Taiwan Semiconductor Manufacturing (TSM) Q4 2022 Earnings Call Transcript

Taiwan Semiconductor Manufacturing (TSM -4.86%)
Q4 2022 Earnings Call
Jan 12, 2023, 1:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Jeff Su

Good afternoon, everyone, and welcome to TSMC's fourth quarter 2022 earnings conference call. This is Jeff Su, TSMC's director of investor relations and your host for today. 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're joining us through the conference call, your dial-in lines are in 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 fourth quarter 2022, followed by our guidance for the first quarter 2023. Afterwards, Mr.

Huang and TSMC's CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then TSMC's chairman, Dr.

Mark Liu, will host the Q&A session where all three executives will entertain your questions. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now, I would like to turn the call over to TSMC's CFO, Mr.

Wendell Huang, for the summary of operations and the current quarter guidance.

Wendell Huang -- Vice President and Chief Financial Officer

Thank you, Jeff. Happy new year, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter and a recap of full year 2022.

After that, I will provide the guidance for the first quarter 2023. Fourth quarter revenue decreased 1.5% sequentially in U.S. dollar terms as our business was dampened by the end-market demand softness and customers' inventory adjustment despite the continued ramp-up of our industry-leading 5-nanometer technologies. It is at the low end of our previous guidance.

In NT dollar terms, revenue increased 2% in the fourth quarter due to a more favorable foreign exchange rate. Gross margin increased 1.8 percentage points sequentially to 62.2%, mainly due to a more favorable foreign exchange rate and cost improvement efforts, partially offset by lower capacity utilization. Total operating expenses accounted for 10.3% of net revenue. Operating margin was 52%, up 1.4 percentage points from the previous quarter.

Overall, our fourth quarter EPS was 11.41 NT and ROE was 41.7%. Now, let's move on to the revenue by technology. 5-nanometer process technology contributed 32% of wafer revenue in the fourth quarter, while 7-nanometer accounted for 22%. Advanced technologies, defined as 7-nanometer and below, accounted for 54% of wafer revenue.

On a full year basis, 5-nanometer technology contributed 26% of 2022 wafer revenue, 7-nanometer was 27%. Advanced technologies accounted for 53% of total wafer revenue, up from 50% in 2021. Moving on to revenue contribution by platform, HPC increased 10% quarter over quarter to account for 42% of our fourth quarter revenue. Smartphone decreased 4% to account for 38%.

IoT decreased 11% to account for 8%. Automotive increased 10% to account for 6%. And DCE decreased 23% to account for 2%. On a full year basis, all six platforms had year-on-year growth.

HPC increased 59% year on year to account for 41% of our 2022 revenue. Smartphone increased 28% to account for 39%. IoT increased 47% to account for 9%. Automotive increased 74% to account for 5%.

And DCE increased 1% to account for 3%. Moving on to the balance sheet, we ended the fourth quarter with cash and marketable securities of 1.56 trillion NT or $51 billion U.S. dollars. On the liabilities side, current liabilities increased by 137 billion NT, mainly due to the increase of 48 billion in accounts payable and increase of 93 billion in accrued liabilities and others.

On financial ratios, accounts receivable turnover days remained at 36 days, while days of inventory increased three days to 93 days. Regarding cash flow and capex, during the fourth quarter, we generated about 487 billion NT in cash from operations, spent 337 billion in capex, and distributed 71 billion for fourth quarter 2022 cash dividend. Overall, our cash balance increased 47 billion to 1.34 trillion at the end of the quarter. In U.S.

dollar terms, our fourth quarter capital expenditures totaled 10.82 billion. To recap our performance in 2022, we had a strong growth in 2022 as our technology leadership position enabled us to capture the industry's megatrends of 5G and HPC. Our revenue increased 33.5% in U.S. dollar terms to reach $76 billion and 42.6% in NT terms to reach 2.26 trillion NT.

Gross margin increased 8 percentage points to 59.6%, mainly reflecting a more favorable foreign exchange rate, value-selling efforts, and cost improvement, partially offset by lower capacity utilization. Thanks to better operating leverage, operating margin increased 8.6 percentage points to 49.5%. Overall, full year EPS increased 70.4% to 39.20 NT and ROE was 39.8%. On cash flow, we spend $36.3 billion U.S.

dollars, or 1.1 trillion NT, in capex. We generated 1.6 trillion NT in operating cash flow and 528 billion in free cash flow. We also paid 285 billion NT in cash dividends in 2022, up from 266 billion in 2021. I have finished my financial summary.

Now, let's turn to our current quarter guidance. As overall macroeconomic conditions remain weak, we expect our business to be further impacted by continued end-market demand softness and customers' further inventory adjustment. Based on the current business outlook, we expect our first quarter revenue to be between $16.7 billion and $17.5 billion U.S. dollars, representing a 14.2% sequential decline at the midpoint.

Based on the exchange rate assumption of $1 U.S. dollar to 30.7 NT, gross margin is expected to be between 53.5% and 55.5%, operating margin between 41.5% and 43.5%. Starting in 2023, certain tax exemptions from the Taiwan government have expired. However, the government has recently passed the amendments to the Statute for Industrial Innovation.

All things considered, we expect our effective tax rate in 2023 and beyond to be approximately 15%. This concludes my financial presentation. Now, let me turn to our key messages. I will start by making some comments on our fourth quarter '22 and first quarter '23 profitability.

Compared to third quarter, our fourth quarter gross margin increased by 180 basis points sequentially to 62.2%. Of which, 140 basis points was contributed by a more favorable foreign exchange rate. Meanwhile, cost improvement efforts also helped offset the impact from a lower capacity utilization. Compared to our fourth quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago, mainly due to cost improvement efforts.

We have just guided our first quarter gross margin to be 54.5% at the midpoint, mainly due to a lower capacity utilization rate as customers further adjust their inventory levels and the less favorable foreign exchange rate. In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor cyclicality, the ramp-up of N3, overseas fab expansion, and inflationary cost. In addition, R&D expenses accounted for 7.2% of our net revenue in 2022. In 2023, as we increase our focus on technology development and add more resources, we expect R&D expenses to increase by about 20% year on year and account for 8% to 8.5% of our net revenue.

To manage our profitability in 2023, we will work diligently on internal cost improvement efforts while continuing to strategically and consistently sell our value. Excluding the impact of foreign exchange rate, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2023 capital budget and depreciation. Every year, our capex is spent in anticipation of the growth that will follow in future years.

As I have stated before, given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate. That said, our commitment to support our customers' structural growth remains unchanged and our discipline, capex, and capacity planning remains based on the long-term market demand profile. In 2022, we spent $36.3 billion to capture the structural demand and support our customers' growth. In 2023, our capital budget is expected to be between $32 billion and $36 billion U.S.

dollars. Out of the 32 billion to 36 billion capex for 2023, about 70% will be allocated for advanced process technologies, about 20% will be spent for specialty technologies, and about 10% will be spent for advanced packaging, mask-making, and others. Our depreciation expense is expected to increase by approximately 30% year over year in 2023, mainly as we ramp our 3-nanometer technologies. With this level of capex spending in 2023, we reiterate that TSMC remains committed to a sustainable cash dividends on both annual and quarterly basis.

