher silicon content for 5G and your share gain. So I wonder if you could walk us through how your average silicon content in smartphone may trend into 2021 and 2022. Thank you very much.

Okay. So Sunny, your second question is regards to the silicon content in 5G phones. The silicon content increase in 5G phone, along with share gain is contributing to our smartphone growth this year. So she wants to know, what is the silicon content outlook for 2021 and '22? C. C. Wei: This is pretty hard for me to answer, because I cannot release all the information I got from my customer. But let me say that, on the average, the 5G phone have about 30% to 40% more silicon content as compared with 4G. Did that give you some kind of idea?

Sure. So I have a very quick follow-up. I wonder if you could give us some color regarding your expectation for your market share for smartphone into next two, three years.

So Sunny is asking whether we can give some comment on the market share -- our market share in 5G phones, the next two to three years. C. C. Wei: No, it's not a very appropriate for me to give some kind of estimate right now. But let me say that as long as we have technology leadership position, we are very confident that we are going to have a heightened market share.

Okay?

Sure, got it. Thank you very much.

Thank you. Thank you, Sunny. All right, let's move on. Operator, can we move on to the next caller on the line please?

Next we have Roland Shu from Citigroup.

Hi, good afternoon. My first question is, can you update the status of your license applications for shipments to Huawei? When to expect to receive approval from U.S. government? And also does your 4Q revenue forecast improve any wafer shipment to Huawei? This is my first question. Thanks.

Okay, Roland. So your question is regards to -- he wants an update of our license application status regarding Huawei. And he also wants to know does our fourth quarter guidance include any shipments to Huawei? C. C. Wei: Roland, we are complying full year with the regulations and so and we also notice that there is report saying that the TSMC got the license. We are not going to comment on this unfunded speculation. And we also don't want to comment on our status right now. For the 4Q shipment to Huawei, the ban, the regulation already say that after September 17th, zero.

15th. September 15th. C. C. Wei: Okay.

Okay, thank you. My second question is, how is the pricing pressure, of course, all technology node so far? Some of your foundry peers are considered to raise ASP given the very high utilization. So were you considering to follow, to raise the prices of 8-inch or other mature technology nodes? Thanks.

Okay, Roland. Let me thank you. So your second question is regards to pricing pressure. Your note is that some of the foundry peers are considering to raise the 8-inch wafer price. So you want to know, does TSMC plan to raise our 8-inch wafer pricing or also raise our pricing on the mature nodes? C. C. Wei: Let me answer the question. The quick answer is, no. We continue to work with customers and customers are our partners. So for short term supply shortage, we are definitely we are not using this kind of opportunity to raise our price, our wafer price. We are selling our values, our service to our customer, that including the technology, delivery, quality, everything. Certainly TSMC is working with all the customers and view them as our partners. And so we don't using this opportunity to raise our wafer price. Did that answer your question?

Yes. Thank you.

Okay. Thank you, Roland. Let's move on operator to the next caller.

Yes, next we're having Brett Simpson from Arete Research. Go ahead, please.

Thanks very much. I just had a question on your long-term capacity planning, and you've laid out the view that we're going to see some structural tightness for the next couple of years in foundries potentially. And I'm just wondering if you see -- you have a very strong growth position in HPC, but you still have a very low market share in like x86 or PC and servers broadly. I'm just wondering if we do see Intel looking to outsource major CPU lines to foundry, it could be a large one time boost to the industry, to the foundry industry. So would TSMC be in a meaningful -- would they be able to meaningfully support Intel's needs if it was a big one time outsourcing? And would you be prepared to take capital intensity to much higher levels should the opportunity arise? Thank you.

Okay, Brett. Let me try to summarize your question. Your question basically is premised around our long-term capacity planning and pointing out that there's a structural tightness in foundry, and we -- TSMC has a strong growth position. So your question specifically relates to x86 and Intel. If Intel were to outsource to foundry, your premise is that this could be a onetime big outsourcing opportunity. And so how would we prepare or handle for this? C. C. Wei: Well, let me say that we do not comment on specific customers, nor on the specific product. But let me say, our CapEx and capacity planning is based on the long term demand profile that is underpinned by the industry mega trend to meet our customers’ demand. And Intel [ph] is one of our important customers and we continue to work with them.

