Good afternoon, everyone and welcome to TSMC's Third Quarter 2021 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 dial-in lines are in a listen-only mode. The format for today's event will be as follows. First, TSMC 's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the 3rd quarter of 2021, followed by our guide for the fourth quarter of 2021. Afterward, Mr. Huang and TSMC CEO, Dr. C.C. Wei, will join and 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 on our press release. And now I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Third-quarter revenue increased 11.4% sequentially in NT terms, or 12% in dollar terms. Our 3rd quarter business was driven by strong demand across all four growth platforms, which are smartphone, HPC, IoT, and automotive-related applications. Gross margin increased 1.3 percentage points sequentially to 51.3%, mainly due to the improvement in back-end profitability in a more favorable technology mix. The operating margin increased 2.1 percentage points sequentially to 41.2%, mainly due to better operating leverage. Overall, our third quarter EPS was TWD6.03 and ROE was 30.7%. Now let's move on to the revenue by technology. 5-nanometer process technology contributed 18% of wafer revenue in the third quarter, while 7-nanometer accounted for 34%. Advanced technologies, which are defined as 7 - nanometer and below, accounted for 52% of the way for revenue. Now, moving on to revenue contribution by platform. Smartphone increased 15% quarter-over-quarter, to account for 44% of our 3rd quarter revenue. HPC increased 9% to account for 37%. IoT increased 23% to account for 9%. Automotive increased 5% to account for 4%, and DCE decreased 2% to account for 3%. Moving on to the Balance Sheet. We ended the 3rd quarter with cash and marketable securities of TWD976 billion or equivalent $35 billion. On the liability side. Current liabilities increased TWD8 billion, mainly due to the increase of TWD24 billion in accounts payables and the increase of TWD6 billion in dividend payable, partially offset by the decrease of TWD21 billion in short-term loans. Long-term interest-bearing debt increased by TWD50 billion, mainly as we raised TWD49 billion corporate bonds during the quarter. On financial ratios. Accounts receivable turnover days decreased 2 days to 40 days, while days of inventory remained at 85 days. Now, let me make a few comments on cash flow and Capex. During the third quarter, we generated about 319 billion NT cash from operations, including some customer prepayments. Spend 189 billion in Capex and distributed 56 billion for fourth-quarter 20 cash dividend. Short-term loans decreased 18 billion while bonds payable increased by 49 billion. Overall, our cash balance increase from 106 billion to 854 billion at the end of the quarter. In U.S. dollar terms, our third quarter, capital expenditures totaled $6.77 billion. I have finished my financial summary. Now, let's turn on our 4th quarter guidance. Based on the current business outlook, we expect our 4th quarter revenue to be between $15.4 billion and $15.7 billion, which represents a 4.5% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to TWD28, the gross margin is expected to be between 51% and 53%. The operating margin is between 39% and 41%. On July 12th, we announced that we have completed the purchase of 5 million doses of vaccine as part of our efforts to help fight against the COVID-19 pandemic in Taiwan, we recognized a small portion of the vaccine donation expense in the third quarter, and the majority of it will be recognized in the fourth quarter, which will have around one percentage point impact on our operating margin. This concludes my financial presentation. Now, let me turn to our key messages. I will start by making some comments on our 2021 capital budget. Every year, our Capex is spent in anticipation of the growth that will follow in future years. We are witnessing a structural increase in underlying semiconductor demand, underpinned by the industry megatrends of 5G related in HPC applications. In order to support our customer's growth, and meet the increasing demand for our advanced and specialty technologies in the next several years, we have budgeted our full-year 2021 Capex to be around $30 billion. Next, let me talk about our profitability. Our 3rd quarter gross margin increased 1.3 percentage points sequentially to 51.3%, mainly due to better back-end profitability and technology mix. Based on the exchange rate assumption of $1 to TWD28, we have just guided the 4th quarter 2021 gross margin to be 52% at the midpoint. The midpoint of our 4rth quarter gross margin guidance also implies that our full-year 2021 gross margin is expected to be higher than 50%, despite the rapidly rising depreciation costs, the dilution from the N5 ramp, and the unfavorable foreign exchange rate in 2021, as compared to 2020. As we have discussed before, 6 factors determine TSMC's profitability leadership, technology development, and ramp up pricing, cost, capacity utilization, technology mix, and foreign exchange rate, which is not controllable. Taking all these factors into consideration, we believe a long-term gross margin of 50% and higher is achievable. Now let me turn the microphone over to C. C. C. C. Wei: Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me start with our near-term demand and inventory. We can credit our 3rd quarter with revenue of TWD414.7 billion or $14.9 billion, driven by strong demand across all four core platforms, which are smartphone, HPC, IoT, and automotive-related applications. Moving into the 4th quarter