We will continue to work closely with our customers to plan our long-term capacity and invest in leading-edge and specialty technologies to support their growth while delivering profitable growth to our shareholders. Now, let me turn the microphone over to C.C.

C.C. Wei -- Chief Executive Officer

Thank you, Wendell. Good afternoon, everyone. First, let me start with our 2023 outlook. Concluding 2022, the semiconductor industry growth, excluding memory, was about 10%, while foundry industry increased about 27% year over year.

TSMC's revenue grew 33.5 year over year in U.S. dollar terms. Our business was supported by our strong technology leadership and differentiation even as our semiconductor inventory correction began to dampen the momentum in second half of 2022. Entering 2023, we continue to observe softness in consumer end-market segment where R&D end-market segments such as data center-related have softened as well.

As customers and the supply chain continue to take action, we forecast a semiconductor supply chain inventory, while reduce sharply through first half of 2023, to rebalance to a healthier level. In the first half of 2023, we expect our revenue to decline mid to high single-digit percent over the same period last year in U.S. dollar terms. Having said that, we also start to observe some initial signs of demand stabilization, and we will watch closely for more signals.

We forecast the semiconductor cycle to pattern sometime in first half 2023 and to see a healthy recovery in second half this year. In the second half of 2023, we expect our revenue to increase over the same period last year in U.S. dollar terms. For the full year of 2023, we forecast the semiconductor market, excluding memory, to decline approximately 4%, while foundry industry is forecast to decline 3%.

For TSMC, supported by our strong technology leadership and differentiation, we will continue to expand our customer product portfolio and increase our addressable market, and we expect 2023 to be a slight growth year for TSMC in U.S. dollar terms. Next, let me talk about the N7, N6 demand outlook. Three months ago, we set out N7, N6 capacity utilization in first half '23 will not be as high as it has been in the past three years due to the end-market weakness in smartphones and PCs and customers' product schedule delay.

Since then, the end-market demand for smartphones and PCs has further weakened and the capacity utilization of N7, N6 is lower than our expectations three months ago. We expect this to persist through first half '23 as semiconductor supply chain inventory takes a few quarters to rebalance to a healthier level. And we expect a mild pickup in our N7, N6 demand in the second half of '23 than our prior expectation. However, we continue to believe N7, N6 demand is more a cyclical issue rather than structural.

We are working closely with our customer to develop specialty and differentiated technologies to drive additional wave of structural demand from consumer, RF, connectivity, and other applications to backfill our N7, N6 capacity over the next several years. Thus, we are confident our 7-nanometer family will continue to be a large and long-lasting node for TSMC. Now, I will talk about our N3 and N3E status. Our N3 has successfully entered volume production in the late fourth quarter last year, as planned, with good yield.

We expect a smooth ramping in 2023, driven by both HPC and smartphone applications. As our customers' demand for N3 exceed our ability to supply, we expect N3 to be fully utilized in 2023. Sizable N3 revenue contribution is expected to start in third quarter '23, and N3 will contribute a mid-single-digit percentage of our total wafer revenue in 2023. We expect the N3 revenue in 2023 to be higher than N5 revenue in its fourth year in 2020.

N3E will further extend our N3 family, we see enhanced performance, power, and yield and offer complete platform support for both smartphone and HPC applications. Volume production is scheduled for second half of '23. Despite the ongoing inventory correction, we continue to observe a high level of customer engagement at both the N3 and N3E, with a number of tape-outs more than 2x that over N5 in its first and second year. Our 3-nanometer technology is the most advanced semiconductor technology in both PPA and transistor technology.

Thus, we expect customers' strong demand in 2023, 2024, 2025, and beyond for our 3-nanometer technologies and are confident that our N3 family will be another large and long-lasting node for TSMC. Finally, let me talk about our plans to expand TSMC's global manufacturing footprint to increase customers' trust and expand our future growth potential. TSMC's mission is to be a trusted technology and capacity provider, with a global IC -- large IC industry for years to come. Our job is to provide the optimal solutions for our customers to enable their success.

These including technology leadership, manufacturing, cost, trust, and recently, also including more geographic manufacturing flexibility. Based on customers' requests, we are increasing our capacity outside of Taiwan to continue to provide our customer the optimal solution they need to be successful. TSMC's decisions are based on our customers' need and the necessary level of government support. This is to maximize the value for our shareholders.

Our decision are also based on the talent pool, land, electricity, and water needs for TSMC's long-term growth. In the U.S., we are in the process of building two advanced semiconductor fabs in Arizona. Our U.S. customers welcome us to build capacity in the U.S.

to support their needs and have placed their strong commitment and support. We held an opening ceremony on December 6 last year to celebrate the arrival of the first batch of state-of-the-art semiconductor manufacturing equipment, and Fab 1 is on track to begin production of N4 process technology in 2024. We also announced the construction of a second fab, which is scheduled to begin production of 3-nanometer process technology in 2026. TSMC Arizona will continue to provide the most advanced semiconductor technology commercially available in the U.S., enabling next-generation, high-performance, and low-power computing products in the future years.

Each of our fab will have a clean room area that is approximately double the size of a typical logical fab. We are also considering building additional mature node capacity outside of Taiwan. In Japan, we are building a specialty technology fab, which will utilize 12- and 16-nanometer and 22-, 28-process technologies. Volume production is scheduled for late 2024.

We are also considering building a second fab in Japan as long as the demand from customers and the level of government support make sense. In Europe, we are engaging with customers and partners to evaluate the possibility of building a specialty fab focusing on automotive-specific technologies based on the demand from customers and level of government support. In China, we expand the 28-nanometer in Nanjing, as planned, to support local customers, and we continue to follow all the rules and regulations fully. At the same time, we continue to invest in Taiwan and expand our capacity to support our customers' growth.

Our N3 has just entered volume production in Tainan Science Park. We are also preparing for N2 volume production starting in 2025, which will be located in Hsinchu and Taichung Science Park. While capacity is not born overnight and takes time to build, we are committed to expanding our global manufacturing footprint to increase customer trust and expand our future growth potential. Depending on the demand from customers and level of government support, our 28-nanometer and below overseas capacity could be 20% or more of our total 28 and below capacity in five years or more time.

While the initial cost of overseas fab are higher than TSMC's fab in Taiwan, our goal is to manage and minimize the cost gap. Our pricing will remain strategic to reflect our value, which also includes in the value of geographic flexibility. At the same time, we are leveraging our competitive advantage of lost volume, economies of scale, and manufacturing technology leadership to continuously drive costs down. We will also continue to work closely with all government to secure their support.

By taking such action, TSMC will have the ability to absorb the higher cost of overseas fabs while remaining the most efficient and cost-effective manufacturer no matter where we operate. Thus, even we increase our capacity outside of Taiwan, we believe long-term gross margin of 53% and higher continues to be achievable, and we can earn a sustainable and healthy ROE of greater than 25% while delivering profitable growth for our shareholders. This concludes our key message. Thank you for your attention.