Okay, thank you. And maybe just a follow-up, regarding your capacity plans over the midterm. Are you planning to add any capacity at the mature nodes, maybe not so much, 8-inch, but certainly so the 28-nanometer or even 16-nanometer and do you foresee putting any customers on allocation given the backdrop with tightness at the moment. Thank you.

Okay. So Brett your second question is regards to our capacity plans in the near-term specifically at some of the mature nodes like 28 and 16-nanometer. Are we planning to add capacity and with the tightness, our customers on allocation?

Well again, let me say that we plan our capacity to meet the customers’ demand, whether it’s the leading edge or mature node or specialties, we always work with a customer dynamically and also work with them closely so to plan our capacity. And definitely today, there are some shortage, but we are doing our best to serve our customers.

Okay. Thank you, Brett.

Thanks very much.

Thanks a lot Brett. All right, operator, can we move on to the next caller on the line, please?

Next one to ask a question, Charlie Chan from Morgan Stanley. Go ahead, please.

Thanks, and good afternoon gentlemen. My first question is about your 2-nanometer progression, I think couple weeks ago, there was a news talking about you may see the 2-nanometer in production in 2024. So just want to get company’s clarification about your progress here and maybe your take on the format and that realistic timing for the next production? Thank you.

Okay. So, Charlie's first question is in regards to our 2-nanometer. He says according to news reports that the production is going to begin in 2024. So he wants to know whether we can share the technology and roadmap requirements and the timing of our 2-nanometer. C. C. Wei: Charlie, let me say frankly, we are not ready to make any comment on the 2-nanometer yet, right.

Okay. Yeah, but there seems to be some come comment from your Technology Forum. So any reason why you can't disclose that to inventor’s society yet?

No, I think Charlie, all we have disclosed about our 2-nanometer is the location which will be in Hsinchu. We have not commented on the technology specifications, the timing or anything beyond that. So that is you -- as you said, according to your reading the news, that is not TSMC's comment. And as C. C. said we are not prepared to comment on 2-nanometer.

Okay, okay. No problem at all. And my second question is, to Wendell about the gross margin trend follow-up? So based on your current depreciation table, when do you think the depreciation is going to peak in the coming years or coming quarters, at what point? And also, I think you mentioned that the new nodes trend is a key factor to the gross margin dilution. But I think 4-nanometer is a part of the 5-nanometer family, right? So can we expect that in 2022, there's not going to be any margin dilution from the 4-nanometer? Thank you.

All right. So, Charlie, your second question is regards to depreciation and gross margin. Charlie wants to know, when do we expect depreciation to peak-out on a quarterly or an annual basis? And he also wants to know that would we expect dilution from 4-nanometer in 2022, given that 4-nanometer is an extension of our 5-nanometer? Should there therefore not be dilution from 4-nanometer?

Okay, Charlie. The first question’s really difficult to answer, because if you continue to invest, you may not have a peak in depreciation. Just as if you continue to have strong growth, you may not have a peak in your revenue. So the second question, yes, we still expect that N5 family, the gross margin to reach corporate average in about seven or eight quarters, which is sometime in 2022.

Great. All right. That's very helpful. Thank you.

Thank you, Charlie. Operator, let's move on to the next caller on the line please.

Right now we're having Laura Chen from KGI. Go ahead, please.

Hi, thank you for taking my question and the congratulation for the good result. My first question is regarding the 3-nanometer. Can you give us an update on current engagement? And we know that C. C. just mentioned we will have reached production next year, and mass production probably on second half 2020. I’m just wondering, will the smartphone HPC go first? That's my first question. Thanks.

Okay. So Laura, your first question is regards to our 3-nanometer. She wants to know, what is the current engagement with customers? And then with the volume production targeted for second half 2022, is it going to be smartphone or HPC-driven? C. C. Wei: All right, let me answer the question first, on the engaging with customer. We are engaging with more customer at N3 as compared with the N5 and N7 at the similar stage. So there's a lot of customers are working with us. And now, which one in the second half of 2022, which one would be the first product? Actually in smartphone and HPC applications, both.