of 2021, we expect our sequential growth to be supported by strong demand for our industry-leading 5 - nanometer technology. Based on the midpoint of our fourth-quarter revenue guidance, our full-year 2021 revenue is expected to grow about 24% year-over-year in the U.S. dollar term. On the inventory front, we continue to expect our customers and the supply chain to gradually prepare a higher level of inventory in the second half of this year as compared to the historical seasonal level. Given the industry continually needs to ensure supply security, we expect the supply chain to maintain a higher level of inventory for a longer period of time. In the near term, we continue to observe short-term imbalances due to interruptions in the supply chain brought over by COVID-19. We also continue to observe the structure increase in long-term demand, underpinned by the industry megatrends of 5G and HPC-related applications, and the higher silicon content in many end devices, including automotive, PCs, servers, networking, and smartphones. While the short-term imbalances may or may not persist, we believe our technology leadership, will enable TSMC to capture the strong demand for our advanced and specialty technologies. And we expect our capacity to remain tight in 2021 and throughout 2022. Next, let me talk about TSMC as a long-term growth driver and return. We are entering a period of higher structural growth. The multiyear megatrend of 5G and HPC-related applications are expected to fuel massive requirement for computation power and propel the greater need for energy-efficient computing, which demand the use of leading-edge technologies. This megatrend will not only spur unit growth, but also drive increasing semiconductor content in HPC, smartphone, automotive, and IoT applications. COVID-19 has also fundamentally accelerated the digital transformation making semiconductors more pervasive and essential in people's lives. With our technology leadership, manufacturing, excellence, and customer’s trust. TSMC is better positioned to capture the course from its favorable industry megatrend. We sell differentiated technologies. Towards raise the structural increase in the long-term market demand profile. TSMC is working closely with our customers to plan our capacity and investing in leading-edge and specialty technologies to support their demand. Our capital investment decisions are based on four disciplines; technology leadership, flexible and responsive manufacturing, retaining customers' trust and earning the proper return. At the same time, we faced manufacturing cost challenges due to an increase in process complexity at DD Note, new investment in mature notes, expansion of our global manufacturing footprint, and rising material in basic commodity cost. As we continue to work closely with our customers to support their goals, our pricing strategy will remain strategic, not opportunistic, to refer to our creation. We will also continue to work diligently with our supplier to deliver, and cost improvement. Even us, we showed a greater burden of investment for the industry, by taking such actions we believe we can achieve a proper return that enables us to invest to support our customers, of course, and deliver long term profitable goals with 50% and higher gross margin for our shareholders. Now let me talk about our Japan fab print. We are expanding our manufacturing footprint to extend and enhance our competitive advantage in providing industry-leading technologies. The world's largest capacity, efficient and cost-effective manufacturing, and to better serve our customer. Our global manufacturing expansion strategy is based on customers' needs, business opportunities, operating efficiency, and cost-economic considerations. After conducting due diligence, we announced our intention to build a specialty technology fab in Japan, subject to our Board of Directors' approval. We have received a strong commitment to supporting these projects from both our customers and the Japanese government. This fab will utilize 22, 28-nanometer technology for semiconductor wafer fabrication. Fab construction is scheduled to begin in 2022 and production is targeted to begin in May 2024. Further details will be provided subject to the board's approval. We believe the expansion of our global manufacturing footprint will enable us to better serve our customer's needs in the rich, global talent, while early in the proper return from our investments and deliver long-term profitable quarters for our shareholders. Finally, I will talk about the N-3 and N-3E status. Our N-3 technology will use FinFET transistor’s structure to deliver the best technology maturity, performance, and cost for our customers. Our N3 technology development is on track. We had developed complete platform support for both HPC and smartphone applications. N-3 risk production is scheduled in 2021, and production was starting in the 2nd half of 2022. We continue to see a high level of customer engagement at N-3, and expect a newer tap-out for N-3 for the first year as compared with N-5. We also introduced N3E as an extension of our N3 family. N3E while feature improved manufacturing process window, with better performance, power, and yield. Volume production of N3E is scheduled for one year after N3. Our 3-nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. With our technology leadership and strong customer demand, we are confident that the N3 family will be another long and vast -- will be a large and long-lasting node of TSMC. This concludes our key message. Thank you for your attention.