Jeff Su

Thank you, C.C. This concludes our prepared remarks. [Operator instructions] Now, we will begin the Q&A session. Our chairman, Dr.

Mark Liu, will be the host.

Mark Liu -- Chairman

Hello, everyone. It's good to meet everyone of you online again. At the beginning of the year, I wish you all stay healthy and have a happy new year. Now, let's have -- answer your question starting.

Thank you.

Jeff Su

Thank you, Chairman. Operator, let's begin. Please proceed with the first caller on the line.

Questions & Answers:

Operator

Thank you. The first question is coming from Randy Abrams with Credit Suisse. And, Randy, please go ahead.

Randy Abrams -- Credit Suisse

OK. I guess, thank you. I wanted to ask the first question just about the rising investment costs and also the cost differential with the U.S. Just based on the two press releases, the Taiwan fab, you cited Fab 18, about $60 billion U.S.

dollar investment for eight phases, which would be, I estimated, about 200,000 capacity. That's about 3 million per thousand wafer. The Arizona fab was 40 billion for about 50,800 million per thousand wafers. So, just two questions on it.

If you could maybe discuss a bit more if there's differences in those releases on the investment and calculation and a bit more color on the relative costs of the U.S. expansion? And then the second part of the question is, is the cost seeing a significant acceleration? It's been rising with each new node, but are you seeing an accelerating pace as you move through 3- and 2-nanometer?

Jeff Su

OK. Randy, thank you. Please allow me to summarize your question. So, Randy's first question is, he wants to understand -- I think he's referring, I think, to our press release when we -- about N3 in Tainan and the total investment there and how does that compare to our announcement of the investment in Arizona for two phases? Randy, if I got you correctly, basically what Randy is asking is what is -- the cost in the U.S.

seem much higher in terms of the investments, so what is driving this big difference or gap, so to speak? That's the first part of your question, right, Randy? OK. So, that's the first part.

Randy Abrams -- Credit Suisse

Yeah, that's right. That's the first part. Yeah.

Wendell Huang -- Vice President and Chief Financial Officer

OK. Hi, Randy. This is Wendell. Let me show you this.

The Arizona fab, we made the decision based on customer's request. And that -- so, we're planning on building the two fabs, one N5 -- actually, N4 and the other one, N3. We're not able to share with you a specific cost gap number between Taiwan and U.S., but we can share with you that the major reason for the cost gap is the construction costs of building and facilities, which can be four to five times greater for a U.S. fab versus a fab in Taiwan.

The high costs of construction includes labor costs, costs of permits, cost of occupational safety and health regulations, inflationary costs in recent years, and people and learning curve costs. Therefore, the initial costs of overseas fabs are higher than our fabs in Taiwan.

Jeff Su

And I think the second part of Randy's question was about the -- how do we see the capex per K as we go from, I guess, Randy, you're asking N5, N3, N2.

Randy Abrams -- Credit Suisse

Yeah, if it's seeing a faster pace of expansion through these next couple of nodes.

Wendell Huang -- Vice President and Chief Financial Officer

Right. Randy, we're not able to disclose the specific capex per K for each node. But certainly, the capex is -- per K is more expensive for a new node as the process capacity increases. OK.

Randy Abrams -- Credit Suisse

OK. And the second question, just wanted to ask actually two areas that came up in the remarks, the R&D, the over 20% increase. If you could give a feel like what's mainly driving that additional step-up? Is it the development cost for the new nodes, the packaging, or is it some now expanding R&D into new geographic areas? And if I can fit in a second part, just the tax rate. Taiwan was hyping a pretty big program of capex in R&D, but tax breaks.

But your tax rate is going up from 11% to 15%. Is that alternative minimum tax or global tax? Just want to understand why not any benefit from that?

Jeff Su

OK. So, Randy's second question, I guess, is sort of two parts, financially related. Firstly, we -- our CFO said we are -- R&D spending will increase about 20% year on year. So, Randy wants to know what is driving behind that.

Is it because we are going overseas? Is it, you know, more technology development as a technology leader, etc.? And then the second part, he wants to understand the guidance of effective tax rate of 15%. Given the recent legislation passed in Taiwan, why is it not lower?

Wendell Huang -- Vice President and Chief Financial Officer

OK. Randy, for the first question, we're the technology leader, and we intend to continue maintaining that leadership. Therefore, we are devoting more and more resources in R&D, including people and other kind of resources. That's the reason why our R&D expense will increase in 2023 and probably beyond.

The other thing about tax, in 2023, part of the tax exemptions or incentives in Taiwan have expired. Without the new amendments to this industrial innovation -- the Statue of Industrial Innovation, our tax rate would have become between 18% to 19%. With these new amendments, our tax rates will drop to about 15%.

Jeff Su

OK. Does that answer your question, Randy?

Randy Abrams -- Credit Suisse

Yeah, that does. I mean, just midterm R&D, do you think the rate stays at this level or could go up one more? That's my final one. Thank you.

Wendell Huang -- Vice President and Chief Financial Officer

From what we are seeing at this moment, we expect the R&D to revenue ratio to be between 8% to 8.5% in the next several years. OK.

Randy Abrams -- Credit Suisse

OK, great. Thank you, Wendell.

Jeff Su

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

Operator

Sure. And our next question is coming from Bruce Lu with Goldman Sachs. And, Bruce, please go ahead.

Bruce Lu -- Goldman Sachs -- Analyst

OK. Thank you for taking my question. The first question is focused on the overseas capacity expansions. So, I think you just mentioned that even though you cannot disclose it, but the cost is definitely higher for the overseas capacity.

But the management believes that the margin will stay the same. So, I mean, I think I asked this question back to 2019, you know. The manager was talking about like the pricing will be the same across the board regardless of geographical location. So, what has changed now? So, with the different pricing, can we say that overseas capacity will generate a similar return and profitability through all the cycle? So -- or what is the benchmark you are looking for when you set up the different pricing schemes?

Jeff Su

OK. So, Bruce is -- Bruce from Goldman Sachs, actually, is -- his question is regarding -- first question regarding overseas expansion. His question is we said overseas costs are higher, yet -- that -- so his question is regards to our pricing. Are we higher priced overseas or if it's overall and what is the benchmark that we use when we go overseas in terms of financial returns and price? Is that roughly correct, Bruce?

Bruce Lu -- Goldman Sachs -- Analyst

Yes, that's correct.

Wendell Huang -- Vice President and Chief Financial Officer

OK, Bruce. This is Wendell. We're not able to comment on pricing details, but our pricing is always strategic and consistent to reflect our value. Value to our customers, as C.C.

said in the statement, includes technology leadership, manufacturing efficiency and quality, cost, trust, and recently also includes more geographic manufacturing flexibilities. Therefore, our overall pricing will remain strategic to reflect our value, which includes the value of geographic flexibilities. Does that answer your question?

