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Taiwan Semiconductor Manufacturing Limited (NYSE:TSM)

Q4 2013 Earnings Call

January 16, 2014 1:00 am ET

Executives

Elizabeth Sun - Director of Corporate Communication Division

Li Mei He - Chief Financial Officer and Senior Vice President of Finance

Morris Chang - Chairman

C. C. Wei - Co-Chief Executive Officer and Co-President

Mark Liu - Co-Chief Executive Officer and Co-President

Analysts

Roland Shu - Citigroup Inc, Research Division

Daniel Heyler - BofA Merrill Lynch, Research Division

Randy Abrams - Crédit Suisse AG, Research Division

Michael Chou - Deutsche Bank AG, Research Division

Andrew Lu - Barclays Capital, Research Division

Steven C. Pelayo - HSBC, Research Division

Gokul Hariharan - JP Morgan Chase & Co, Research Division

Donald Lu - Goldman Sachs Group Inc., Research Division

William Lu - Morgan Stanley, Research Division

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Eric Chen - Daiwa Securities Co. Ltd., Research Division

Jonah Cheng - UBS Investment Bank, Research Division

Elizabeth Sun

[Chinese] Welcome to TSMC's Fourth Quarter 2013 Earnings Conference and Conference Call. This is Elizabeth Sun, TSMC's Director of Corporate Communications and your host for today. Before we begin, please let me extend our warmest wishes to all of you for a very Happy Year of the Horse. Today's event is webcast live via TSMC's website at www.tsmc.com. [Operator Instructions] As this conference is being viewed by investors around the world, we will conduct this event in English only.

The format for today's event will be as follows: First, TSMC's Senior Vice President and CFO, Ms. Lora Ho, will summarize our operations in the fourth quarter and full year of 2013 followed by our guidance for the current quarter. Afterwards, TSMC's Chairman, Dr. Morris Chang, and TSMC's 2 Co-CEOs, Dr. Mark Liu and Dr. C.C. Wei, will jointly provide a couple of key messages, then we will open both the floor and the line for the Q&A. For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation.

As usual, I would remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor notice that appears on our press release.

And now I would like to turn the podium to TSMC's CFO, Ms. Lora Ho.

Li Mei He

Thank you, Elizabeth. Good afternoon, and happy New Year to everyone. Thank you for joining us today. I will start my presentation with financial highlights for the fourth quarter and a recap of 2013's financial performance, followed by the guidance for the first quarter of 2014.

In the fourth quarter, TSMC's business was negatively impacted by semiconductor supply chain's inventory management. On a sequential basis, fourth quarter revenue declined 10.3% to TWD 146 billion. Gross margin was 44.5%, down 4 percentage points from the third quarter, mainly due to lower capacity utilization. Total operating expenses decreased 11% as we took several expense cutting measurements during the quarter. This led to an operating margin of 32.8%, down 3.9 percentage points from the third quarter. Non-operating items was a gain of TWD 2.6 billion. We have reversed the TWD 1.2 billion impairment loss due to strong business recovery from one of our invested companies. In addition, we received the last payment of litigation settlement from SMIC. Overall, EPS was TWD 1.73 in the fourth quarter. ROE was 21.7%.

Let's take a look at revenue by applications. During the fourth quarter, inventory correction continued across all major segments of the semiconductor supply chain. Our Communication-, Computer- and Consumer-related revenue declined 13%, 7% and 20%, respectively, while Industrial and Standard product remained flat during the quarter.

On a full year basis, Communication increased 29% and represented 54% of our revenue of 2013. This reflected the strong demand for application processors, base band, display driver and other peripheral ICs used in mobile computing devices. Computer decreased 10%, with PC graphics declining the most. Consumer increased 43% year-over-year, reflecting the strong demand in the next generation game consoles. Industrial and Standard increased 14% as mobile devices use various ICs enabled by our specialty technologies, such as touch controller and the power management IC, et cetera.

By technology, 28-nanometer contributed 34% of our total wafer revenue in the fourth quarter, up from 32% in the third quarter. On a full year basis, 28-nanometer tripled and had contributed about 30% of our total wafer revenue, a big increase from the 12% in 2012.

Now let's move on to the balance sheet. Cash and marketable securities was TWD 245 billion at the end of the fourth quarter. Current liabilities increased by TWD 42 billion due to higher accounts payable to equipment suppliers. Accounts receivable turnover days increased to 48 days. Days of inventory remained at 45 days.

Let me make a few comments on the cash flow. During the fourth quarter, we generated TWD 103 billion from operations, invested TWD 74 billion in capital expenditure and repaid TWD 2 billion short-term loans. At the end of the fourth quarter, our cash balance increased TWD 26 billion to TWD 243 billion. In the fourth quarter, free cash flow was an inflow of TWD 29 billion.

Now I would like to give you a recap of our performance in year 2013. 2013 was another record year for TSMC. Thanks to the technology leadership and excellent manufacturing execution in 28-nanometer, we were able to capture the strong growth in mobile computing market. From a financial point of view, revenue increased 18% year-over-year to reach TWD 597 billion or, in U.S. dollar terms, about USD 20 billion. On the profitability side, gross margin declined 1.1 percentage point to 47.1% due to lower capacity utilization in 2013, while our structure profitability continued to improve. On cash flow, we spent TWD 288 billion or USD 9.7 billion in CapEx, up 17% from 2012. However, we were able to grow operating cash flow at a faster rate of 22% to reach TWD 347 billion. Therefore, free cash flow increased by 54% year-over-year to reach TWD 60 billion. On earnings, income before tax increased by 19% versus 2012. Meanwhile, we took a hit by the higher effective tax rate. The effective tax rate went up from 9% in 2012 to 13% in 2013. As a result, EPS increased at a slower pace of 13% to reach TWD 7.26, set a new record. Overall, our ROE was 24% for the whole year, meet our long-term financial objective of bigger than 20% ROE.

I have finished my report on financial part. Now let me provide you with first quarter outlook. Based on the current business expectation and a forecast exchange rate of TWD 30, we expect our revenue to be between TWD 136 billion and TWD 138 billion. This will translate into 6% Q-over-Q decline. On the margin side, we expect the first quarter gross margin to be between 44.5% and 46.5% and operating margin to be between 32% and 34%. As you can see, first quarter gross margin is expected to be better than the fourth quarter despite a lower revenue. Let me explain why. You all know our business has certain seasonality. First quarter is normally a slow quarter. If we can start a wafer earlier in a slower quarter, then we will be able to complete more wafers in the following quarters when the business pace picks up. This way, we're able to complete and ship more wafers to support a surge demand in the peak quarter without having to deal to a peak capacity for that quarter. Meanwhile, we can also benefit from better utilization rate. In a slower quarter, it improves our profitability. We began to implement this practice a few months ago and expect it to benefit our gross margin by 2 to 3 percentage points in the first quarter.