Thank you, C. C. This concludes our prepared statements. Before we begin the Q&A session, I will like to remind everybody to please limit their questions to 2 at a time to allow all the participants an opportunity to ask questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the question in queue, please press 0, 2. Now let's begin the Q&A session. Operator, please 77proceed with the first caller on the line?

The first one to ask questions, Gokul Hariharan, J.P. Morgan.

Good afternoon. Congrats on the good results and thanks for taking my question. My first question is on the long-term road map. Intel has now unveiled their long-term road map until 2025 with four process nodes looking to catch up with TSMC and potentially even overtake. Could TSMC talk a little bit more about its own longer-term roadmap timing of adoption of some of the new technologies, like, get all-round, high-end EUV, battery power line, etc.? And where is TSMC itself from a profit technology leadership perspective in the next 3 to 5 years? The entry message is definitely well-received, but couldn't we talk a little bit longer term, given some of your competitors are addressing that time frame as well. That's my first question.

Okay. Thank you. Gokul, please let me summarize your first question. Gokul's first question is about -- regards our long-term technology roadmap. He notes that in IDM is outlined there is a long-term road map for the next 3 to 5 years. And talking about catching up and overtaking. Gokul wants to know what are our views or plans -- or our road map I guess around the timing of new technologies, such as new transistor structure, like get all around, , etc. And how do we see our technology leadership position in the next 3 to 5 years? C. C. Wei: Okay. Gokul I don't comment on my competitor's technology road map or their technology approaches. But for TSMC, we are confident that we'll be very competitive and we do have a very competitive schedule actually, let me say that, in all 3 - nanometer technology and the 2 - nanometer technology. And I can share with you that in our 2-nanometer technology is the density and performance will be the most competitive in 2025. And of course, I can also share with you that again. All around the structure is being considered. Although I am not going to -- not ready to release more information about it. So that's -- again, let me conclude in one sentence. What becomes very competitive and we are confident that our technology leadership will be maintained.

Okay. Thank you, C.C. Gokul, do you have a second question?

Yes. Thanks for that answer. Looking at Capex, I think back in Q1 results definitely indicated spending a 100 billion-plus in Capex over the next 3 years. Since then, you have talked about Japan's capacity expansion. Looks like there are some capacity expansion plans for leading-edge in Kaohsiung as well. Could we talk a little bit about -- is a TWD100 billion going to be enough or do you still need to see -- do you still see some upside for this TWD100 billion budget on the Capex over the next 3 to 4 years since the growth seems to be stronger. And if we see that upset in Capex, are we still looking at the high end of 10% to 15% growth CAGR, or do we believe that there could be faster growth than this 10% to 15% or high end of 10% to 15% that we had talked about previously? Thank you.

Okay, Gokul. Let me see if I can catch your second question, is around our Capex and growth -- longer-term CapEx and growth outlook. Gokul is asking what are our plans in Japan and plans for expansion in Taiwan. Will there be upsides to this 100 billion CapEx number that we have talked about in the previous -- for the next few years? And then also will there be a higher long-term growth CAGR target as a result as well?

Gokul, this is Wendell. Let me answer your question. We are not able to comment specifically on the next few years, CapEx. Our capital investment decisions are based on 4 disciplines; technology leadership, flexible and responsive manufacturing, retaining customers' trust, and earning the proper return as C. C., just mentioned. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. As we said, we are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrends of 5 G-related and HPC applications and increasing silicon content. As soon as our growth outlook looks good, there could be an upside to our CapEx plans, and we will continue our disciplined investment approach to support our customers and capture the growth opportunities. Now, in terms of our revenue CAGR, we're not planning to make any changes at this moment. We will provide you with more information at our January conference.

Thank you very much.

Okay. Thank you, Gokul. Operator, can we move on to the next participant on the line, please?

Next one to ask questions, Bruce Lu from Goldman Sachs. Go ahead, please.

Hi. Thank you for picking my question. I think my first question is that 80% of the TSMC's Capex is focused on an advanced node capacity expansion. And do you see that the mature nodes become the bottleneck for your customers? How do you ensure your customer can have enough mature node -- or chip?

Okay, sorry. Bruce, let me repeat your question. Question is around the mature nodes and that with AT -- typically a majority of our Capex is for the leading nodes. So how can we ensure that our customers will not be bottlenecked or have enough on the mature nodes as well?

Okay. Bruce, let me answer that question. TSMC's strategy at mature nodes is to work closely with our customers to develop and invest in specialty technology solutions to meet customers' requirements and create differentiated and long-lasting value for customers. We take a holistic view and work with our customers to decide the optimal capacity to support their demand.

Okay. Does that answer your first question, Bruce?

Yes. Let me try to answer -- ask a different question. I think recently we have had a lot of investors asking that there is a lot of noise just on the such as some TV or China's smartphone. The inventory level you saw that at a higher level. But the foundry all along remained very, very positive, and every -- almost everyone is raising the capacity and CapEx, can you try to tell the investor what's the discrepancy and where is the -- why the foundry can continue to see such a strong demand, while the end demand is deteriorating?

Okay, so Bruce, let me summarize your second question. The second question for Bruce is around looking at end-demand and the foundry. Bruce notes that there's a lot of, I guess, noises about different types of end demand. However, the foundry outlook seems to be very positive. So how do we explain this disconnect or discrepancy? C. C. Wei: Okay, Bruce, let me say that while we do not rule out the possibility of an inventory correction, but we expect TSMC’s capacity remains very tight in 2021 and throughout 2022. This is because of our technology leadership position. And even there's a correction to occur, it could be less volatile for TSMC given the previous downturn as our underlying structural mega trend of 5G related and HPC applications. And, the increasing silicon content, in addition to the unit CoWoS in the end devices were continuing. And again, we saw our technology leadership; we are better positioned to capture the mid to long-term CoWoS activities. I hope that answers your question. There's a discrepancy between the demand and why still a very tightening capacity.

Okay. I understand. Thank you.

Thank you, Bruce. Operator, can we move on to the next participant, please?

Next one, Randy Abrams, Credit Suisse.

Hey, yes, thank you. Good afternoon. I wanted to ask probably for Wendell, a few questions on the margins. You mentioned 50% and above, just a couple of follow-ups on that. Should we think it's still within a couple of points of 50 or with an effort to firm up pricing, you could push that higher? Just reflecting to maintain return on capital, you will have a higher asset base. And that's the first part of that question. And then within margin, if you could update us on the inefficiency if you had to operate at a high level if you've worked that out. And also if you have an initial view on depreciation for 2022.