Bruce Lu -- Goldman Sachs -- Analyst

Well, to some extent. Let me ask the question in a different way so that -- you know, we do understand it will reflect TSMC's value, i.e, geographical location as a value. But at the end of day, it's a cost-plus for everybody across the board. I mean, how confident that TSMC feels that, you know, the customers can swallow the cost and the end customer will swallow the cost, i.e., without triggering the potential, you know, wafer price inflation or semiconductor inflation at the end of the day with more and more global capacity for TSMC.

Wendell Huang -- Vice President and Chief Financial Officer

Yeah. OK. Bruce, let me add that in C.C.'s statement, he also mentioned that we will -- aside from selling our value, we will continue to drive down our costs, but also to leverage our competitive advantages of large volume, economy of scale, and manufacturing technology leadership. And with all these actions, plus the government support, we are able to absorb the higher costs of overseas fabs and maintain our long-term financial goals, gross margin of 53% and higher.

Bruce Lu -- Goldman Sachs -- Analyst

Understand.

Wendell Huang -- Vice President and Chief Financial Officer

And maybe C.C. -- yeah.

C.C. Wei -- Chief Executive Officer

Let me add some color. This is C.C. Wei. Actually, in our view, the semiconductor become more essential and more pervasive in people's life.

And the semiconductor industry value in the supply chain is increasing. And if we look at our customers' performance, they are rising structural gross margin over the past five to six years, it continue to improve. That reflects what I just said, the semiconductors' value has been recognized and also very important in our daily life. And so, we set out our pricing strategy to reflect all the values we share to customer and customer, also, in their value for the end market.

Jeff Su

Thank you, C.C. Bruce --

Bruce Lu -- Goldman Sachs -- Analyst

Thank you.

Jeff Su

Do you have a second question?

Bruce Lu -- Goldman Sachs -- Analyst

Yes, please. So, the second question is for the N7. I think we spend some time for 7-nanometer, which is more cyclical. I think, after three months, I think, the correction is even bigger.

So, how -- you know, can you share the full year outlook for 7-nanometers? You know, when we can expect the customer or the 7-nanometer capacity production to back to normal or back to like fully utilized? Or can we avoid that same cyclical symptom in 5-nanometer and 3-nanometer in two or three years from now?

Jeff Su

OK. So, Bruce's second question was on 7-nanometer. So, his question is 7-nanometer seems to have deteriorated versus three months ago. So, you know, what is our view, kind of fully recovered in this year? And then I think, Bruce, the second part of your question is also how can we avoid the same cyclical symptoms at other nodes in the future? Is that correct?

Bruce Lu -- Goldman Sachs -- Analyst

Yes.

Jeff Su

OK.

C.C. Wei -- Chief Executive Officer

So, I will answer this one.

Jeff Su

Sure.

C.C. Wei -- Chief Executive Officer

First, it -- you know, N7 most of business for TSMC in the last two years is a from the PC and the smartphone. And that happened to correct -- or let me say that inventory correct, they happen to be the most severe one. And so, the end market dropped most severely than we thought. In fact the unit were not increased, but the content will be increased.

So, is demand be more softened than we thought three months ago. Why be repeated at 5 or 3? You know, cyclicality of the semiconductor always exist, but it's unlikely, this time, the scenario to be repeated because of a current downturn, actually, is a kind of being enhanced or being dictated by the pandemic. Due to the pandemic, the digital transformation progress have been enhanced, and so the demand being increased dramatically. But then due to the pandemic, the supply chain disruption happened, and people during this time probably changed their strategy or their thought on the inventory build up.

So, artificially, the inventory had been built up quickly and dramatically. And then the response to each industry are different. And so, they managed the inventory correction also differently. These kind of phenomena, all because of -- or largely because of pandemic.

And we don't think that it will happen again. And in the next 5-nanometer, 3-nanometer, I believe TSMC and TSMC's customer will be more prudent on planning that, what is the demand and also the supply.

Jeff Su

OK. Bruce, does that answer your second question?

Bruce Lu -- Goldman Sachs -- Analyst

Yes. Let me follow up a little bit. I mean -- so, C.C. just mentioned before the external factors, right? So, what the TSMC do to avoid the same thing for 5 and 3 in the future for someone like if you are, you know, cutting your capacity plan into a more conservative way or something like that.

Is that something we should expect in the future nodes?

Jeff Su

So, Bruce is asking sort of a follow on. So, then with 7-nanometer, how do we avoid the same thing happening at 5 or 3 in the future? Will we cut our capacity? How do we change our capacity planning and build to avoid a similar situation?

C.C. Wei -- Chief Executive Officer

Bruce, this is a very good question. Actually, let me share with you how we deal with it. In fact, between the N5, N3, the technology node, our capacity buildup, and we saw a lot of tools that can be commonly used by this two node. So, in fact, for TSMC to build capacity, we put N5, N3, and maybe in the future N2 as a total picture to look at it.

And we will keep our flexibility to increase or to adjust for the future. So, we will be better prepared. That all I can tell you.

Bruce Lu -- Goldman Sachs -- Analyst

OK. That's good to hear. Thank you.

Jeff Su

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

Operator

Sure. And our next question is coming from Gokul Hariharan with J.P. Morgan. And, Gokul, please go ahead.

Gokul Hariharan -- JPMorgan Chase and Company -- Analyst

Hey, thanks. Happy new year. And let me take my first question on the near term 2023. So, you mentioned, first half, we have seen a worse kind of environment compared to three months back.

Is it mainly HPC data center that has seen further reduction or are we seeing it across the board, including smartphone for the first half? And also, on second half, just putting in rough numbers on your guidance, looks like we are looking for a pretty sharp rebound in second half of 2023, something like 25% to 30%, second half versus first half of this year. Could we have some more color on what are the areas that gives you the confidence for that such a strong rebound in the second half of the year to get us back to like a flattish revenue growth for the year?

Jeff Su

OK. So, Gokul's first question is on the near-term outlook. He wants to understand, first half, we said the inventory correction is sharper. So, he wants to understand what are we seeing in different end-market segments? Is the sharper correction driven by data center? Is it smartphone, PC? What are we seeing across the different segments first?

C.C. Wei -- Chief Executive Officer

Well, let me answer the question. The inventory correction actually began last year. And at the peak of the third quarter, we think the inventory had been peak in third quarter last year and gradually reduced in the fourth quarter. And we did see some inventory reduced sharply, you know, recently.

And it will continue to be so to first half of this year. So, that's why we say we have confidence that in the second half, the business will rebound. But it's not a very strong V-shape. We didn't know yet.

But certainly, it's not a U-shape for the business to recovery in the second half.

Gokul Hariharan -- JPMorgan Chase and Company -- Analyst

OK. I think N3 is clearly one part of that ramp. But is there anything else that is -- that you are already seeing that strong confidence for the second half rebound in addition to the N3 ramp-up?

Jeff Su

Sorry. So, Gokul was asking sort of in terms of the second half, why can TSMC's business be better than the overall industry? Besides N3, are there any other factors when you think about technology leadership?