Another thing I want to highlight is the tax rate for 2014. We expect our full year effective tax rate to be about 13.3%, which is about the same as 2013's 13%. However, from a quarterly perspective, second quarter would carry about 40%, the total tax burden for the whole year, due to the need to accrue the 10% return -- on which field we'll return earnings.

This concludes my remarks. Let me turn the podium to our Chairman, Dr. Morris Chang.

Morris Chang

Good afternoon, ladies and gentlemen. Today, our comments are scheduled as on the slide on your left. First, I am very glad to have the opportunity to introduce our new, hot management team.

I first start with Lora, although I think everyone -- most are aware of. Lora has a bachelor's degree from Princeton University and master's degree from National Taiwan University, both degrees in finance. She worked for Cyanamid, Wyse, Thomas & Betts and TI-Acer before she joined TSMC in 1999. And she has been TSMC's CFO since 2003.

Next, Dr. C.C. Wei. C.C. is -- has a bachelor's degree from Chiao Tung University and a Ph.D. from Yale University, both in electrical engineering. C.C. worked for TI, SGS, Chartered before joining TSMC in 1998. C.C. has been Senior VP of Operations, Senior VP of Business Development, Co-COO. And in the Co-COO job, C.C. was successively responsible for our R&D and our operations. Now C.C. is President and Co-CEO. C.C. is 60 years old, and I should add that Lora is 57 years old.

Mark Liu. Mark has a B.S. from National Taiwan University and a Ph.D. from Berkeley, both in electrical engineering and computer science. Mark worked for Intel, Bell Telephone Labs before joining TSMC in 1993. And at TSMC, he has been VP, Senior VP of Operations, and he was also a Co-COO. And all the time he was Co-COO, he was responsible for our sales, marketing and planning. And now Mark and C.C. are Presidents and Co-CEOs of the company. Mark is 59 years old. I'm not going to introduce myself. I think you already know me.

So let me talk about 4Q, and I will just give you a few comments, a few words, on the year 2013. And I will say more words for this year. 4Q, I think Lora already discussed it. It's pretty much as we guided it 3 months ago. Our revenue was affected by the supply chain's inventory management across almost all major segments, particularly in Communication-related applications. The supply chain DOI declined from 1 day above seasonal in the third quarter to 1 day below seasonal in the fourth quarter. However, our structural profitability remains intact. The lower utilization caused by lower revenue resulted in a lower gross margin and operating profit percent than 3Q. On 2013, overall, we are pleased by the results. It was another consecutive year of record performance. And as Lora pointed out, revenue grew by 18%, and profit before tax grew by 19%.

Now looking at 2014, we expect still another consecutive year of double-digit growth in revenue, and I will talk a little more about profit later. 1Q is a seasonally weak quarter for IT companies, including us, and supply chain continued to manage inventory conservatively even when the DOI has already reached below seasonal level. We expect the supply chain DOI to be 2 days below seasonal in 1Q -- at the end of 1Q. Our structural profitability in 1Q still remains intact. In fact, it will probably improve slightly, as you can tell from the guided profit margins.

For full year 2014, we forecast the following industry numbers: For worldwide semiconductor industry, we forecast 5% growth. For fabless industry, we forecast 8% growth. And for foundry industry, we forecast 10% growth. For TSMC, as I already did, we are forecasting revenue growth surpassing the growth of the foundry industry. 2014 capital budget is estimated to be between TWD 9.5 billion and TWD 10 billion, similar to that of last year. About 95% of the capital expenditure is for advanced technologies, and we mean 20-nanometers, 16-nanometers, more 28-nanometers, R&D and our [indiscernible]. Depreciation expense is expected to increase by about 35% year-to-year. The ratio of depreciation expense to revenue is expected to rise by a few percentage points in 2014.

However, we will have a higher than the ASP by several percentage points resulting from our new technologies, principally the high-K metal gate 28-nanometer and the 20-SoC. We also plan to have better operating efficiencies. The higher operating efficiency would include lower variable cost to wafer, higher manufacturing productivity, et cetera. Now between those 2, principally, the higher blended average price which results from the richer product mix, principally from that and also partly from the better operating efficiencies, we intend to offset the increase of depreciation as a percent of revenue. We believe we can maintain and perhaps even improve our structural profitability in '14 versus past year. From second quarter on, we'll see strong growth.

We are growth engines. In terms of market segments, mobile products, smartphones and tablets, we'll be a growth engine. In terms of technology, high-K metal gate 28-nanometer and 20-SoC are our growth engines.

I will say a few words about mobile product now, and C.C. will a little later talk about the technologies -- the new technologies. Smartphones are expected to grow by 25% to 1.246 billion units, and tablets are expected to grow by 21% to 307 million units. Now to be a little [indiscernible] range, the high-end smartphones are expected to grow 8% year-over-year to 325 million units; the middle end, 22% year-over-year to 449 million units; the lower end, 45% year-over-year to 472 million. And due to the continued performance improvements, which means multi-mode and 64-bit, et cetera, and also due to feature enhancements, such as fingerprint, MEMS, NFC and new standards in WiFi and Bluetooth, we expect silicon content for the mobile devices to continue to rise -- silicon content in the mobile devices to continue to rise. And TSMC share in the mild [ph] memory silicon content of these devices is expected to increase from 45% last year to 47% this year. As a result, TSMC revenue from mobile products are expected to grow more than 35%.

And just looking a little further ahead, further than this year, we expect to continue benefiting from the growth of mobile products in 2015 and expect to see emerging devices, such as wearables and others, to join the line for the mobile products.

Now let me ask C.C. to speak to the technology aspects of our global venture. C.C.?

C. C. Wei

Okay. Thank you, Chairman. Good afternoon, everybody. I'm C.C. Wei, and I will give you the update of our 28-nanometer high-K metal gate version.

Okay. Let me recap the history. We start the 28-nanometer's volume production in year 2011, now meaning under 28 ERP [ph], the oxynitride-gated version. And since then, the business continued to grow. So last year, we had tripled the 28-nanometer applications versus year 2012. And in this year, year 2014, the business, 28-nanometer, will continue to grow at least by another 20%. And all the increase are coming from the 28-nanometer, the high-K metal gate version, which is -- we named it 28HPM. Let me add more color to it. We expect we're going to have about -- more than 100 tape-outs from about 60 customers that -- in this year, in 28HPM.

Now you may ask why there are so many product, what is designed on this technology. One of -- the main reason I can give to you is the performance, the superior performance. For example, 28HPM compared with a 28 ERP [ph] now locks in another 30% of the speed at the same type of power consumption. Or you can say that at the same power consumption -- same speed, it will consume 50% less power, and everybody knows that the power consumption in a mobile device is very important, okay. That's why we think we have a very high put [ph] business on the 28HPM.

Now furthermore, after the 28HPM, we also offer 28HPC [ph], which is a low-cost version of the 28HPM. The 28HPC [ph] is developed to meet the customers' demand to compete in the need to go in smartphone market. We expect that this 28HPC [ph] will have a very strong demand in the next 2 years. That's why we have it, okay.