Okay. Randy, let me summarize your question. Your question is about our margin. Randy notes that we now say 50% and above. He wants to know, is this a couple of points above, how high above, and will we be able to maintain our, I guess, RIC or ROE as a result? And also that in last time we had talked about running at a high level of utilization in certain inefficiencies. Has that now become more improved or what is the outlook there? And also, the depreciation outlook for 2022.

Okay. Let me answer the last question first. Depreciation in 2022 will increase, but the magnitude, we are going to tell you next year in January. For the margin, how many percentage points are over 50%? We don't want to disclose it right now, but we hope we can tell you more at the January Investor Conference and that will of course bring a better ROE than before due to the higher-margin targets. You also asked about utilization?

Randy also asking about inefficiencies when we had talked previously about when we run at a high level of utilization, less efficiency, cost improvement, and things like that. So Randy is wondering, is this -- is it continuing? Is it?

The utilization continues to be pretty high. At the same time, the cost improvement activities are ongoing. As a matter of fact, in the fourth quarter, we believe the margin will be better partially because of the cost improvement activities.

Okay. Great. Then -- a question I'll ask. And it's one quick follow-up actually related to utilization 15 above, if you have utilization view is that 90% or that full capacity? And then the second question I have is on capital intensity. One of the equipment suppliers, Tokyo Electron, put up a slight but moderate increase in capital intensity. So CapEx perk, they have it by 2-nanometers, just rising gradually to 210 million per thousand wafers. Could you discuss it, if you can a CapEx per case -- absolute or how you see that trending? And do you see that continuing to accelerate up or actions you're taking to keep it more stable after the increase we've seen in the past few years?

Okay. So Randy's second question is about capital intensity. He notes that Tokyo Electron is showing that the capital intensity or the CapEx per K is moderating the pace of increase, particularly as you get into 2 nanometers, so he is wondering if we can just comment on our CapEx per K.

Well, Randy, I -- what I can share with you is that the Capex for advanced -- more and more advanced technology is normally higher. That's for sure. But at the same time, through selling our values and working with the customers and the suppliers, we believe we are able to still earn a profit return, which is at this moment at 50% and a higher gross margin is achievable.

Okay, Randy?

Thank you.

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

The next one is to ask questions. Brett Simpson from Arete Research.

Yes. Thanks very much. My question was on the N3 introduction next year, can you talk a bit about the ramp-up of N3? Is it going to be a typical ramp, very similar to the last couple of node ramps, or do you see the timing of this being different? And also, just in terms of the costs, there's a lot of talk about costs rising above expectations for N3, as you add more layers, can you just clarify how you see costs and then three and whether you can still achieve a 70% density gain at that note? Thank you.

Okay, Brett, so that means your first question is around N3. Brett wants to know with N3 ramping in the second half of next year, what type of ramp do we expect versus the prior notes? Will it be typical or will the timing be different? And also on the N3 cost, what does the N3 cost structure look like? Is that your question, Brett?

That's right. Thanks, Jeff. C. C. Wei: Okay. Great. Hi. This is C. C. Wei. Let me answer the second part of the question first. costs definitely it is higher than N5. That is because of technical complexity and we have to use many new pieces of equipment which is -- cost higher. But then the ramp-up is very similar to the previous node. We saw many customers engagement actually is higher than what we observed in the previous node. The second half of 2022 will be our mass production but you can expect the revenue will be seen in the first quarter of 2023 because it takes a long tech cycle time to have all those wafers out.

Okay. So basically on three-nanometer, this won't be -- typically, you see your first revenue Q2 or Q3 it's going to be later next year. Is that right? C. C. Wei: That's right.

Yeah. Brett, I think we have been consistently saying that N3 will begin production in the second half of 2022. That has been a consistent message since we first introduced N3 in 2019.

Okay, great. And maybe just a follow-up on 28-nanometer. You just talked about a new fab that's coming on stream in 2024 in Japan. And can you clarify the latest thinking in terms of Europe? Is that another that we could be new fab, an expansion for TSMC? And then in terms of looking at the 28-nanometer node, there's a lot of capacity being expanded at the moment. Can you talk about what's driving this and why you think this will not lead to an oversupply situation in time? Thanks.

Thank you, Brett. Brett, the second question is around 20 nanometers, 2 parts. First, of course, that C. C. just announced our intention to build 28 nanometers in Japan, so Brett wants to know, do we have plans in Europe? And then the second part is that, with 28 nanometers, what is driving the longer-term structural demand for 28, is there a risk of oversupply of 28 nanometers? C. C. Wei: We don't rule out the possibility of building a fab in other areas that include Europe. However, we do emphasize when we build up a new capacity for 28-nanometer is almost all to serve the specialty technologies. For some of the specialty technologies that are not offered by our competitor, and TSMC is working with our customers to meet their demand. So you got any possibility of oversupply? Not for TSMC. Okay. That's all I can let you know.

That's great. Thank you, C. C.

Okay. Thank you, Brett. Operator, can we move on to the next participant, please?

Next one to ask questions, Roland Shu, Citigroup.