C.C. Wei -- Chief Executive Officer

Gokul, you are right. N3's ramp-up helped the business to rebound. And also, actually, let me share with you the -- some of the HPC customer. Also, I have a new product launch in the second half, especially in the AI area or in the, you know, computing area.

Did that answer your question?

Gokul Hariharan -- JPMorgan Chase and Company -- Analyst

Understood. OK. Thank you. That's my first question.

Jeff, can I move on to the second one?

Jeff Su

Yes, please.

Gokul Hariharan -- JPMorgan Chase and Company -- Analyst

Yeah. Thank you. My second question is on capex and capital intensity. Capex, we are taking it down a notch for this year given the downturn, I guess, and some conservatism.

Are we already seeing the peak in capex intensity in the cycle or we are likely to -- given the plans in Europe, plans to expand more capacity in the U.S., are we likely to see higher capex intensity in the out years as well?

Jeff Su

OK. Sorry. Is that your -- OK, Gokul. I think I got the gist of your question.

So, Gokul's second question is on capex and capital intensity. He notes, this year, we have guided 32 to 36 given sort of some tightening up and such. So, his question is, does this represent -- have we already seen or past the peak in terms of our capital intensity this cycle or as we may continue to evaluate and expand overseas and such, will there be another step up in our capital intensity?

Wendell Huang -- Vice President and Chief Financial Officer

OK. Gokul, this is Wendell. As we said before, we invest the capex this year for the growth in the future years. So, we're -- we also said earlier that we're tightening up the spending where appropriate.

But as long as we believe the growth opportunities is there, we will continue to invest. Now, we've given the guidance for this year so you can calculate the capital intensity. It will be over 40%. From what we are able to see at this moment several years down the road, we're seeing the capex intensity to be between mid to high-30s.

That's the current view.

Gokul Hariharan -- JPMorgan Chase and Company -- Analyst

Thanks, Wendell. Is that several years, like five years out or is it like --

Wendell Huang -- Vice President and Chief Financial Officer

Yeah, something like that. Something like that.

Gokul Hariharan -- JPMorgan Chase and Company -- Analyst

OK. Understood. Thank you very much.

Jeff Su

All right. Thank you, Gokul. Operator, can we move on to the next participant?

Operator

Thank you. And our next question is coming from Charlie Chan with Morgan Stanley. And, Charlie, please go ahead.

Charlie Chan -- Morgan Stanley -- Analyst

Thanks for taking my question, gentlemen. So, first of all, question to C.C. And so, thanks for your sharing during the Monte Jade Association, the presentation on semiconductor challenge was very insightful. So, my question is that you mentioned during your pitch saying that the biggest challenge for semiconductor is cost is getting higher and along the so-called distorted supply chains.

So, I wanted to ask C.C. what's the true value add of Moore's Law going forward, C.C, because it's much more expensive and whether you really see that customers can continue to expand their gross margin and create value to this world. So, this is my first question. Thank you.

Jeff Su

OK. So, Charlie's first question is around technology. He notes that, you know, the cost, I guess, and cost per transistor is getting higher and overall global costs are increasing as well. So, his question is, what is the value or is there still value in these so-called Moore's Law going forward? How does TSMC view this issue?

C.C. Wei -- Chief Executive Officer

Well, Charlie, let me share with you, now -- nowadays, we look at our technologies' value not only the geometries are shrinking, actually. More importantly, actually, is the power consumption efficiency. And also, we try to help our customer with our advanced 3D IC Fabric technology to improve the system performance. And that's what is important.

In the future, we want the world to be more greener, more safer, better. So, power consumption is becoming very, very important while we still improve the system performance. And that's where our customer can get their value. And that's what we view in the future.

Did I --

Charlie Chan -- Morgan Stanley -- Analyst

Thank you. Thanks for the information. So, a follow up to that is that we noticed that for your major smartphone SoC customers, they seem to slow down the migration to the newer nodes or so-called bifurcation for their -- a new SoC adoption. So, do you think -- for mobile computing particularly, do you think the value add is diminishing, you know, based on what you just said? And also, another structural change we are seeing is about those custom chip by ASIC in the HPC segments.

So, can management talk about that part of business, meaning ASIC design in terms of the total revenue contribution in HPC and the growth rate of that ASIC business? Thank you.

Jeff Su

OK. So, Charlie, I'm going to interpret. So, he has a follow-up to his first question and then his second question. So, the follow-up to his first question is then in terms of going back to costs again, do we see any sign of a slowdown in smartphone SoC migration at the leading node? That's his follow-up for -- and then his second question is then do we see more companies designing ASICs and can we disclose the revenue contribution from such customers? Correct, Charlie?

Charlie Chan -- Morgan Stanley -- Analyst

Yes, correct. Please.

C.C. Wei -- Chief Executive Officer

OK, Charlie, let me answer your question. In fact, we do not see any slowdown on our customer to adopt TSMC's leading-edge technology, actually. They might have a different kind of product schedule and they might have a different kind of product plan and etc. But the technology adoption, actually, it did not slow down.

That's my answer to your first follow-up question. And the [Inaudible] that some kind of customer, some of the hyperscale customers are -- want to develop their own chip. Yes. But I cannot give you more information than that.

However, I can tell you that they also look at compute for their own business. The positioning for the opportunity actually increased our opportunity, and that required TSMC's leading-edge technology. So, we do have quite a few hyperscale customers working with TSMC to develop their own chips.

Jeff Su

OK. Thank you.

Charlie Chan -- Morgan Stanley -- Analyst

And would that cannibalize their merchant business? For example, does the merchant CPU, GPU, are they going to be replaced or impact by those custom-designed growth?

Jeff Su

So --

Charlie Chan -- Morgan Stanley -- Analyst

If I may.

Jeff Su

OK. Last question. Charlie is asking, then his concern is that if hyperscalers are developing, will they cannibalize business for other types of companies?

C.C. Wei -- Chief Executive Officer

I cannot comment, but I don't think so. You know, they, also, develop the specific purpose for their own. I mean, it's not a kind of to replace generalized purpose of CPU, GPU, or those kind of chip.

Jeff Su

And I think, also, for TSMC, we're happy to work with all types of customers, whatever type they may be. OK. Thank you, Charlie. Let's move on to the next participant.

Charlie Chan -- Morgan Stanley -- Analyst

Thank you.

Operator

And our next question is coming from Sunny Lin with UBS. And, Sunny, please go ahead.

Sunny Lin -- UBS -- Analyst

Thank you. Good afternoon and thank you for taking my questions. So, my first question is on the N3 ramp-up. And so, if we look at the share, revenue could be higher than 5-nanometer for the first year.

But if we look at the sales contribution as a percentage of total sales, it's actually a bit lower. And so, I wonder, for the share, perhaps, there ase some market demand issue. But looking into 2024 and 2025 based on your current customer engagement, should we model a faster ramp-up into 2024 or 2025 or its overall ramp-up could be slightly slower because of maybe customer schedule issues or planning? If we think about the peak revenue contribution for 3-nanometer over time, do you think you will be able to reach 30% range as N5 and N7? That's my first question. Thank you.