Then to give you some information on the competition to explain why we are so confident on this 28-nanometer's high-K metal gate business. If you still remember that long time ago, we mentioned about gate-first data -- still remember that terminology? All right. So simply to say that gate-last version will give you better performance and better product control. And as a result, all our customers will enjoy their imaging, the gate-last version of technology, to have a higher or better performance if -- than other product, which are designed and -- with a different approach. In addition to that, I'll say that because of better product control and TSMC's manufacturing excellence, we have a much better yield than our competitors. And so that our customer will enjoy the lower bad [ph] cost. That's why we have it. And that's why we explained that our confidence on the 28 nanometers business, it will continue a very good business for us.

Now let me switch the deal to 20-SoC. That's another exciting news that we have I want to share with you. 20-SoC is -- have launched -- we've developed to enable TSMC customers to bid in the mobile device market. And this technology, we, beginning this year or next year, we'll have a very good business to capture. So probably, the space is now the 20-SoC. We have 2 fabs, Fab 12 and Fab 14, that complete the core of 20-SoC. And as a matter of fact, we started production. We are in the volume production as we speak right now. So it's in the high-volume production as we are speaking right now.

Let me add more information to that: First, there are more than USD 10 billion have been committed to build the capacity. Second, we have more than 2,500 engineers and 1,500 operators right now in manufacturing, doing the 20-SoC, the volume production. The rank and grade will be the fastest one in TSMC's history. Using the rank and grade, you can get a hint of the business, how big the business is.

I've another fact to share with you. We have probably, at the end of this year, we have more than thousands of tape-out from about 1,000 customer that they are producing the 20-SoC product, okay. You might ask, "How's business? How about the competition?" If you have a very strong competition, you might -- you cannot have too much confidence on the future. Let me talk about the competition. I'm very confident that our 20-SoC is of high-K density, the volume production, as the 20-nanometers node. Please remember that high-K density and the high volume production. I don't think any competitors can say [indiscernible] and this kind of production and with this kind of K density at this time, nobody. And most of our competitors, to be frank with you, they are not even into this game yet. So we are confident we will have a good business that will contribute to TSMC's revenue, wafer revenue, by probably around 10% this year.

And that will conclude my presentation, and thank you for your attention.

Morris Chang

Thank you, C.C. Now looking into next year now, 2015 and perhaps even 2016, I think next year, this time, I will be telling you that our growth engines in technology next year, a year from now, is going to be 16-FinFET. Now recently, Intel published some data which showed our 16-FinFET technology to be behind, and we think that the data is highly misleading.

So I now would ask Mark Liu to speak to TSMC's competitiveness versus Intel and Samsung.

Mark Liu

Good afternoon, ladies and gentlemen. I will start this topic by update you our recent development status of our 16-FinFET technology. 16-FinFET technology has been a very fast-paced development work in TSMC, and we have achieved to reach production milestone of 16-FinFET in November '13, November last year. And this month, we should have the 1,000 hours, so-called, the technology qualification. So the technology is ready for customer product tape-out. Our 16-FinFET yield improvement has been ahead of our plan. This is because we have been leveraging the deals, learning on 20-SoC. Currently, 16-FinFET SRAM yield is already close to 20-SoC. And with this status, we are developing an enhanced transistor version of 16-FinFET plus, with 13% performance improvement. It will be the highest performance technology among all available 16- and 14-nanometer technology in 2014. The above progress status is well ahead of Samsung.

Let me comment on Intel's recent graph shown in their investor meetings, showing on the screen. I -- we usually do not comment on other companies' technology, but this -- because this has been talking about TSMC technology and, as Chairman said, has been misleading, to me, it's erroneous based on outdated data. So I'd like to make the following rebuttal: On this new graph, the vertical axis is the chip area on a large scale. Basically, this is compared to chip area reduction. On the horizontal axis, it shows the 4 different technologies: 32, 28; 22, 20; 14, 16-FinFET; and 10-nanometer. 32 is Intel technology, and 28 is TSMC technology so is the following 3 nodes, the smaller number, 20, around -- 14-FinFET is Intel, 16-FinFET is TSMC. On the view graph shown at Intel investor meeting, it is with the gray plot, showing here. The gray plot showed the 32- and the 20-nanometer TSMC is ahead of the area scaling and -- but -- however, with 16, the data -- gray data shows a little bit uptick. And following the same slope, go down to the 10-nanometer, was the correct data we show on the red line. That's our current TSMC data. The 16, we have in volume production on 20-nanometer. As C.C. just mentioned, this is the highest density technology in production today. We take the approach of significantly using the FinFET transistor to improve the transistor performance on top of the similar back-end technology of our 20-nanometer. Therefore, we leverage the volume experience in the volume production this year to be able to immediately go down to the 16 volume production next year, within 1 year, and this transistor performance and innovative layout methodology can improve the chip size by about 15%. This is because the driving of the transistor is much stronger so that you don't need such a big area to deliver the same driving circuitry. And for the 10-nanometer, we haven't announced it, but we did communicate with many of our customers that, that will be the aggressive scaling of technology we're doing. And so in the summary, our 10 FinFET technology will be qualified by the end of 2015. 10 FinFET transistor will be our third-generation FinFET transistor. This technology will come with industry's leading performance and density. So I want to leave this slot by 16-FinFET scaling is much better than Intel's set but still a little bit behind. However, the real competition is between our customers' product and Intel's product or Samsung's product.

TSMC's Grand Alliance, that is the alliance of us, our customers, EDA, IP, community and the supplier, is the largest and the only open technology platform for the widest range of product innovations in the industry today. As for the tape-out of our 16-FinFET, more than 20 customer product tape-outs of 16-FinFET technology is scheduled this year already. They include wide range of applications, baseband application processors, application process for SoCs, graphics, networking, hard disk drive, field-programmable array, CPUs and service. Our 16-FinFET technology captured a vast portion of products in the semiconductor industry. We've been actively working with our customer's designer on this. It's been -- since last year. TSMC's speed and productization of the customer's product and our ability to execute for a short time-to-market for a customer are far superior than Intel and Samsung.

So lastly, I will comment on the mobile products. With this 16-FinFET technology and the innovations of processor architecture and various IT from our customers, we are confident that this planned 16-FinFET mobile product, which is going to tape out to us, will be better than Samsung's 14-nanometer and better than Intel's 14 SoC.

Thank you very much.

Morris Chang

Thank you, Mark. Summary. In summary, I want to say the following: First, in 2014, we expect double-digit revenue growth and we expect to maintain or slightly improve our structural profitability. As a result, we expect our profit growth to be close to our revenue growth. In 2014, the market segment that most strongly fuels our growth is the smartphone and tablet, mobile segment. The technologies that fuel our growth are the 20-SoC and the 28 high-K metal gate, in both of which we have strong market share. In 2015, our strong technology growth will be 16-FinFET. We believe our Grand Alliance will outcompete both Intel and Samsung, outcompete.