Hi. Good afternoon. Thanks for taking my questions. My question is, you have a global manufacturing expansion strategy to build more fabs overseas are going for -- as you said, you also thought is good about the possibility to build a fab in Europe. My question is on your -- is a joint venture with a local government or key customers an option for you to build this new fab overseas, or you prefer to build a fab, and 100% own, all like what you did for those fab in China or the U.S. or Europe now?

Okay. Roland, your first question is about our overseas fabs. Roland wants to know as we expand overseas, will we consider joint ventures with local governments or our key customers, or will we continue to -- or will it be 100% owned like what we have done in China and in the U.S.?

Okay. Roland, let me answer this question first. Normally, as you mentioned, our OVC fabs we normally own 100%. We do not consider a JV with governments. However, JV with other Companies or key customers can be considered on a case-by-case basis.

Okay. Thank you. Yeah, my second question is now you expect a short-term goal up of 0 emission course up by 2025, but you have to continue to invest in 5-nanometer, 3-nanometer, or even 2 - nanometer before 2025. So how are you going to achieve the 0 emission course target and also, in the meantime, keep up with your expansion plans? So where this like no, these aggressive 0 emission admission quotes, to decelerate your investment plans to meet your target. Thank you.

Okay, Roland. Roland's second question is asking in -- that our commitment recently announced to zero emissions growth by 2025. But as we continue to invest and expand on N5 and N3, how will we be able to achieve this target?

Okay. Lauren (ph) it's actually a net-zero in 2050, not zero-emission in 2025. We are going to do this. The first phase, make -- working ourselves to say -- to become more energy efficient because a lot of the carbon emission comes from the electricity. In our production, we can try to minimize the carbon emission, and secondly, we are going to use more green energy, which is the -- which will emit the most part of the carbon. And for whatever is left, it will depend on carbon trading, the carbon rights in the future. That's the basic framework of achieving this net 0 in 2015.

No, actually I'm talking about 0 emission call. You have this near-term target, 0 emission growth by 2025. I know this is different from Europe in 2050.

Right. Yes.

-- but the way to achieve those are pretty much the same.

I think -- sorry. Roland, your question is about net 0 emissions growth by 2025 and Wendell --

Yes.

-- said we have net zero emissions by 2050, right? So I think what Wendell, is saying is that our -- we will continue to invest in technology, but we also as Wendell just said, our own internal efforts, our use of renewable energies, carbon credits, and also working with our suppliers and our supplying chain on green manufacturing to achieve and deliver on these targets.

Okay. Understood. Thanks.

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

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

Thanks. Good afternoon, gentlemen. My question -- the first question is about the chip shortage situation. I think Chairman interviewed by Time Magazine and his view he says there should be more than sufficiency of finished chip in the supply chain. So can you help us or global investors to understand when do you think that chip shortage, especially for the automotive, can be fixed? And also your revised 2-nanometer governments or carmakers. And besides asking you to provide customer data, what would be a better way to manage the shortage issue going forward. Thank you.

Okay. Thank you, Charlie. Charlie's first question is around the chip shortage with several aspects to it. Charlie wants to know about the chip shortage, and also observations of customers stockpiling chips. He wants to know that, how do we see the situation, and when can this be fixed, particularly for the automotive segment. And that -- and let me stop there first. C. C. Wei: For the automotive, let me specifically point it out. The automotive supply chain actually it's quite long and complex. It's more complicated than we initially thought. But let me say that TSMC 's participation in the global automotive IC market, is only about 14%, and we are doing our part to support our automotive customers with what they need. However, we cannot solve the entire industry's supply challenge. And recent factors such as a pandemic in Southeast Asia also affecting the auto IC supply. Again, we are actively taking the steps throughout the first half of this year to trace the chips supply challenges for our automotive customers. And we are -- we also believe the wafer supply shortage is greatly reduced for our automotive customers, starting probably in the 3rd quarter. At the end of OEM probably we'll wait for a couple of quarters to see it. That's our estimate.

Thank you very much. It's super helpful. Another question is that -- again, the price hike, right? So I think the news we're reporting you decided to hike the price by 5% to 20%. May we know how do you determine the different ranges applying to different customers? What's the strategic reason behind a different range of price hikes? And I know you don't really want to give the next year's guidance, but based on that 5%, 20% price hike in terms of a percentage of a gross margin improvement, can your comment on the margin improvement? Thank you.

Okay. Charlie's second question is asking about pricing. And he is asking that recently there's lots of news that we have increased our price by anywhere from 5% to 20%, so he wants to know how do we decide how much to increase for what types of nodes or customers. And then also, what will be the impact on the 2022 gross margin. Is that correct, Charlie?

Yes. Thank you. C. C. Wei: Hi, Charlie. In fact, we do not come in on all pricing. This is a very private discussion between TSMC and our customers, but let me say that we continue to work closely with our customers to support their growth. That one needed TSMC to expand the capacity to support their growth. Is for both leading-edge technologies and specialty technologies. And so our wafers pricing strategy continues to be strategic, not opportunistic, or short-term. And so that we can be better prepared to support the capacity expansion. As for the return, maybe emphasize again, our gross margin was 50% higher. TSMC needs to earn a proper return that can enable us to invest for future expansion to support our customers ac across.