Okay, thanks. And then my second question is about our supply chain equipment procurement plans. I think, given our positive outlook and continuous CapEx, so do we plan to evaluate more local suppliers? I think given TSMC's leading position in the global foundry space, I think that give a good position to lead the localization equipment. So can you give us some color about what's your view on the -- to buy more equipment from the Taiwanese supplier? What are the current status of total procurement percentage per year from Taiwanese vendors something like that?

Okay, Laura. So your second question is regards to our vendor and supply chain procurement strategy. Your question is really are we considering -- will we consider to use more local Taiwan suppliers? Do we have any type of percentage breakdown or anything like that? Correct?

Yes, yes. Right. Thanks. C. C. Wei: Okay. We developed the technology while we maintained the technology and manufacturing based on the best performance and the best cost structure. So we did not put the where it came from, or we did not put the regions into consideration to be frank with you. So the best technology, the best manufacturing costs is what we cut [ph]. And so we don't have any certain percentage limitation on which area or the equipment came from. All right?

Okay. Does that answer your question, Laura? Okay, thank you. Operator, let's move on to the next caller, please.

Next one we have Chris Caso at Cowen & Company. Go ahead, please.

Yeah, hi. Thanks for taking my question. I have two of them. First one is on the mature nodes i.e., 28-nanometer and above. Not currently, but over the next few years, how do you expect the revenue and wafer starts to trend on the mature nodes, especially as some of your customers start migrating to the leading edge. Then my second question is, in the past, you've spoken about converting some 28-nanometer plus capacity to 20-nanometers or so for IoT and other applications. Can you provide us an update on how this transition is going?

Okay, thank you, Chris. Let me try to summarize your questions. Maybe I'll summarize the first one and then we can summarize second. Your first question is regards to our mature nodes, specifically 20-nanometer and above. You want to know in the next few years, what is the revenue outlook and also the demand or wafer starts outlook over the next few years, especially as customers may start to migrate to more leading nodes? What do we do at the 28-nanometer and above? What is the outlook? C. C. Wei: Well let me answer that specifically on the 28-nanometer. We continue to improve the technology. And now we offer 22-nanometers ultra-low power, and that's for IoT applications. And we also work with the customer to migrate their products from 65, 55, to 45, to 28 and to 22. Today the loading is not perfect yet, but we expect in one or two years, and then we expect the loading work greatly improved. And so to answer your question on all the mature node, we’re still improving our technologies and we still expect the force [ph].

Okay, and I think, Chris, just to clarify, your second question was in regards to 28 and your question was conversion to 20? But as CC said, we're converting 28 to 22. So hopefully that also addressed your second question. All right.

He did. Thank you.

Sure. Chris, thank you very much. All right. Let's move on operator to the next caller, please.

Next one, we are having Rick Hsu from Daiwa Securities. Go ahead please.

Yes, hi. Good afternoon, guys. Okay, my first question, I just want to make a little clarification about your CapEx for this year. I think Wendell said above it’s going to be around $17 billion or is going to be over $17 billion, can you clarify on this? And also give us a little bit color about the CapEx for next year please?

So your first question to clarify, our 2020 CapEx, is it about or above $17 billion?

Yes, it's about -- about $17 billion.

Okay.

Yes. For 2020 -- I'm sorry.

Yes, please go ahead.

Yes, your second question is about 2021 CapEx. It's too early to discuss the 2021 CapEx at this moment. But as -- if we see strong demand and we will make the investment because the CapEx investment in this year is always for the demand in the following years. So if we see the following year have strong demand, we will invest.

All right, thank you so much. It isn’t a second question, just a follow-up? Can I ask one more?

Sure, your second question, please.

Okay, so second question is about the inventory. I think C. C., had mentioned that right now because of the macro uncertainties, COVID-19 especially, so customers intend to keep the inventories above seasonal for a longer period of time. But what if because one day the uncertainty is gone and he's got this inventory [ph], otherwise, one day when uncertainty is removed, you will be above your customer wide inventory and [indiscernible] this business question.