Thank you very much.

Question-and-Answer Session

Elizabeth Sun

All right. [Operator Instructions] Questions will be taken both from the floor and from the call. Should you wish to raise your questions in Chinese, I will translate that to English before our management answers your questions. [Operator Instructions] Now let's begin the Q&A session. Our first question comes from the floor. It will be from Roland Shu of Citi Securities.

Roland Shu - Citigroup Inc, Research Division

My first question is on the 16-nanometer FinFET and the [indiscernible] for your technology patterned on the 16-nanometer FinFET. [Chinese] competitor [indiscernible] 14-nanometer versus 16-nanometer. So -- and I know you have a 16 plus. So my question is whether the 16 plus is improving from the [indiscernible] or this is just a stellar performance in [indiscernible]? Or are we going to consider to change our 16 plus to [indiscernible] 32-nanometer? I think this is a question for Chairman.

Morris Chang

Well, Mark, would you answer that? You don't mind if Mark answers it, do you?

Mark Liu

16-FinFET-plus is a transistor enhancement for the design back when design rule are similar to 16-FinFET. Therefore, a designer can design on 16-FinFET and recharacterize, upgrade, their product performance. This transistor, as I mentioned, also can reduce the cell sites into cell sites and with other -- and with the -- enhance the performance of transistor. That's the way to reduce the chip size. So we do not intend to change the naming. I mean, this is engineering. This is the word that -- this is the name that we choose earlier based on the physical, consistent number, and we do not intend to change name.

Roland Shu - Citigroup Inc, Research Division

Okay. So 16 plus or 16 actually is [indiscernible] at least a similar [indiscernible] as a 16-nanometer. So this is [indiscernible].

Morris Chang

I mean, for the question, again?

Roland Shu - Citigroup Inc, Research Division

I mean, actually, very happy to hear you are so confident about your 15 -- 16 plus [indiscernible]. I mean, my second question actually is for Lora, actually, for the cash dividends. [indiscernible] you've been very good at bottom line last year and this year. And also, it's improving free cash flow. So question is [indiscernible] TSMC is considering to improve cash dividend?

Li Mei He

When you look at the free cash flow, when the free cash flow sufficiently cover our current free dollar per share dividend level, that is the time we will seriously consider to increase cash dividend.

Roland Shu - Citigroup Inc, Research Division

So in another [indiscernible] mid-year 2013, free cash flow positive reached about 30.5 [indiscernible] this past year. So [indiscernible], this is the only one consideration when the free cash flow will be above the [indiscernible] you will increase the cash dividend?

Li Mei He

That's the major element. I will not comment on your model. But other than the free cash flow consideration, another thing is that we look at the capital intensity. Our capital intensity in the past 4 or 5 years has been very close to 50%. That number will come down this year, 2014, will even come down further in 2015. So that is another element for us to seriously consider cash dividend increase.

Morris Chang

I guess he's asking when we raise the cash dividend. I don't think that [indiscernible] to say that, certainly, 2014 is perhaps -- the first half, 2014 dividend, payable in 2015. I think it's not out of the question, okay.

Elizabeth Sun

Okay. Our next question comes from the floor, and that will be from Bank of America Merrill Lynch, Dan Heyler.

Daniel Heyler - BofA Merrill Lynch, Research Division

I came with a lot of questions, but you answered a lot of them earlier on. Well, I've got 2 questions. First, I guess, as we look at -- maybe, perhaps for C.C., RAM technology side. As we look at EUV, do you agree that the most likely implementation of EUV approved to be for foundries, number one, over kind of the 1 to 2 layers at 10-nanometer and that you can kind of achieve x number of wafers per hour to hit a rollout of that technology? What exactly wafers per hour do you need? And at what time will you achieve those?

Morris Chang

Mark, will you answer that, please? He's -- I think he's asking whether we are considering [indiscernible] and EUV [indiscernible] we've got maybe 1 or 2 layers. That's the question, right?

Daniel Heyler - BofA Merrill Lynch, Research Division

Yes.

Mark Liu

We, the current processor record -- our current execution plan is on 10-nanometer, do not have EUV. It's all in emerging layers. However, we have been working with SNL [ph] very closely, and we set a target for their EUV's throughput. And together, we will -- we have envisioned to improve the 10-nanometer cost if the EUV development in SNL [ph] can reach our target, the target we gave them, okay. And these 2 parties have been working very closely. So EUV is a cost reduction opportunity for us on 10-nanometer.

Daniel Heyler - BofA Merrill Lynch, Research Division

Okay, great. A quick follow-up on that. If we were to draw that curve that you put up earlier, would that look fairly linear based on your current model? On your cost curve previously that you showed on...

Mark Liu

That is -- that curve is without EUV.

Daniel Heyler - BofA Merrill Lynch, Research Division

Exactly, without -- with EUV, and we imagine a dotted line, do we go through a bit of a penalty there and then we're back on trend? Or do you think it's...

Mark Liu

It's the same. With EUV, design will be the same. We're not going to be waiting for that, wait for that design...

Morris Chang

We're looking at EUV just as a cost.

Daniel Heyler - BofA Merrill Lynch, Research Division

But is the cost...

Mark Liu

Cost reduction opportunities.

Daniel Heyler - BofA Merrill Lynch, Research Division

And then I was going to ask you previously on managing the squeeze in utilization that we've seen over the last couple of years. You're addressing that through production during lead cycles. Are there other things that you can do, going forward, to smooth out these big swings in utilization? And I guess part of the answer I'd like to know, what you think the industry dynamics will be on these swings. I mean, how should we think -- is it pretty much business as usual from an order standpoint the last 3 years? Or could we see the orders...

Morris Chang

I think that Lora just explained what we have started to do, which is really what the IBMs do all the time, that is they build some inventory plan through the duration that's slow. They build some inventory and that's all we're doing too. Of course, in our case, we have to get right, but I do believe that we have organized ourselves. We actually -- I wanted to start doing it as early as August of last year because, even at that time, we saw that the fourth quarter and the first quarter would be rather slow. And well, also, we had to organize [indiscernible] and people. People have to do better. If not their job, but their bonus is on the line. But now, this inventory we are building will not be written off. And also, we have had to decide how much reserve to take, et cetera, et cetera. So now we didn't get completely organized. We didn't get -- we really didn't get going until sometime in the -- around the middle of fourth quarter. So the effect of inventory building on the fourth quarter was minimal. Now in the first quarter, as [indiscernible] has already pointed out, it does have an effect. I think we've said 2 or 3 percentage points of the gross margin.

Daniel Heyler - BofA Merrill Lynch, Research Division

And is that 2 to 3 percentage points something that you're modeling kind of through the course of the year? Or is that a single quarter?

Morris Chang

I don't think...

Daniel Heyler - BofA Merrill Lynch, Research Division

Through the course of the cycle? Or is that just 1 quarter?