Okay. Got it. I guess my question is whether your desired ROI or desired margin changed, right? Meaning, you -- for example you hike the price by certain percentage points. But besides that hiking, there's a cost you just mentioned. But that would be due to further margin expansion. I think that should be all of my questions. Thank you.

Right. Charlie, I think we just said that in the past we always say above 50% gross margin. But now we're saying that 50% and higher gross margins are achievable.

Okay. I see.

Okay. Thank you, Charlie.

Okay. Understood.

Thank you.

Thank you.

Operator, can we move on to the next participant, please?

Right now, we have Nick Gaudois, UBS.

Yes. Good afternoon. Thanks for taking my question. Just going back to the confirmation you just did on investing in Japan. Should we understand what portion of CapEx in '22 - '23 is incorporated in your overall guidance of $100 billion or would that come on top, and would you -- could you specify it, if you can at all? A related question to that would be, what capacity are we talking about for 22 and 28-nanometer. Thank you.

Nick's First question is about our fab plans in Japan. He wants to know that with today's announcement, is the CAPEX for the Japan fab already incorporated in the -- this $100 billion target that we have talked about previously. And also, can we disclose the capacity for Japan?

Okay. Nick, the CapEx for this project, as we said last time -- in the last quarterly release was not included in the $100 billion budget as you mentioned, so it will be incremental. Other than this, we really are not able to comment on the investment amount and other details until after our board's review and approval.

Right. Okay. Fair enough. Understood. Going back to N3, you talked about the improved process window for N3E, is that the only main difference or is there a difference in performance as well between the two? Thank you.

Okay. So Nick's second question is on N3E. He knows that we have talked about the improved manufacturing process window. He wonders if there are any other improvements in things like performance and etc. C. C. Wei: There's a difference. As we said N3E is an improvement. Improvement in that the manufacturing window. However, the majority in the design rule or something is similar. We're using the N3 to enhance the manufacturing window with a better performance.

Got it. Thank you very much.

Thank you, Nick. Operator, can we move on to the next participant, please?

Next one we have Laura Chen, KGI.

Hi. Thank you for taking my question. I think we're talking about -- we've seen this solid demand across the world thanks to strong position in technology. But on the other hand, on the demand side, we're also seeing that some growth slowing down particularly in China. So I think back in the early -- earlier this year, we mentioned the 5G smartphone shipment, we estimate that will be 500 to 550 million units. Just wondering, do you still keep that target? And also, do you have any idea or preliminary projection for the 5G smartphone into next year? And also, what if the smartphone 5G moving to a lower end or entering that kind of segment what's the implication to TSMC? That's my first question Thank you.

Okay, Laura. Laura's first question is focusing on the smartphone. She notes that recently, it seems the smartphone momentum in markets like China is slower. So she is wondering about what is our forecast for the smartphone market this year, as well as how do we see the 5G penetration this year and then also the trend for the next few years. Is that correct, Laura?

Yes. Thank you.

Okay, Laura, let me answer this question. We see the proliferation of your 5G smartphone is still higher than the 4G at the same period of time before. And also, we're looking at about -- probably slightly over 500 million units of 5G smartphones for this year.

Right. So do you have any preliminary thoughts about the next year's gross and will that mainly be driven by the lower-end segment, in that case, what's the implication to our outlook?

We'll update you about that information in January.

Okay, thank you. And also, my second question is also regarding our CapEx intensity. We already talked about the three-year . But just wondering that, do we still expect the CapEx intensity to maintain high beyond 2023 since we are launching again around or 2 nanometers in 2025? Can we expect TSMC like our previous intensity -- comeback intensity hike back in 2011, and thus we will maintain the high CAGR growth going forward? Thanks.

Okay. So Laura's second question is on capital CAPEX intensity. She's asking, what is the outlook for our capital intensity beyond 2023? Will we still have a very high level of capital intensity? Or she notes back in 2010, 20 11 periods, of course, our capital intensity was higher, but then we were able to harvest the growth and grow -- capture the growth. How do we see the next few years playing out?

Okay. Laura, in 2020, the capital intensity was 38%. 2021, this year is going to be over 50%. As we said earlier, C. C. mentioned this earlier, our CapEx spend every year in anticipation of the growth in the future years. If we think the future growth is good then there's a possibility of higher CapEx. We're entering into a higher growth period because of the industry megatrends of 5G and HPC applications, plus the silicon content increase. The higher capital investment in the next few years is appropriate. As a result, we expect the capital intensity to be relatively higher than the previous year, like in 2020, for the next two to three years, before gradually coming down maybe to mid to high-30s level from what I can see at this moment. And your observation on the previous investment cycle from 2011 to 2014 will be a good one.

Thank you very much.

Okay. Thank you, Laura. Operator, can we move on to the next participant, please?

The next one is to ask questions. Sebastian Hou, Neuberger Berman. Go ahead, please

Thank you for taking my questions. I only have one. It's on pricing. I think last quarter the Company talk about firming up pricing to reflect the cost. And based on the higher long-term gross margin guidance that the CFO gave this time of 50% plus, I'm curious if this round of pricing adjustment is enough to absorb the higher CapEx intensity only for this year or the next multiple years. I have a follow-up to this question, so I will stop here.