Jeff Su

OK. Sunny's first question is on 3-nanometer. She notes 3-nanometer revenue is greater than 5-nanometer in its first year, but the revenue percentage contribution of mid-single digit is smaller or lower. So, she's wondering why is that, is because the market slowdown? Is it, you know, less customer adoption and interest? What is the reason behind that? And does that mean -- what is our expectation for that ramp to continue in 2024.

And also beyond, when do we see 3-nanometer kind of reach -- when can it reach 30% of revenue?

Wendell Huang -- Vice President and Chief Financial Officer

OK. Sunny, let me start. The percentage of revenue for the advaced nodes becomes less important. This is because our base has become so big, much bigger than before.

So, I wouldn't worry about the percentage issue. In fact, we continue to observe a high level of customer engagement at both the N3 and N3E. The number of tape-outs more than double that of N5 in the first and second year. So, as a result, we expect the strong demand will continue in 2023, '24, '25, and beyond for our N3 technologies, driven by both the HPC and smartphone applications.

Yeah.

Jeff Su

OK. Does that answer --

Sunny Lin -- UBS -- Analyst

Got it.

Jeff Su

Yeah.

Sunny Lin -- UBS -- Analyst

Yeah, partially. So, any thought on the potential peak revenue contribution in next couple of years?

C.C. Wei -- Chief Executive Officer

Too early to talk about that N3, but we continue to believe that it will be a large and long-lasting node for us.

Wendell Huang -- Vice President and Chief Financial Officer

It will be an important contributor to our 15% to 20% revenue CAGR the next several years.

Jeff Su

OK.

Sunny Lin -- UBS -- Analyst

Got it. Thank you. My second question is a quick one. And so, for you to growth by [Inaudible] share, just want to know what kind of industry goals are you assuming for the major end markets, including smartphone, PC, server, and automotive?

Jeff Su

OK. Sunny's second question is, you know, TSMC, we have said we will grow -- have slight growth year on year in U.S. dollar terms this year. Her question is, what are we assuming for the end-market growth in areas like smartphone, PCs, automotive, and others?

C.C. Wei -- Chief Executive Officer

Well, let me answer the question, Sunny. What do we look at in 2023? Actually, we look at the smartphone and PC unit, we think there's a little bit drop, you know, in terms of unit and content will continue to increase. And for TSMC, actually, we increase our product portfolio. We also extend our market segment -- available market segment to TSMC.

So, that's why we expect the whole industry to drop, you know, slightly and TSMC still grow slightly. Sunny, did that --

Sunny Lin -- UBS -- Analyst

Got it.

C.C. Wei -- Chief Executive Officer

OK.

Sunny Lin -- UBS -- Analyst

Sorry. Yeah, so just a quick follow-up on server and automotive. So, any expectations on server units for this year? And for auto, I think, in October earnings call, you mentioned there could be some slowdown going to first half of the year. Have you started to see that deceleration? That's all my questions.

Thank you very much.

Jeff Su

OK. So, Sunny also wants to know what is our forecast for server units, automotive units? And then we said in October, three months ago, we said automotive demand was holding steady. What is the case now?

C.C. Wei -- Chief Executive Officer

Well, the automotive demand continue to be very tight. I meant that -- no, I mean, demand continue to increase, actually. And today, we still probably not 100% supply enough wafers to them. But, you know, it's improving.

It's improving. And we expect the automotive to -- the shortages to be relaxed quickly. And the unit --

Sunny Lin -- UBS -- Analyst

Got it.

C.C. Wei -- Chief Executive Officer

For the units to grow, we expect the automotive to grow to this year. But, you know, that's a OEM system.

Jeff Su

OK. Thank you, Sunny. Operator, can we move on to the next participant?

Sunny Lin -- UBS -- Analyst

Thank you very much.

Jeff Su

Yeah, thank you. Operator Can we move on to the next participant?

Operator

Sure. Our next question is coming from Laura Chen with Citigroup. And, Laura, please go ahead.

Laura Chen -- Citi -- Analyst

Hello. Hi. Thank you very much for taking my question. My first question is also about the overseas expansion.

Like C.C. mentioned, that the overseas more advanced and 28-nanometer will account for 20% in the longer-term perspective. And also, we are expanding more in the advanced node within the U.S. I'm just wondering that will you also expand more back end or advanced packaging, along with your advanced node say like 5- or 3-nanometer, in Arizona as well?

Jeff Su

OK. So, Laura's first question is, actually, C.C. said the 28-nanometer below capacity could be 28 -- 20% and more in the several years time, depending on customer demand and government support. But her question is, would we consider expanding advanced packaging overseas as well?

C.C. Wei -- Chief Executive Officer

Well, today, we actually don't have a plan, but we do not rule out the possibility because the back end is a part of the total wafer service for our customer. OK?

Laura Chen -- Citi -- Analyst

OK, got it. And because we see that a lot of advanced nodes used for the high-computing PC. So, along with that kind of application we see now, TSMC is very good at those 3D IC or the advanced packaging. So, I'm just wondering that, longer-term perspective, whether that is also the direction in the U.S.

Jeff Su

So, I think while Laura is saying because, you know, of course, TSMC 3D IC solution is leading and HPC adoption is strong, so with advanced technologies, will there be a need to build or have packaging in the U.S. as we move advanced technology portion to the U.S.?

C.C. Wei -- Chief Executive Officer

Well, Laura, I guess I can say that we don't rule out the possibility, but today, we don't have a plan yet.

Laura Chen -- Citi -- Analyst

Sure. Sure. Thank you very much. And my second question is about the gain around road map.

Can you give us more color, some of the current progress? We know that we have the schedule to ramping up in 2025 versus the [Inaudible] the high-voltage equipment will probably only ready then. Do you think that could be any like a potential pushback to like 2026 onwards?

Jeff Su

OK. So, Laura's second question is on the nanosheet transistor structure. She wants to know what is the progress for TSMC as we are adopting nanosheet structure at our N2? Will this be impacted or pushed out by the availability of things such as -- I think you're asking high-NA, Laura, and things like that, correct?

Laura Chen -- Citi -- Analyst

Right. Thank you.

C.C. Wei -- Chief Executive Officer

OK. Actually, our N2 technology development is on track. Actually, it's better than what we thought. We have very good progress recently.

And, you know, our risk production will all be in 2024, and the volume production in 2025. The schedule is not changed if we don't put it in. But so far, so good. Let me assure you that.

Jeff Su

OK?

Laura Chen -- Citi -- Analyst

OK. Thank you very much.

Jeff Su

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

Operator

Thank you. And our next question is coming from Rolf Bulk with New Street Research, and please go ahead.

Rolf Bulk -- New Street Research -- Analyst

Yes. Thank you for taking my question. I had a question on your 2023 capex budget and your fab build-out plan. You -- earlier on in the conference call, you talked about the build-out cost of fabs in the U.S.

being five times higher versus Taiwan. And in that context, I was wondering if you could talk about the share of capex spending that you expect to go toward that build-out versus equipment this year versus last year. So, the larger share of capex goes to those kind of build-out. And if so, how much more? Thank you.