Li Mei He

Yes. I don't think you can model it for the whole year because we have to look at lower season and off-season. That means that we do in the lower season. So only in the low quarters we will start to produce some inventory.

Daniel Heyler - BofA Merrill Lynch, Research Division

I misspoke there. I kind of meant through the cycle. Is that kind of your expectation through -- as you go through the cycle? At the troughs, each of the troughs, could we kind of see this as something you can repeat on the next correction, a couple of percentage points?

Morris Chang

The answer is no, but it's -- when we see that we need to use it, we'll do it. We don't bother way in advance, okay.

Daniel Heyler - BofA Merrill Lynch, Research Division

Okay. And is there anything else you can do to affect this -- the volatility and improvement in margins? Are there other things in the toolbox there?

Morris Chang

Yes. Yes, we, for instance, we very carefully control the capacity results.

Elizabeth Sun

All right. We will now take our next question from the call. Operator, please proceed to the first caller on the line.

Operator

Your first question from the phone comes from Randy Abrams from Crédit Suisse.

Randy Abrams - Crédit Suisse AG, Research Division

My first question on the management structure now with the Co-COOs promoted to Co-CEO. If you could talk about how the responsibilities will change with their promotion to Co-CEO? And for yourself, Dr. Chairman, how will your activities change versus before this move? So if you could talk about the roles for each of the different Co-CEOs and yourself now.

Morris Chang

Yes. We started the President and the Co-CEO in November, and it has been now 2 months. And if you ask me now, has my life changed in the last 2 months, my answer is no. It has not changed. But I think that my effort, my time, has been spent more on the coaching aspect. I think that -- I do believe that I do more coaching. If I spend 100 hours and -- I now perhaps spend about 20 hours of the 100 hours on coaching, whereas in the past, I'd probably spend only 5 or 10 hours of the 100 hours on coaching. Now actually, this is an overseas call, is this correct? Yes. So let me just very -- explain very briefly what the Taiwan law and customs are in relation to a Chairman's authority and responsibility. Basically, by both law and custom, the Chairman of a company has the ultimate authority and responsibility, basically. However, he may delegate this authority and responsibility to the President. He may also take it back anytime. He can re-delegate it at any -- any and all, any or all of the responsibilities to the President. And now these 2 gentlemen are -- their title is President and Co-CEO. President comes first. They are, in a very legal sense, Presidents. Now the co-CEO is basically a western term. And then in the United States, a CEO usually bears the final, ultimate responsibility and authority. A Chairman in Taiwan does. In the U.S., it's the CEO. Now so my role in the future is really to convert these 2 gentlemen from the Taiwan-sense President to the U.S.-sense CEO, and it will be a gradual process. I don't know whether -- do you think I explained this clearly, yes? Everybody here...

Elizabeth Sun

Randy, do you think the Chairman has explained your questions clearly?

Randy Abrams - Crédit Suisse AG, Research Division

Yes, that was clear. And I could ask a second question. It goes back to the last conference. There was a talk about the battle raging on 16-nanometer in 2015, and I'd want, I guess, an update on how -- given the technology progress you've made, how you're looking at 2015, those battles playing out, and your thoughts on your market share position. And also, if you see any challenge, whether it's market share or pricing with 2 new -- with Samsung and Intel both more aggressively pursuing foundries.

Morris Chang

I think it's about 16...

Elizabeth Sun

16-nanometers [indiscernible] in 2015.

Mark Liu

Right now, we intend to maintain our position in the foundry business on 16-FinFET as we did on the 28. As I mentioned, our 16-FinFET, we have over 20 tape-out already working with our customer. And it -- of course, these products will be competing with Intel's product in 2015. And that is that we are so closely work with our customers. Together, the technology is ready to tape out. We need to work with our customer closely so that their design and the time-to-market can be cashed [ph] as early as possible for their 2015 rent.

Morris Chang

Well, we live on technology. Just as Intel thinks or, in fact, they do, we do that, too. So it's extremely important for us that on 16-FinFET, we need to provide good enough technology so that the Grand Alliance of customers, of key equipment vendors, the EVA, ARM and third-party IP developers, all those are in the Grand Alliance. We need to -- our role is to provide good technology so that the Grand Alliance together can outcompete Intel and Samsung. And we feel very confident that we do that. So if you talk about market share, we feel that we'll win a pretty big share of the market. I don't know how much yet, but I think that it'll be pretty big.

Elizabeth Sun

All right. Now we are coming back to the floor. Next question will be coming from Michael Chou of Deutsche Bank.

Michael Chou - Deutsche Bank AG, Research Division

I actually have a follow-up question on 16-nanometers because you mentioned you think the reasons 16-nanometers [indiscernible] regarding the competition. So what's your [indiscernible] be versus [indiscernible] 14-nanometer FinFET? Would you be [indiscernible] versus competitors 14-nanometer FinFET devices [indiscernible]?

Mark Liu

In the transistor design, the speed and power are -- is convertible. So from our intelligent -- our 16-FinFET plus technology, with 15% improvement on top of 16-FinFET, is about the same as Intel's transistors. So that is what we are targeting at, and customer can convert that speed to power consumption, so -- okay.

Michael Chou - Deutsche Bank AG, Research Division

My second question is, could you update that your sales force [indiscernible]?

Li Mei He

Let me take that. We expect to...

Mark Liu

[indiscernible] I thought I'd already said it, around 10% wafer upgrade.

Morris Chang

For the year?

Mark Liu

For the year, yes.

Morris Chang

And so by the fourth quarter, it will be much higher, yes.

Michael Chou - Deutsche Bank AG, Research Division

How about the fourth quarter?

Morris Chang

It's negligible.

Mark Liu

Q4 this year should be high.

Morris Chang

Q4 this year, Q4 '14 will be very high. That's what I said earlier. Q4 last year was negligible.

Li Mei He

With 10 years [ph], with 10% for the total year of wafer revenue, we expect fourth quarter alone 20-nanometer will contribute more than 20% of our wafer revenue.

Elizabeth Sun

Okay, next question will come from the floor again. It will be Barclays' Andrew Lu.

Andrew Lu - Barclays Capital, Research Division

[Chinese] I have 2 questions here. First one is regarding the capacity design for 20- and 16-nanometer FinFET. Some, you've indicate [indiscernible] 60k per month for 20 and 16, 60k per month for 16-nanometer FinFET. And are we expecting -- last time, I remember Dr. Chang mentioned the 16-nanometer FinFET, the capacity was quite similar, 90% switches [ph]. So if we -- more than that, well, next year, CapEx is down and the CapEx number probably even lower than this year.

Morris Chang

I don't want to take that. We may check even more market share than we've been announcing we will and, if that happens, we will spend money. Now but you're right about the 20 to 16 capacity being -- or 20 capacity being quickly convertible to 16 at a loss that -- a lot less than the 10% of the decline, a lot less.

Andrew Lu - Barclays Capital, Research Division

What, isn't it...