Sebastian, his first question is on pricing and we have talked about firming our pricing, actually also talking about selling our value in the past. So he is wondering now that we say 50% in higher gross margin, does that mean we -- if it's enough to cover the costs?

Okay. Sebastian, let me answer this way. Well, first of all, we're not able to comment on detailed pricing discussions with the customers, but we worked closely with the customer to provide our value. And after providing our value, we're not expecting that a long-term gross margin of 50% and higher, is achievable as compared to the 50 -- above 50% gross margin previously.

Got it. My follow-up is that given that the next couple of years, the CapEx plan is still fluid. And I think CFO's mentioned there could be an upside to our CapEx plan either because of Japan or any other regions. So does that imply this will be a continuous adjustment, meaning that then it won't be just one shop, but we will evaluate the future pricing and what kind of value we can offer to customers based on the CapEx, based on -- and also to balance infrastructure possibility? So that means that we may continue to see potential upside in the pricing in the coming years.

Sebastian, your follow-up is again -- let me summarize. I think Sebastian is asking about our pricing. Is it a one-time or will this be an ongoing thing? C. C. Wei: Sebastian, this is C. C. Wei. Certainly, I will not be able to comment on the pricing discussion with our customers. But we work with them, and we continue to pin our capacity and share our value. The capacity is one of the very important venues of TSMC to support customers' growth. And so our pricing is accordingly, we serve our value, and so we prepare for that. This is a one-time or this is not a question. We do it strategically and not opportunistically. And continue to work with our customers.

Thank you, C. C. and Wendell, but at least I think we can make a fair conclusion that the higher-margin guidance outlook this time is a strong reflection or evidence of that the customer is willing to pay higher because of -- we offer value-add service, is that right to -- fair to interpret it as it?

Yes. Simple.

Got it. Thanks. That's all from me.

Okay. Thank you, Sebastian. Operator, can we move on to the next participant, please?

The next one to ask a question is Mehdi Hosseini, Susquehanna International. Go ahead, please.

Yes, and thanks for taking my question. I want to go back to your comments on the N3 and N3 plus. And can you tell me how I should think about EUV double patterning and how you're gonna impact your cost structure? And I have a follow-up

Okay. Mehdi's first question is about -- on N3, and actually, Mehdi, its N3E, not N3 plus. His question is on in N3 and N3E. He is wondering about the impact of things like EUV and double-patterning, what impact does this have on the cost structure for N3 and N3E? C. C. Wei: Let me answer that question. From N3 to N3E we provide a better value on the transistor performance and have a better manufacturing window. As for the cost, they are similar. But we think our customers will enjoy a better yield, better diversity, and better transistor performance.

Thank you. And my follow-up has to do with your earlier commentary on customer prepayment. In the past, you've had one or two largest customers that had a large prepayment. Should I assume that there is diversification and a larger number of customers that are providing these prepayments?

Okay. Mehdi's second question is on customer prepayments. He observes that in the past we may have -- may have had 1 or 2 customers who do prepayments. He wants to know, are we seeing a diversification, are we seeing a larger number of customers doing prepayments today?

Okay, Mehdi. Let me answer this question. Yes, in the past, there was only 1 or 2 customers providing the prepayments. But as we've been talking about now, we expect to invest higher capacity, higher capital expenditures in the next few years to satisfy the strong demand. And in order to secure our customers' commitment, we are able to secure the prepayments for some of those customers, and the number of the customer, I cannot disclose, but it's more than before.

Thank you.

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

The next one will be Rick Hsu from Daiwa Capital Markets.

Hi, this is Rick, and thank you so much for taking my questions. The first question is about -- I think it's a follow-up to Bruce's question earlier about the disconnect between sell-in and sell-through demand. And I think C. C. mentioned that he doesn't rule out the possibility of inventory crashing. May I know, if that happens -- do you -- when do you expect that to happen? And also, if that happened, which area will feel the more impact in terms of technology node and in terms of the end applications? Thank you.

Okay. So Rick's question is again, going back to the disconnect or sell-in versus sell-through. And also that we have said we do not rule out the possibility of an inventory correction. Rick wants to know if one were to occur, when would it occur, what particular M segments or applications could be more impacted? C. C. Wei: Rick, I say we do not rule out the possibility, it's just a possibility. And all I say is TSMC 's capacity, where we have been very tight, in 2021 and throughout 2022. which market sector? So far we observe a little bit soft in the smartphone and PC market. But you've asked me to predict, I cannot give you a very accurate prediction. We are the only one -- I can't give you a hint as we continue to say, it's not a -- for the semiconductor industry, the demand does not only come from the unit course, also it's increasing silicon content in any devices. So even you saw some smartphone unit becomes soft or even decrease, that doesn't mean that semiconductor – the or the demand . Does that answer your question?

Yes. Perfect. Yes, that's very good. Thank you so much. And the second question is on the technology, my question; I remembered that a 7-nanometer you can find a 7 plus as a note for you guys to have a very good transition I'm just wondering, are you going to do the same thing to define a particular technology note for the transition.