Okay, Rick, so your second question is regards to inventory, although there is macro uncertainty in COVID-19, but someday this will be over. So does this worry us? Will we see a sudden sharp correction or inventory drop as a result? C. C. Wei: Okay, let me share with you again our view on inventory. In fact, we don't worry too much about it because of the -- as I said now, because of the pandemic, the digital transformation has been accelerated and that creates a lot of new demand, let me say that now. Looks like, take for example, now work from home, so now everybody buy a PC, every kid's had to buy a PC. And then let's look at again on 5G smartphones’ benefit, their advantage of bandwidth and the speed and low latency, everything. And people are going to need it in this digital transformation. And so even right now is that we expect the inventory is higher than historical high level, but the demand will pick up and in next year or the 2022, we are confident that demand will pick up. So that minimize or mitigate the impact of the inventory correction, that everybody has a doubt on their mind.

Okay.

Okay, great. Thank you so much.

Sure. Thank you, Rick. Operator, let's move on to the next caller, please.

Next one is Mehdi Hosseini from SIG.

Yes. Thank you for taking my question. First one, if your customers are willing to have inventories above this average trend line, should we assume that your wafer shipment in the first half of 2021, specifically Q1 would also follow at better than seasonal trend? I have a follow-up.

Okay. So Mehdi's first question is regarding to basically our first quarter, if customers are willing to hold a higher level of inventory, should we assume that wafer shipments in the first quarter will also be much better? C. C. Wei: We're going to share with you in the first Investor Conference. All right. Right now we're not ready to make any come on 2021 especially the first quarter.

Okay. Your second question, Mehdi?

Okay. Sure. Can you please remind us what we should think about tape-out activity specifically as I think for N5 and how does it compare to N7? Any color would be great.

So your question is the tape-out activity at N5 and N5 as compared to N7. Well --

Yes.

Okay. The demand is very strong in N4, N5 and we are engaging many customers. So the exact number of the tape-out right now is all in our planning and -- but I can share with you that customer demand is very strong and will continue to be strong for the next couple of years.

Okay. All right. Thank you, Mehdi. Operator, can we move on to the next caller please?

Right now, we have Gokul Hariharan from JPMorgan.

Thanks for the follow-up question. There’s been a lot of discussion on market share on leading edge. So could you comment a little bit on how do we think about TSMC market share in N7, which I think it is probably at 85% -- 80%, 85% or even higher? And compare that with what are we expecting for the N5 family, if we include N5 and N4? And I had a second question as well? Thank you.

All right. Gokul's first follow-up question is in terms of market share. He wants to ask C. C., what do we see in terms of our market share at 7-nanometer? And what is our expectation or outlook at the 5-nanometer family? C. C. Wei: Gokul, since I continue to say we have technology leadership. So I can share with you that we have very high percentage of market share. But what exactly the number is not appropriate to share [ph], because it's all our own estimate. But again, the most important thing is not the market share. The most important thing for us is continue to maintain the technology leadership, and we are focused on that.

Okay?

Okay. Just a quick question on that. Could you say at least directionally, if N5 market share in our own estimate is higher than N7 or similar to N7?

Okay. So the second question Gokul wants to ask, still our market share, do we see directionally will N5 market share be higher than that of N7? C. C. Wei: Yes, very similar, because we are always the technology leader. When we introduced N7, we are the technology leader. And when we introduced the N5 this year in mass production, we continue to be the technology leader. So they are very similar.

Okay. Thank you.

Understand.

Thanks, Gokul.

Can I ask one more question?

I think, Gokul, sorry. That's two. So I -- sorry, I would like to ask you to get back in the queue because we still have, I think quite a few people.

Okay. All right.

But thank you. All right. Operator, let's move on to the next caller please.

Next one we have Randy Abrams from Credit Suisse.

Okay, thanks for the follow-up. I wanted to ask on the R&D has stepped up faster in the quarter. From this higher level, could you discuss the investment rate that you're expecting for R&D as a percent of sales? And would the new advanced nodes and packaging investments start to increase the R&D intensity?

Okay. So Randy's first question is that he noticed, or points out actually that our R&D has increased or stepped up in the third quarter this year. So he wants to know, given advanced packaging and the continued technology leadership, what is the R&D percentage of sales outlook that we should expect?

Randy, let me share with you that in the third quarter, the R&D expenses are higher, because of our development activities in N4 and N3. Longer term, we're still expecting the R&D expense to be about 8% or slightly higher than 8% of our revenue.