Jeff Su

OK. Sorry, Rolf. Let me try to summarize your first question. His first question is on our capex in 2023 and our fab build-out plans.

I believe, Rolf, you're referring to fab build-out plans overseas, correct?

Rolf Bulk -- New Street Research -- Analyst

Yes. What I'm trying to understand is if I think about your capex budget for this year versus last year, what share will go toward infrastructure to support that build-outs, what percentage will go to equipment, roughly?

Jeff Su

OK. So, Rolf wants to know, for our capex, how much is going to building and facilities, how much is to tools? Rolf, I want to make one correction. When our CFO said that the -- when you refer to five times greater, I think our CFO was saying the construction costs are four to five times higher, not the capex cost. But nonetheless, Rolf is asking for a breakout of the capex.

Wendell Huang -- Vice President and Chief Financial Officer

Well, Rolf, we provide the breakdown on capex per year, advanced versus specialty technology, but we do not provide the breakdown between tools and constructions. But as I said, the -- in the U.S., the construction of building and facilities is probably five times that of Taiwan, and it will last for a few years.

Jeff Su

OK. Rolf, do you have a second question? Sorry.

Rolf Bulk -- New Street Research -- Analyst

Thank you very much.

Jeff Su

Yeah.

Rolf Bulk -- New Street Research -- Analyst

Yes. As a second question, could you talk about the growth that you achieved in your advanced packaging segment in 2022 and what growth you are expecting in 2023? And in particular, could you talk about your SoIC products and whether interest in those products is accelerating? Thank you.

Jeff Su

OK. Thank you, Rolf. So, Rolf's second question is on the advanced packaging business. What was the growth in advanced packaging last year and what do we expect the growth to be this year? And then also, more specifically, in terms of our SoIC technology, what is the outlook or the momentum there?

Wendell Huang -- Vice President and Chief Financial Officer

OK, Rolf. This is Wendell again. The -- in 2022, our advanced packaging grew at a similar rate to our corporate rate. So, it accounted for about 7% of our total revenue in 2022.

And we think that in this year, the growth will be also similar, pretty -- well, slightly lower than the corporate. It will be probably flattish for the back end.

Jeff Su

OK. Thank you, Rolf. All right. In the interest --

Rolf Bulk -- New Street Research -- Analyst

Thank you very much.

Jeff Su

Thank you. In the interest of time, maybe we'll take questions from the last three participants. Operator, can we move on to the next participant, please?

Operator

Sure. The next question is coming from Charles Shi with Needham. And, Charles, please go ahead.

Charles Shi -- Needham and Company -- Analyst

Thank you for taking my question. I want to ask a little bit about the 20% R&D expense step-up in this year. I -- can you provide a little bit more details? What the incremental R&D expenses are going to be directed at? Well, for one thing, if I understand correctly, your N3 R&D team are going to move on to the N-plus 2 node if we assume 3-nanometer the current end node, or is there any other incremental R&D spending this year you are expecting to be around design enablement, advanced packaging, specialty technology? Can you kind of give us a sense where that big step up is coming from? Thank you.

Jeff Su

OK. So, Charles' first question is on R&D. He wants to understand or actually more details in terms of the 20% approximately year-on-year increase. What is driving -- or the R&D spending going to be focused on? Is it N3? Is it N2? Is it design enablement, you know, by specific breakdown?

C.C. Wei -- Chief Executive Officer

Charles, let me answer your question. All your comment are correct. I mean, that is because of a newer technology, that N2, N1.4, and also a lot of new things are more expensive than before. And actually, the technology complexity continue to increase exponentially.

So, that's why we spend much more R&D budget. We want to continue to be No. 1 in the world. So, we continue to invest, you know, including the geometry shrinkage, including the new transistor architecture, including the design enablement, and including buying the new equipment.

That [Inaudible]

Jeff Su

OK. Charles, do you have a second question?

Charles Shi -- Needham and Company -- Analyst

Yes, I do. Maybe a second question, I want to ask about specialty technology. Obviously, you expect specialty technology to backfill your 7-nanometer fabs. I think this may be a more common knowledge inside the industry, but I recently spoke to some of your customers who are more on the analog mixed signal side.

A lot of them are, I mean, driving volumes more around 28-nanometer and above, and they get -- tell me that the benefit of going to 14-nanometer and those 16-nanometer for your 7-nanometer is there. But it's not large enough, as in the past, moving node to node. And at the same time, the cost is much higher. And I look at your technology road map, specialty technology road map, it does seems to me that the specialty technology platforms are not as broad at the 7-nanometer if I compare with the 28-nanometer and above.

I just want to get some insights from you. How do you think about the progression of specialty technology going forward as it seems to me that it's kind of slowing down, a little bit more slow -- slowing a little bit down faster for the analog mixed signal customers. Thank you.

Jeff Su

So, Charles' second question is on specialty technology. His observation is that, you know, the technology -- specialty technology portfolio at 7-nanometers seems not as broad as prior nodes. And that the -- his question is, do we see this slowing scaling of analog and mixed signal areas, you know, in terms of the specialty technology development and moving down to, you know, lower nodes or more advanced nodes?

C.C. Wei -- Chief Executive Officer

Charles, your observation is quite good. Actually, you are right. But then let me share with you a little bit more detail inside. Actually, you know, you are right.

For the analog portion or mixed signal portion, we do not need to really move into 7-nanometer or more advanced node. But as time goes by, now you see more and more computing functionality needs to be added into that product. Let me share with you that one thing like WiFi. You need a really very high speed to move to the next generation and also the RF.

For those kind of thing, you need very high performance of the computing together with low-power consumption. It is important. And if you want to get the low-power consumption, the only the leading-edge node can give you that kind of opportunities. You know, all the footprints stay the same.

Then if you want to have higher functionality with low-power consumption, that's where you have to move into the 7-nanometer or more advanced node even with the analog product. Does that answer your question?

Charles Shi -- Needham and Company -- Analyst

Yes. So, I think this is about the reason that you feel so quite comfortable about that 7-nanometer utilization will come back. You said it will mildly come back a little bit in '23, but that you're still confident '24 and forward that the 7-nanometer will still be a very, very long-lasting node for you.

C.C. Wei -- Chief Executive Officer

You are right.

Jeff Su

OK.

Charles Shi -- Needham and Company -- Analyst

All right. Thank you.

Jeff Su

Thank you, Charles. Operator, let's move on to the last two participants.

Operator

Thank you. The next question is coming from Brad Lin with Bank of America. And, Brad, please go ahead.

Brad Lin -- Bank of America Merrill Lynch -- Analyst

All right. Happy new year. Thank you for taking my question. I have two questions, one is on the globalization challenge and the other on the mature nodes.

So, first of all, we now TSMC is excellent in managing the supply chain and the cluster in Taiwan. However, then we now expand in Japan and U.S footprints. With the lack of the cluster there, will the management please share with us the strategies to maintain the strong efficiency and excellence that TSMC has been delivering? Thank you.

