On July 19, contract chip manufacturing giant Taiwan Semiconductor Manufacturing Company (NYSE:TSM), commonly abbreviated TSMC, announced that it would be lowering its capital expenditure plans for 2018 to $10 billion to $10.5 billion from a prior range of $11.5 billion to $12 billion.

Most of TSMC's capital expenditures in any given year are used to purchase the expensive tools required to produce chips.

The outside of a TSMC wafer fabrication plant.

Image source: TSMC.

During TSMC's earnings conference call, management went over the drivers behind that capital expenditure forecast cut. Let's take a closer look at them.

A push-out

TSMC CFO Lora Ho said that the first factor that drove the capital expenditure reduction was a "delay of payment to 2019" as a result of a "schedule adjustment."

Ho made sure to explain that "the planned capacity remains unchanged."

This schedule push-out, Ho said, was good for a $700 million reduction in TSMC's 2018 capital expenditures. However, since this is a push out and since TSMC's capacity plans here remain unchanged as a result, the company will still have to lay out that cash (unless, of course, its plans change), but that spending should now be part of TSMC's 2019 capital expenditure plans instead.

More efficiency

The second driver of the reduced capital expenditures for 2018, Ho said, was a $600 million reduction due to "efficiency gains" that will allow TSMC to "spend less on tools." 

During the question-and-answer session, Ho offered a more detailed explanation of those "efficiency gains."

The first thing she attributed those reductions to was "process simplifications."

The steps required to manufacture a chip is known as a "process" and a given generation of chip manufacturing technology is also known as a "process technology."

"If you have a simpler process, you don't need to buy that much tools," Ho explained.

She then said that TSMC "share tools between [research and development] and operations."

"If we can find more opportunities to share, we don't have to buy that much tool," Ho added.

TSMC CEO C.C. Wei also chimed in, indicating that because the company has made improvements to its cycle times (that is, the time it takes to go from a blank wafer to a fully processed wafer with chips on it), it doesn't need to buy equipment as early to meet its desired production schedule.

Foreign exchange impact

The third major factor that led to a reduction in TSMC's capital expenditure budget for the year was from the U.S. dollar appreciating against the euro and the Japanese yen.

TSMC buys tools from ASML Holding (NASDAQ:ASML) and Tokyo Electron. ASML is based in the Netherlands and reports its results in euros, so it's likely that it does business in euros as well. Tokyo Electron is Japanese and likely does business using the Japanese yen.

Since the U.S. dollar apparently strengthened against the yen and the euro, this means that each dollar converts into more yen and euros than it did before. Therefore if ASML and Tokyo Electron price their equipment in euro and yen, respectively, TSMC will need to spend fewer U.S. dollars to buy the same equipment that it would've needed to otherwise as a result of the currency movements.

TSMC attributed $200 million of its capital expenditure reduction to these foreign exchange movements.