Okay, great. Appreciate that. And the second follow-up question I had, just on a couple of segments, on auto I think you mentioned earlier about coming back. It was soft in the quarter. Could you discuss now as a growth driver from a low base, if you're finally seeing some of those content drivers for next one to two years, there could be a meaningful pickup even without auto but from a content? And then the other side on consumer, which was quite weak, just despite a lot of work from home and consumer electronics coming through. So if you could give color maybe on something happening in the consumer segment?

Okay, so Randy's second question is really a little bit split into two. But he wants to know, with the automotive business seeming to bottom out. How do we view our automotive platform as a growth driver outlook over the next few years? And then similarly, he also is asking about digital consumer. C. C. Wei: All right. Actually, let me comment on the automotive platform. Actually, the COVID-19 has a major impact on the automotive market and supply chain this year have all been affected. But we are seeing the sign of recovery in 4Q. In the longer term, the trend towards safer, greener and smarter vehicle will continue to drive silicon content increase as well as the demand for advanced and specialty technology. And again, I want to emphasize with our technology leadership, we are well-positioned to capture the opportunities. On the growth rate, the growth rate continued to pick up but still behind the HPC's growth rate. And for the digital consumer, it's kind of flat or is little bit growth that I can see today. Did that in answer your question, Randy?

Yeah. Just maybe then near term, I was surprised with as much down factoring in their stay at home consumer electronics demand. But I don't know [ph] if anything, just specific or short term in nature in that. C. C. Wei: Okay. Actually, some of the product because of stay at home or work from home, some of the product we put into the HPC's category.

Okay, all right. Great. Thank you.

Okay. Thank you, Randy. Operator, let's move on to the next caller please.

Next one is Sebastian Hou, CLSA.

Hello, Sebastian. You may need to unmute.

Thank you. Thank you, Jeff. So let me -- first question let me ask the overbooking inventory question another way again, if I may. So we understand the higher inventory structure led by COVID-19. But how about the higher inventory, is that led by customers’ fear of foundry capacity targets, which is now under supplied almost everywhere from leading edge to cutting edge. And based on the past cycles, how does the supply of any components, the higher risk of supply chain over booking and I'm curious whether TSMC is seeing any gap between customers' ordering volume and your internal forecast on end demand, or if not a concern at all as all the strong orders are just a reflection of the real demand. Thank you.

Okay, so Sebastian's question is around the inventory. And while his view is some of the inventory may be related to COVID-19 and more structural or linger for a while, he wants to know, is there a concern, does TSMC have a concern that because the foundry is tight, that therefore their customers are doing a lot of overbooking or so called double booking. And also, therefore, does this create a concern for TSMC when we look at our internal forecast for the end demand market versus customers booking, that there is a large gap and risk of shortfall? C. C. Wei: Well, Sebastian, actually, in TSMC's view, all my customers are our partners. So we work with them very closely. And so to basically minimize that the fear of overbooking, because they don't have to be afraid of capacity shortage and then do the overbooking to TSMC. No. We work with them as a partner and we -- both parties -- all my customers work with TSMC and tell us their view on the market and we share our view on the market we stand also. So this one minimize a lot of the possibility of overbooking. And that's the way that TSMC working with our customers, they are all our partners. Did that answer your question, Sebastian?

Thank you. Yes, yes. That's a very great answer. Thank you, C.C. My second follow up question is that we've seen the rising customer relationship risk in recent months. So I wonder if TSMC or your customers are concerned or discussed with you about the potential risk in production operation, as most of your fabs are located in Taiwan. And if such heightened risk continue for longer than just months, whether TSMC will keep consider to keep most of fab in Taiwan, or increase investment in other regions. Thank you.

Okay, Sebastian. Thank you. Let me summarize your second question. Your question is regarding that, you observed the rising or growing risks in the cross strait relationships. And so therefore for our customers, do they feel there's a heightened risk? And thus, is there a need for TSMC to I guess paraphrase, expand our manufacturing footprint into other locations, given the state of cross strait relations in the next few years? C. C. Wei: Okay, Sebastian. In fact TSMC will continue to focus on Taiwan? I mean that's our center of R&D, and majority of our production fabs will continue to be located in Taiwan, regardless of all the geopolitical tension or any kind of disruption. Did that answer your questions?

Yes, yes, that's correct. Thank you C.C. Thank you, Jeff.

Sure. Thank you, Sebastian. All right, operator, let's move on to the next caller, please.