Morris Chang

Well, you said that 20 -- you said 90%, I think. So I'm saying it's more than 90%.

Andrew Lu - Barclays Capital, Research Division

Switchable?

Morris Chang

Switchable.

Andrew Lu - Barclays Capital, Research Division

So we might hear a kind of different case, depends on subject change or cosmic event. We might see the next year, if seasonality that FinFET has that -- it might not achieve 50% [indiscernible] it might be quite different.

Morris Chang

No. We are not -- by the way, we are not building 60k per month capacity of 20 and then 60k per month capacity of 16. They are not additive, okay.

Andrew Lu - Barclays Capital, Research Division

A kind of floating change based on customer [indiscernible].

Morris Chang

I think you approach one way, from 20 to 16. It will not go the other.

Andrew Lu - Barclays Capital, Research Division

My second question is, since the 14- and 16-nanometer FinFET arguments are among these top 3 players so much, why would you [indiscernible]? I think it's [indiscernible] strategy thinking back to 2 to 3 years back.

Morris Chang

Well, the best laid plan by man is sometimes undone by God, okay? So let me tell you a story, although it's not bad. It's customer focus. We, actually, first got committed to the 20. We got committed, and then suddenly, we realized that there was a need for FinFET or a faster FinFET. Since then, one of the guerillas in the business announced that there was a FinFET business. Now if we hadn't committed us already to 20, we might have skipped 20. I think we would have skipped 20. But we were committed already. So that was a good thing, getting committed. The customer was committed, too. That was a good thing. That was value we've gained a great deal, I think, on the 20. But we have to hasten up to do the 16 now. And I think the key, the team in TSMC, the R&D team, did a tremendous job in now getting the 16 to where it is now. That's the small -- the brief history. Did that answer your question? So, okay, not exactly. So what was your question exactly?

Andrew Lu - Barclays Capital, Research Division

Let me ask it in another way. When you, in fact, 3, 2 years ago, when you considered 20 and 16 investments, do you consider switchable as an important part?

Morris Chang

Yes, always. We now, for instance, when we considered 10-nanometer, we considered the 16 to 10 switchability. And we keep saying switchability. Actually, it's just convertibility, one way you say is convertibility. I don't see it being converted back. It's -- we can -- that is an important factor when we consider it.

Andrew Lu - Barclays Capital, Research Division

So if we want to know the answer, if we invest our 14 instead of 16, what's the important kind of use for 14-nanometer versus the 16-nanometer?

Morris Chang

We invest in 14. We are now investing in 14. I'm sorry, did I misunderstand you? You said if we invest in 14?

Andrew Lu - Barclays Capital, Research Division

No, earlier decision, 20 and 14, what percentage…

Morris Chang

Well, earlier decision...

Andrew Lu - Barclays Capital, Research Division

20-nanometers can be used in 14-nanometers?

Morris Chang

My goodness. The earlier decision was not 20 and 14. Earlier decision was 20 and 16. And the reason here was, well, actually, there's -- I mean, 16 and 14 is the same, yes? Probably not.

Elizabeth Sun

Okay. Since there are so many hands being raised, so many times, I have to -- the next, I have to go to HSBC's Steven Pelayo.

Steven C. Pelayo - HSBC, Research Division

Great. When you talk about 20-nanometer, you talked about it being, I think as much as 30% faster ramp than what you had at 28-nanometer, 20% of revenues by the fourth quarter. That's all the top line. I'm curious about the margin impact, too. And obviously, you've got a good ASP premium. But I think it took about, I don't know, maybe 5 quarters to get 20-nanometer to corporate average margin. Could you talk a little bit about the pace, given the accelerated ramp to get 20-nanometer to corporate average margins?

Morris Chang

Well, actually, 5 is fully normal. I mean, yes, 28 it took -- a year's fine, right? Was it 5?

Li Mei He

7 or 8 quarter for 28-nanometer. I can tell you, 20-SoC will be the same as 28-nanometer, will reach corporate average at 7 or 8 quarters like 28-nanometer.

Steven C. Pelayo - HSBC, Research Division

And then if I could just get a clarification on that. The smoothing effect to the first quarter to try to take in some of the potential ramp in the second quarter, can you measure how much is that? And then does that then impact the potential growth in the second quarter? So are we taking 2 or 3 percentage points of growth away from the second quarter by pulling that into the first quarter, or do you think it doesn't really impact, in fact, this will be nothing in to see in 2Q?

Morris Chang

No. This, the so-called smoothing, it helps the margin, it does not affect the [indiscernible].

Li Mei He

If I can add one more point. The real purpose, not to lose capacity. When you have for a search demand and your capacity is not enough, and you lose the business, you lose the business. By switching and smooth among quarters, we don't lose the product, we don't lose the market share. That's the main purpose. So we don't have to build so much capacity, especially, such peak capacity probably only exist for a few quarters, which is bad for the company. Now you understand that?

Elizabeth Sun

Okay. The next question will come from JPMorgan's Gokul.

Gokul Hariharan - JP Morgan Chase & Co, Research Division

Dr. Chang, Mr. Wei and Liu and Lora. And the next question, just what to know, give us a little bit on the back end side. The earmark for TSMC working on the back end side officially on 2.5D/3D these level partners. And you also had given a kind of a target of about $1 billion revenue sometime in 2015 and 2016. Could you update us on what your plans are on the back end side? And secondly, also, how does that work, when you work with the back end partners, are you going to be full-pledged going into the just wafer level stuff or are they going to die level stuff as well?

Morris Chang

Do I need to repeat the question? Okay. Anyway, to answer your question about the revenue of reaching the $1 billion for the CoWoS and 3D IC. Since we announced the CoWoS technology and we work on the 3D IC, we're using a lot of key technologies and develop a lot of derivative applications. So today we estimate, probably not go up to $1 billion, but it's around $800 million in year 2016, that's what we are -- our estimate today, all right. What's your second question, by the way?

Gokul Hariharan - JP Morgan Chase & Co, Research Division

Yes. Second is, is it going to be, the back end of -- back end activities, is it going to be limited only to the very high-end 2.5D/3D created products, or is it also going to be [indiscernible] package, like [indiscernible]?

Morris Chang

Okay. The correct answer is, we are not shooting for some kind of technology [indiscernible]. We're always working with that customer to meet their demand, all right? So to answer your question, it's whatever or whatever that our customer ask us to integrate, to give them better service, we will do it, all right? So it's not limited to the 2.5D, 3D or whatever it is, all right?

Elizabeth Sun

Next question will come from the floor, again. It will be from Goldman Sachs, Donald Lu.

Donald Lu - Goldman Sachs Group Inc., Research Division

So Chairman, [Chinese] First question is, I want to ask the Chairman, how would you -- are you satisfied with the calculation of the costs? And also, how the 2 co-Presidents will share their work, they do or not? And that other is still -- the 3 co-CEOs [indiscernible] but probably not now. And maybe give us some details about how the company has won. And I will have a follow-up question on computation.