Jeff Su

OK. Brad's first question is on our global footprint. He notes that TSMC has done a good job in terms of supply chain and cluster management. But as we go overseas to U.S.

and Japan, how will we continue to ensure that we do a good job?

Mark Liu -- Chairman

Well, OK, let me answer. I think the -- Wendell has answered this question earlier. And let me summarize a little bit. TSMC is in a service business, not in just pure production.

The service depend on the trust from the customers. So, in the past, our trust in services depends on our technology leadership, manufacturing excellence, and the lowest cost and quality. But recently, the geopolitical development is evolving just in front of us. That 100% in one place cannot suffice our customers' needs.

Therefore, we study the overall global footprint planning. Now, of course, the costs will be higher. And I think our team has been focused on how do we do this, and at the same time, keep our minimum gross margin to be 53% and above. And that is the standard that we decide how the pace of our global expansion going to be.

And there are other segments in terms of the space, of course. The global expansion increase the value to our customers and the new geopolitical environment, and therefore, the pricing, how the customer can shoulder the increased costs in terms of pricing. And of course, the -- geopolitically, the semiconductor in the U.S. and Japan are all new.

So, I believe as we are working hard on how to reduce the cost by building up the semiconductor supply ecosystem in U.S. and in Japan. And I think, indeed, both governments echo our -- not just us, they also rally their other major companies to build a similar capacity in this place to reduce their costs. So, that is the general agreement -- arrangement we are planning.

There's no fixed rate. Of course, the government's support will be another factor. And so, that is -- we are cautiously step by step to make sure our shareholders' value still be kept.

Jeff Su

Thank you, Chairman. Brad, do you have a second question?

Brad Lin -- Bank of America Merrill Lynch -- Analyst

Yes, thank you very much for the answer. So, my second question is on the mature node, and so we know mature node is long-lasting and generates pretty good profits with TSMC's technology leadership. So, while we are expanding overseas, what are the strategy for mature node in the long run, especially on China expansion led by -- also by their government subsidies? And also, R&D is quite valuable for TSMC. And so, we continue to allocate the R&D to mature node while maintain good pace in the [Inaudible] and advanced packaging.

Thank you.

Jeff Su

OK. So, Brad's second question, I think maybe to summarize is more on the mature nodes. So, he wants to better understand our strategy on the mature nodes. As we expand our manufacturing footprint and increase capacity outside of Taiwan, what is our strategy for mature nodes? You know, will we bring mature nodes overseas? What is the status in China? How are we allocating R&D resources to mature nodes, already specialty technology strategies, etc.?

C.C. Wei -- Chief Executive Officer

Well, actually, our mature node capacity strategy is very simple. We develop differentiated specialty technology for our customer. In fact, we are working with customer and to define what they need and then what kind of technology that we need to develop. We don't add any commonly used large technology per se, but we develop a specialty and differentiated, and for the long-term structural market demand.

And that's our current strategy. And because of that, of course, we put the R&D effort and resources to cooperate with our customer, and so we can generate profitability with a reasonable utilization.

Jeff Su

OK. Thank you, C.C.

Brad Lin -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you very much.

Jeff Su

Thank you, Brad. OK. Thank you. Operator, in the interest -- well, can we move on to the last participant, please?

Operator

Sure. Our last question is coming from Mehdi Hosseini with Susquehanna International Group, and please go ahead.

Mehdi Hosseini -- Susquehanna International Group -- Analyst

Yes. Thanks for letting me ask a question. And I want to go back to gross margin. I'm a little bit confused, if you could clarify something? Your wafer shipment in Q4 declined and also FX, actually, strengthened by a little bit, which should be negative on gross margin.

So, your cost-cutting efforts must have been greatly exceeding these trends. And I want to get a better feel for it, then I have a follow-up.

Jeff Su

Mehdi's first question is on gross margin. His -- he notes wafer shipments declined sequentially in the fourth quarter. The -- but with the foreign exchange movement, he notes it's a negative for gross margin. So, he wants to under -- you know -- but -- well -- and then he wants to understand what is, you know, the magnitude or rate of cost improvement.

Maybe our CFO can clarify some of these, particularly the FX.

Wendell Huang -- Vice President and Chief Financial Officer

Right. Our fourth quarter gross margin is 180 basis points higher than that in the third quarter. Foreign exchange rate actually went toward our favor. The NT depreciated in the fourth quarter from 30.32 in the third quarter to 31.39.

So, that gave us about 140 basis point of gross margin expansion. Now, the remaining, one, there are cost improvement, but offset by, as we said, lower wafer utilization.

Mehdi Hosseini -- Susquehanna International Group -- Analyst

OK, so the volume helped. Now, if I just take your comment about the first half declining 5% to 10% on a year-over-year basis, does imply that there is a chance that revenues in Q2 would decline on a sequential basis. Would that also drive gross margin down on a sequential basis?

Jeff Su

OK. So, Mehdi's second question is then we have noted -- we did not say 5% to 10%, but our first half revenue will decline mid to high single digit year on year. So, he wants to know, does this mean that second quarter revenue will be down sequentially? And is there -- does that mean that the gross margin will go below 53% or decline into --

Wendell Huang -- Vice President and Chief Financial Officer

Right. We'll give you the guidance so you can really calculate yourself on the revenue growth on the second quarter. And it's too early to talk about the gross margin in second quarter and beyond. However, we can tell you that we work very diligently to make sure our gross -- long-term gross margins of 53% and higher is achievable even in this year.

Mehdi Hosseini -- Susquehanna International Group -- Analyst

Understood. But could it go below 53 and then rebound so it will average to 53?

Wendell Huang -- Vice President and Chief Financial Officer

It's too early to talk about that. But as I said, we work very diligently to make sure this long-term gross margin target of 53% and above can be achievable, including this year.

Jeff Su

And we will give you the second quarter gross margin outlook in April, Mehdi, in three months. OK? All right. Thank you. OK.

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 30 minutes from now. The transcript will be available 24 hours from now, both of which you can find and is available through TSMC's website at www.tsmc.com. Thank you again for joining us today.

We wish everyone a happy lunar new year, and we hope you will join us again next quarter. Goodbye and have a good day.

Duration: 0 minutes

Call participants:

Jeff Su

Wendell Huang -- Vice President and Chief Financial Officer

C.C. Wei -- Chief Executive Officer

Mark Liu -- Chairman

Randy Abrams -- Credit Suisse

Bruce Lu -- Goldman Sachs -- Analyst

Gokul Hariharan -- JPMorgan Chase and Company -- Analyst

Charlie Chan -- Morgan Stanley -- Analyst

Sunny Lin -- UBS -- Analyst

Laura Chen -- Citi -- Analyst

Rolf Bulk -- New Street Research -- Analyst

Charles Shi -- Needham and Company -- Analyst

Brad Lin -- Bank of America Merrill Lynch -- Analyst

Mehdi Hosseini -- Susquehanna International Group -- Analyst

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