Next we have Bruce Lu from Goldman Sachs.

Okay, so the question is for advanced packaging. What is the revenue growth for the advanced packaging in 2020? The growth have seems to be very strong but the management offer only guidance for the future growth of advanced packaging is only slightly higher than the corporate average. There is much lower than what we have in the past three years. Any reasons behind that, and what's the profitability for the advanced packaging right now?

Okay. So Bruce, your first question is regards to our advanced packaging business. You want to know, what is the growth of the advanced packaging business in 2020? And also what is the profitability of the advanced packaging?

Yeah. Bruce, the growth of our advanced packaging in this year is close to the corporate, but not as high. In the next several years, we do expect that on CAGR basis, it will be faster -- it will go faster than the corporate average. And in terms of margins, its margins is slower than the corporate. However, its investment intensity, capital intensity is lower. Therefore, on a return basis, ROIC basis, it is acceptable to us.

Okay. So the next question is for the 28-nanometer. I want to clarify something. In the fourth quarter 2019, I think management showed a very high confidence that 28-nanometer essentially we're back to the corporate average driven by the more [indiscernible] center, et cetera, et cetera. However, my understanding is that, management still is that it will be lower than the corporate average in the coming years in terms of the attachment rates? Is that the understanding right now?

Okay, so your second question, Bruce, is regarding our 20 nanometer in….

28.

I'm sorry.

I said 28-nanometer.

Yes, 28-nanometer. And that you said that we had commented in the fourth quarter 2019 earnings result, January this year that our 28-nanometer utilization would improve in one to two years’ time to the corporate average. And now your question is, does that statement still hold true?

Bruce, let me say that, the progress is a little bit slower than we expected, but still in one to two years, the utilization rate of the 28-nanometer, particularly, we advance to 22-nanometer will be reaching the corporate average.

Okay, thank you.

All right, thank you. Thank you, Bruce. All right, in the interest of time, we will take the question from the last caller or last participant, please.

The last question is Roland Shu from Citigroup. Go ahead, please.

Yes, your [Indiscernible] technology is with one more EUV layer insertion than 7 plus, but so it’s with reduced multiple layers and it’s with a simplified process. So can you elaborate your technology development logic between N6 and N4 and also the target market for N6 and N4 and how N6 and N4 contribute to your business respectively going forward?

Okay, Roland, so your question is regards to N6 versus N4 positioning. You point out technology wise, N6 has one more EUV layer than 7 plus, but N4 may have reduced mask layers versus N5 and with simplified process. So you really what you're asking does N4 serve the same group or target the same group of customers as N6 or are they separate markets or targeting separate customers and applications?

Correct. Thanks. C. C. Wei: Roland, it's actually very hard to answer your question whether the N6 is the same kind of group of N4. Let me give you some kind of idea. N6 is kind of development, continued enhancement of the N7 or N7 plus. And so all the second wave of the customer will use N6 when they want to enter the 7-nanometer family, and because of that offer the better density, better performance and better power consumption. Now the similar to N6, N4 is also -- we continue to improve the N5. And we also observe that if we can reduce the mask count, we can improve the density, we can improve the cycle time. And we also at the same time, we also offer the better density, better performance, et cetera, et cetera. And so are they the same group? I cannot answer this question, but with the same purpose, we offer N6 to be the second wave of N7 to our customer. We offer the N4 also to offer to the second wave of the customer of N5.

Okay, thank you. A little bit complicated because there -- so is there a need for enhancement to N5 because this is with the simplified process. And still there is -- I can understand that there is no improvement on defect on this product, but that’s a fact, but the hard part of the performance point of view is going to be enhancement in N5?

Okay, so your second question, Roland, continues to ask about the 4-nanometer. Well, for N4, does it carry any performance enhancement or PPA improvement as compared to N5? C. C. Wei: Yes. The short answer is yes. We improved the density, we improved the performance, including the transistor performance.

Okay. Thank you.

Thank you, Roland. Thank you very much. All right. This concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within four hours from now. The transcript will become available 24 hours from now. Both of them are going to be available through TSMC's website at www.tsmc.com. Thank you everyone for joining us today. We hope everyone continues to stay safe and healthy. We hope you will join us again next quarter. Goodbye and have a good day.