Morris Chang

All right. I am quite satisfied with the transition. And these 2 gentlemen, Mark is now responsible for sales, marketing, strategic planning, business development, and yes, information technology and materials management, all those. And C.C. is responsible for operations, all the operations. And he is also responsible for specialty technology R&D. Specialty technology incidentally accounts for 25% of our total business. So now, Donald, your other question is whether they're going to rotate. My plan currently is, I don't plan that way, I don't plan it that way right now. However, ideally, it's a pretty flexible thing. Tomorrow, I may take one part of Mark's and give it to C.C. or vice versa. But I'm not -- I'm not considering rotation, per se. Yes, does that answer your first question?

Donald Lu - Goldman Sachs Group Inc., Research Division

Yes. My second question is, this is, as far as I can remember, the first time TSMC comments on competitors, mainly, Intel and Samsung.

Morris Chang

That's because they picked on us.

Donald Lu - Goldman Sachs Group Inc., Research Division

I understand. That is a very good reason. Okay, since we are already doing it, why don't you give us more color? 16-nanometer, for example, are we saying that in terms of die size, performance, our product will be very similar to Intel's 40-nanometer FinFET? And also, Mark commented that for the FinFET tape-out, specifically there's a [indiscernible] server chip, and can we say that TSMC's [indiscernible] server chip will have the similar physical performance as Intel products today?

Morris Chang

Well, I think, Donald, we have already given everybody enough information on our 16-FinFET. I think that if we keep giving more, we would be helping our competitors, who have picked on us. And so now I do -- we do stand on what we said. We are going to -- our Grand Alliance will all compete Intel and Samsung -- our Grand Alliance on the 16-FinFET will all compete. By that, I don't mean that we'll compete and exceed, I don't know. We can't do it -- we won't be able to do that. But we will -- our Grand Alliance, with us as foundry supplier, will capture a large share of the 16-nanometer. C.C., would you add something?

C. C. Wei

Yes. I think if you have a product in mind today, to get to 16-FinFET, I'll tell you that your job will be more secure coming to TSMC. And make sure your product be able to deliver in the market.

Elizabeth Sun

Okay. The next question will come from Morgan Stanley's Bill Lu.

William Lu - Morgan Stanley, Research Division

[indiscernible]

Morris Chang

[indiscernible] on what?

William Lu - Morgan Stanley, Research Division

[indiscernible]

Morris Chang

Yes, right. Yes, I said that just now.

William Lu - Morgan Stanley, Research Division

[indiscernible]

Morris Chang

No, I'm afraid I'm no expert on that. I mean, but there are a lot of other [indiscernible] in the [indiscernible]. And maybe those people are getting [indiscernible], maybe the handset maker is getting [indiscernible], maybe the [indiscernible] is getting [indiscernible]. You asked me a general question, which I am not expert enough to answer.

William Lu - Morgan Stanley, Research Division

Or just to make sure I understand, so you kind of categorized into high-end, mid-end and low-end, do you see that the semi content is going up for each one of these segments, or what's the...?

Morris Chang

We're going to pass on that. Lora?

Li Mei He

The high-end content definitely will go up. But the growth rate for high-end will be slower than the mid-end, low-end. The mid-end, low-end stay constant, but because the mid-end and low-end has higher volumes, which is to TSMC's advantage.

Morris Chang

I actually look at more -- look more at, I guess, I had [indiscernible]. I look more at our value in the smartphone. And it's a grown up business of TSMC, right? It's grown up from average, average meaning average in high-end, medium-end, low-end, average of $6 in 2012 to $8, is this right? $8 last year to $11 next year, or this year, I'm sorry. $6, $8, $11 [indiscernible].

William Lu - Morgan Stanley, Research Division

That's very helpful. Second question is for Dr. Wei. You talk about 28-nanometers, and I think the expectation is that you are going to try to switch customers in poly to high-K metal gate. If you look at the market this year for 28, what do you think is the split between high-K metal gate and poly, is it 70-30, is it 80-20? And can you also talk about your expected market share for TSMC for high-K metal gate and also for poly?

C. C. Wei

If you [indiscernible] on TSMC, I would say greater than 80% of the 28-nanometers go to 1 billion high-K metal gate.

William Lu - Morgan Stanley, Research Division

How about for the industry?

C. C. Wei

I cannot comment on that.

Elizabeth Sun

Okay. The next question, I think we should go back to the line. Operator, could you please proceed with the next caller on the line?

Operator

Your next question from the line comes from Mehdi Hosseini from SIG.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

I have 2. And the first one is for Dr. Liu and Dr. Wei. You offered some metrics comparing HPM with HP, talking about the speed improving by 30% and power by 15%. Would you be able to offer similar targets or similar metrics comparing 28 to 20, and 20 to 16? And I have a follow-up.

Morris Chang

I think it's -- it sounds like C.C. but [Indiscernible].

C. C. Wei

Well, the question is that he asked, on the 28-nanometer HPM compared with our 28.

Morris Chang

Well, go ahead and answer it then, if you know what the question is.

C. C. Wei

All right. If I repeat the question correctly, that means he asked about the -- from 28HPM compete with -- not compete, compared with the 28HP, there was a 30% speed improvement. Now how about the 16-FinFET? 16-FinFET actually improved much more compared with the 28HPM.

Morris Chang

Did that answer the question?

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Okay. And what about 28--

Morris Chang

Is that the question?

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Yes. And how about 28--

C. C. Wei

I cannot hear you clearly.

Elizabeth Sun

Mehdi, are you still on the line?

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Yes. Can you hear me?

Elizabeth Sun

Okay. Mehdi, I think your question was asking Dr. Wei to explain what's the power and speed improvement from 28 to 20, and from 20 to 16.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Yes.

C. C. Wei

Okay, 28 to 20 got about a 20% improvement in the performance. On the 20 to 16, we specifically talked about the 20-SoC to 16-FinFET. The 16-FinFET will have a higher than 30% improvement in the speed. Does that answer the question a bit?

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Yes, it does. Yes, and let me move on to the second question that I have for Dr. Chang. Over the past 2 years, we have seen a significant improvement in revenues from Q1 to Q2, and this was followed by seasonal or below seasonal trends in the second half. How do you see this year evolving? Do you see this year be any different than the past -- than the trend over the past 2 years?

Elizabeth Sun

Mehdi, your question is about seasonality of this year, whether we will have a strong rebound in second quarter from first quarter, and then whether we will have a stronger second half than the first half.

Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division

Yes, correct.

Morris Chang

Our current outlook is very, very anti-normal seasonal. Our current outlook is that we have the first quarter is the lowest, and the second quarter is stronger, the third quarter is stronger yet, and even fourth quarter is stronger than the third quarter. Now that's a -- I certainly would not call that anything seasonal at all. I think that, that's [indiscernible] unique for this year, and mainly because of the ramp-up of 20-SoC.

Elizabeth Sun

Now we come back to the floor. The next question comes from Daiwa's Eric Chen.