Rick's second question is about technology migration and transition. He notes that in N7, we had introduced also N7 plus to transition and start to adopt EUV. He's asking if we will incorporate a similar transition as we move to a new transistor structure. C. C. Wei: Well, I don't think we can have any more information to share with you as we move from N3 to go to the next mode, the advanced node. Today, I only announced that the N3 to N3E that why have better transistor performance and a better manufacturing window. For N2 GAA, we will share it with you when we're getting more ready.

Okay. Thank you. Thank you so much.

Okay. Thank you, Rick. In the interest of time, Operator, let's take the last two participants, please.

Okay. Now, the one who is going to ask the question is Krish Sankar, Cowen, and Company. Go ahead, please.

Hi, thanks for taking my question. I just wanted to follow up. One is on C. C. prepared comments. You said the industry is going to maintain a higher level of inventory, instead of the specific end markets on which specific technology nodes we're seeing with a high level of inventories, and your comment that we're seeing softness in smartphones and PCs. Is there are a function of end demand or is it a function of not being able to get the components to make those products? And then I had a quick follow-up.

Okay, Krish. Krish's first question is on the higher level of inventory that we see preparing in the supply chain. He wants to know which end markets or applications specifically, or which technology nodes do we see this higher level of inventory. And then also, the slower momentum in the sell-through of smartphones or PCs, is this related to component tightness or shortages? C. C. Wei: Let me answer the question. The high inventory is actually closed by some of the necessity for not to be disruption in the supply chain, so is across the board. Actually, it's not any node or any product is across the board. And we say what we continue for a period of time. That is because of what today or those adamant to drive the people to prepare more inventories, still continue to exist. Does that answer your question?

Got it. Yes, it is. And then, just like the second part of the question which is the softness in smartphones and PCs, is that end demand related or component tightness related? And then I'll ask one final question along with it. The gross margin upside you saw in Q3 from the back-end, was it a one-time thing, or is there more upside for that in the future? Thank you.

Okay. So Krish's question also this weakness that we see in areas like smartphones, is it -- and PCs. Is this related to end demand or is it related to component shortages? C. C. Wei: Both actually, let me answer the question quickly. Actually, the end market is a little bit soft, is slow, but we think is possible due to the component shortage.

And then the second part of this Krish's second question I should say, is on the gross margin side. And also the improved back-end profitability.

The back-end profitable -- back-end business is sort of seasonal. It has a high season, the low season during the years. Normally, the second half is a high season, especially the third quarter. As a result, the profitability of background will be better in that quarter.

Thank you very much, gentlemen. Thank you.

Thank you. And then, Operator, we will take the last participant, please.

Yes. The last one to ask questions is Andrew Lu from Sinolink Securities. Go ahead, please.

Thank you for taking my questions. C. C., I want to ask, this year you just guided 24% year-over-year growth. I think this number is probably in line with the industry. It's clear we have a stronger grossing advanced technology, but losing some share in the legacy. Very build more mature technology based on customers' demand. If our CapEx changed, are we adjust down our advanced CapEx, but increased more CapEx on mature technology?

Okay. St Andrew's first question, he's looking at our growth in 2021 to be around 24%. He sees the strong leadership in the advanced nodes, but his note is that we're losing share in the mature notes, so going forward, will there be an adjustment in our CAPEX strategy, leading versus mature? Is that correct, Andrew?

Yes. Correct. Thank you, Jeff. C. C. Wei: Andrew, let me answer that. We did not change our strategy or philosophy in our Capex pin. But certainly, the most important thing is, we're working with our customers to support their demand. This is way important, that including on the specialty technologies. We share the -- actually, we share them to increase the mature nodes' capacity. But as we announced that Japan fab actually is a mature technology. It's a 2228 node.

Can we say that in the future, we should have a higher percentage of CAPEX in terms of total CAPEX compared to the past?

Andrew really wanted to know -- Andrew wants to know will the CAPEX spending proportion of the mature notes versus leading edge, or will we have a higher proportion for the mature notes in the future years? C. C. Wei: Andrew, not yet, because we increased our CAPEX. Even the same proportion, the mature nodes, actually we spend a lot of money also. Did that answer your question?

Yes. My last question is, it seems that we are adjusting our price based on the cost increase or whatever, how do we factor into our model for next year? What can plan the AST increase? Should we factor into our model? Because I had been observing average price on plenty basis over the last three years, including this year. Our price for last 3 years, including this year above 7% to 9%. If next year we have additional adjustments on the Apple-to-Apple pricing level. Should we say easy to have a 10% blended basis increase on ASP? Thank you.

Okay. Andrew's second question is on the blended ASP outlook. He wants to know in essence, can he model a 10% or greater blended ASP increase for 2022?

Andrew, it's too early to comment on 2022. We will provide you with more color in January. Plus, we don't really comment on ASP, anyway.

Thank you.

Okay. Thank you. 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 and the transcript will become available 24 hours from now. And both of which are available through TSMC 's website at www. tsmc.com. Thank you for joining us today. We hope everyone continues to stay healthy and safe, and we hope you will join us again next quarter in January. Goodbye, and have a good day.