Where is the Tariff Pull Forward?
A brief overview of TSMC and then a conversation of supply chains and inventory orders
I'll start with a quick TSMC overview and then drill into the single biggest question I've been asked so far this earnings season - where is the tariff pull-forward?
TSMC Earnings
TSMC put up an expected revenue beat, with the majority of the revenue growth coming from the large and fast-growing HPC segment.
TSMC is on track to double its AI revenue in 2025 and expects to grow in the mid-40s based on its 2024 revenue base. TSMC discussed doubling down on overseas fabs, which will dilute its gross margin by 3-4 percentage points as the fabs ramp up.
Utilization rates have come down, but this is driven by lagging-edge utilization, not leading-edge utilization.
TSMC additionally noted that the supply-demand dynamic is looser than 2024 for CoWoS, and they will grow CoWoS capex by a third to $6 billion in CY25. Capex is still substantial, and they reiterated a range of $38 billion to $42 billion for CY25. TSMC is still king, and there’s not a single thing stopping them from the pole position.
Now let’s talk about the unseasonable 2Q25 guide, which is above seasonal growth. This is a sign of a slight pull forward for Tariff, but we're talking about a 3% shift in yearly revenues, from 23% of the average annual revenue to 26%. That's a sign of a slight pull! But remember that historically, the big quarters for revenue are usually Q3 and Q4, the holiday season.
Because elsewhere I look, and it's not good. Let’s see which companies that have reported in the semiconductor industry have talked about tariff pull-ins and draw some conclusions about the broader economy.
Mixed Evidence of Tariff Pull In
Let’s check the scorecard so far. Earnings this season have been hard to read into because, like everyone, CEOs and CFOs of public companies are confused. Here’s a smattering of comments on tariffs so far.
Nanya, which has very little US revenue, says it is tough to fulfill rush orders.
As far as the rush order wise, it's sort of at this moment, a little bit difficult to determine it is a rush order or it's a general order, okay? Nanya is just barely beginning to ship our DDR5, okay? So from a DDR5 point-of view, we're seeing that the market acceptance of our DDR5 5600 and we are gradually moving to 6400 speed. Those acceptance is reasonably well, okay, in the market, okay? So I don't know how to define that as rush order or not.
Ericcson had slightly unseasonable growth, but is opting for a wait-and-see approach on where to ramp capacity given tariff changes. There is a slight inventory buildup today.
And I think when it comes to your question there on inventory buildup, we had some inventory buildup already here in Q1 in our own sites to make sure that we have material in place and could handle a bit of the situation. But going forward, we don't see big impact from that also from a customer perspective, we don't expect too big impacts from this part.
But we don't do any big changes now because we don't know actually where we're going to land. So we will see here in the coming months if we choose to ramp up or ramp down between different sites. But it's very depending on where the tariffs actually land at the end of the day here.
ASML plans to pass on costs to customers, and they can’t rush to ship tools. Additionally, they plan to pass most of the costs on to the customer.
Yes, Chris, as we also said on the video, it's very hard, given the dynamics around tariffs to put any meaningful number on there, right, because on the one hand, the question is what tariff will eventually -- what tariffs are we eventually going to look at, in general, from one region to the other. But then more specifically, when it comes to semiconductors, it's pretty clear that, that is still under review by the U.S. government. So it's impossible to see what, as I mentioned before, what the size of the tariffs is actually going to be.
And then the second question, to the extent that, that is clear, the question is, how will that ultimately be absorbed in the entire value chain? And we've made it clear also on the video that we're working very closely with everyone involved to try and minimize the total exposure of the ecosystem to tariffs. So we try to see what we can do to minimize the overall impact. But we also believe that once that has been minimized, that the burden of that should not be with ASML and that the burden of the tariff and the lion's share of the tariff burden should be borne by the next element in the value chain. I think that's the way we approach it.
ABB (broad data center industrial) is seeing no pre-buying, but also has a lot of capacity in the United States.
No, we did not see that in the first quarter that people were prebuying. I think that is just due to the uncertainty of what kind of -- would you buy to be able to mitigate. So no, we have not seen that.
VAT is not seeing any pre-buying, but thinks that the line of thinking is correct.
I think, so far we have not seen that, but I think you are anticipating correctly, this could happen. But at the moment, it's still too volatile and changing too fast that our customers would do such action. They are also analyzing. Everybody is kind of analyzing the situation and find the right measures to answer the new challenges.
Disco is taking the wait-and-see approach.
As for HBM, there has been talk of additional investments, so we will have to wait and see how much more certain this will be, and whether the timing will be clear. At this point, we still do not have a concrete sense of levels or direction for Q2 onward.
Also, we are not sure if the tariffs will have any impact on the generative AI business, and I think we may have to keep a close eye on it.
This Q1 forecast basically does not incorporate the impact of tariffs.
Do you see the theme? I was expecting some massive pull forward into tariffs, and we’re not seeing it. And now let’s be real, semiconductors are not the end-all be-all of the entire market, but the way I’m seeing it is there is some slight pull forward, but there’s a giant status quo bias that is showing a general preference for the current state of things instead of flipping prior assumptions quickly.
From my vantage point, there is a worrying assumption here - and I’ll try to piece together the logic of what I’m seeing or what I would do if I were in the CEO's seat and faced 10-25% tariffs.
Inventory Cycles
What we are seeing is that the global supply chain is a deer caught in the headlights of a car. Almost everyone is on the sidelines, and I believe that semiconductors are no different. During 2020, the initial impulse was to cut orders as demand was falling off a cliff, which created a tailwhip of overordering on the other side of COVID. Let’s try to walk through the aggregate decisions happening this time around.
Suppose I had to create a standard playbook for a company that sells widgets. From what I’ve seen, it is to be defensive but not overreach, given the uncertainty. We are seeing a slight increase in inventory by an extra month to get inventory days above 100 days, so you can weather the next quarter of inventory, and then pray that demand for Q4 and price increases can get you through. No one is willing to burn cash to buy speculative inventory, so you're going to wait and see.
That is effectively what you’re seeing reflected in the above anecdotes.
Meanwhile, no one knows where the final tariff rate will land, so you likely want to wait until you can have certainty on where to add your final capacity. This is the wait-and-see approach, and it makes sense. But all these pauses pretty much create another problem when and if tariffs are held up. Let’s assume that tariffs will stay in some form, and that many of the tariffs enacted will be higher than the 10% flat rate.
This has a second ramification because what happens in Q3? You will have to raise prices, or you have a belief as a company that orders will be meaningful down in Q3/Q4. The current actions have a simple conclusion: the second half of the year will either be a recession or massive inflation if the tariffs remain in place.
For more complete thoughts on the inventory cycle, please refer to behind the paywall.