Eric Chen - Daiwa Securities Co. Ltd., Research Division

Bringing on the [indiscernible], you just mentioned your smartphone high-speed ASP getting higher [indiscernible] than the U.S. dollars. And I believe that's probably because of the sudden [indiscernible] by the smartphone from a single core to a dual core to quad core. And my point is, probably we will now have the 16 core. And the 16-core figure probably will be the next launch. And I might -- I tried to say is, we probably work in the [indiscernible] knowledge milestone, the way where we did catch up, and then that probably will give you some edge in impact. So actually my question is, your strategy and that in some of the low-end smartphone [indiscernible], what [indiscernible] China model IC maker. Your monthly share, probably, that's my understanding, again let me know, if I'm wrong. And then your market share as a China smartphone IC maker is probably lower than your market share as a global smartphone IC maker. So what is your strategy to be able to wafer, [indiscernible] 3G?

Morris Chang

We intend to be a significant factor in the China market. We intend to be a significant factor in the medium to low-end, middle to low-end kind of smartphones.

Eric Chen - Daiwa Securities Co. Ltd., Research Division

Okay. [indiscernible], the partner where you provided [indiscernible], does mainly for the low-end smartphone IC business. And the, for the costs, why [indiscernible] and what kind of advantage maybe for the [indiscernible] margin?

Morris Chang

Our 28 HP is still the high-K metal gate version, so the performance will be much better than 28LP, but getting the low-cost version. So you can trade off that performance and the die size sometimes. And so you can get a -- your optimum position, depending on your product. From our point of view, and we work with the customer, that we offer this solution for them to meet the challenges of the market of mid, low-end smartphones. It's a low-end, so you expect the pricing to be low. But then for us, we offer the technology to compensate that.

Eric Chen - Daiwa Securities Co. Ltd., Research Division

How many percent of performance improvement, how many percent the price lower than that under the gate and stronger [indiscernible]? And how about the trend?

C. C. Wei

From the LP to HP. I'm not going to tell you how many percentage of the price or something like that. I'll tell you that...

Morris Chang

You realize it depends on the guy that designs it, too. But as far as non-intrinsic stuff, it's [indiscernible].

C. C. Wei

You are mentioning about the performance.

Morris Chang

Speed.

C. C. Wei

Oh the speed. The speed, actually, 28HP at 30% of the 28HPM.

Morris Chang

So how many percent [indiscernible]?

C. C. Wei

That's 30%. And so TSMC, the customer can trade off that 30% speed performance, and then trade in with the die size, so that you can get the die size. And that you don't -- if you don't enjoy the 30% performance, you can enjoy the die size shrinking. That's the idea.

Eric Chen - Daiwa Securities Co. Ltd., Research Division

Okay. I assume there were no price [indiscernible] to either 10% higher than the 45?

Morris Chang

No, no, we'll not going to talk about what the price. We'll tell our customers what's the price. You're not our customer, we're not going to tell you.

Eric Chen - Daiwa Securities Co. Ltd., Research Division

And the same question, the question is for the lower ARM and I remember then that Dr. Chang just mentioned that the ASP this year will jump by several points. And my question, [indiscernible]?

Morris Chang

No, no, no. That's not what I said. I said our blended ASP will rise. It will not jump, it will rise. Our blended ASP will rise by several points.

Eric Chen - Daiwa Securities Co. Ltd., Research Division

Okay. They will rise several points, [indiscernible] TSMC revenue growth at 18% year-on-year, when utilization risk becomes, is it competitive, probably from 14%, correct me if I'm wrong. So my point is that the [indiscernible] because one of the main reason because of blended ASP. And I believe the blended ASP last year are probably wrecked by probably 5% more. So are there either the [indiscernible] or the lower, how do you think about it this year? And you mentioned a 20-nanometer prospect in Q4 probably will reach the 10% of your total revenue. 20%, I'm sorry, 20%. And it will reach about 10% of your total revenue. In that case, can we [indiscernible] that TSMC's blended ASP [indiscernible] over 5% year-on-year this year?

Li Mei He

Actually, Chairman just gave you the answer. He said the blended ASP, with the product mix feature, it will go up several points. So he has already answered your question. So what's your question?

Elizabeth Sun

Eric wants to know...

Eric Chen - Daiwa Securities Co. Ltd., Research Division

I would like to know compared to the last year, [indiscernible] stronger than on the ASP?

Elizabeth Sun

Well, Eric assume that 2013, our ASP went up by 5%, which we will not comment. And he wants to know whether 2014 we can go up above 5% or below 5%, which we will not comment. Okay. Next question will come from the floor, and it will be UBS, Jonah Cheng.

Jonah Cheng - UBS Investment Bank, Research Division

[Chinese] One small question for me. So recently in terms of [indiscernible], maybe [indiscernible] or how can you believe you'll get this kind of mobility [indiscernible]?

Morris Chang

No, we have not considered that. We understand, in fact, that only Chinese [indiscernible] companies will benefit from -- not companies located in China but truly Chinese registered companies can -- only they can benefit from this subsidy from foundry or tablets.

Elizabeth Sun

I think Jonah, your question is, can TSMC benefit from the benefits of the Chinese companies.

Morris Chang

Well, I don't know about that. [Indiscernible] We do have a lot of business in China, from companies, from tablets, Chinese tablet companies. Our business has been rapidly growing. I don't know. I somehow doubt that in giving us their business, they are benefiting from the subsidy. I somehow doubt that but I don't know for sure.

Jonah Cheng - UBS Investment Bank, Research Division

Yes, and [indiscernible].

C. C. Wei

I think we will benefit.

Morris Chang

Oh, we will?

C. C. Wei

The tablet companies in China are very aggressive, approaching leading-edge technologies. To tell you, our 16-FinFET this year, already some of the tablet companies will be using this in tape-outs. So I think all those tablet companies' subsidy will propel them into the leading-edge technology more.

Morris Chang

I don't see that -- how this [indiscernible]. The subsidy is not for them to use leading-edge, is it?

C. C. Wei

Because our technology, leading-edge technology, it's not yet available in China.

Morris Chang

Yes, that I know. So how does that, how is that related to the subsidies like that?

C. C. Wei

Their business will be aggressive. We'll be into leading-edge, which will benefit our competitive advantage.

Morris Chang

They will be generally better off after receiving the subsidy, as that allows them to move faster into leading-edge technology, that's the story. That's the advice they're saying, something that sells. Those [indiscernible] will be better off, thereby making more money. But what happens -- never mind. Okay.

Elizabeth Sun

All right. Well, I think -- yes, I think with this [indiscernible] prospect in China, we will be very happy to end our quarterly conference call here. And before we conclude the conference, please be advised that the replay of the conference will be accessible within 3 hours from now. Transcript will become available in 24 hours from now, and thank you for joining us today, we hope you will join us again next quarter. Goodbye and have a good day.

Morris Chang

Thank you very much. Good meeting.

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