As the largest foundry globally and the most critical player in the semiconductor supply chain, TSMC is usually viewed as a barometer for the entire semiconductor market. The company reported its Q3 result last week. While the numbers are somewhat "boring" with revenue and gross margin only slightly above analyst estimates for both Q3 and Q4, TSMC provided its view on the supply chain that may help ease investors' concern of a sudden downturn for the company.

First, TSMC expects its capacity to remain tight for the rest of 2021 and through 2022.

While there is some near-term demand noise from PC and smartphones. TSMC believes the higher silicon content in HPC and smartphone and its technology leadership to help offset the negative impact. The most advanced 5nm and 7nm process nodes made up more than 50% of revenue this quarter, and TSM remained the clear leader in the leading edge. In addition, because of the recent supply chain disruption, customers are now willing to hold higher inventory levels than in the past. The company did not rule out the possibility of a broader downturn, but people worry about an imminent sudden downturn could relax a bit, at least for now

• "We also continue to observe the structural increase in long-term demand underpinned by the industry megatrends of 5G and HPC related applications and the higher silicon content in many end devices including automotive PCs, servers, networking, and smartphones. While the short-term imbalances may or may not persist. We believe our technology leadership will enable TSMC to capture the strong demand for our advanced and specialty technologies, and we expect our capacity to remain tight in 2021 and throughout 2022."

Second, TSMC stated its gross margin would remain 50% or better for the long term.

The bearish view on TSMC is that the increasing capital intensity will translate to higher depreciation. The company won't be able to pass the higher cost to customers, and the gross margin will structurally decline.

The management clearly acknowledges the rising cost in the analyst meeting

• "At the same time, we faced manufacturing cost challenges due to an increase in process complexity at a leading node, new investment in mature notes, expansion of our global manufacturing footprint, and rising material in basic commodity cost"

But on the second point, the management is confident that it's creating enough value to pass on the higher cost to customers. When asked about customers' willingness to pay more, the answer is a confident yes. In addition, the company is now seeing more customers making prepayments to secure capacity. So customers are now paying more and paying earlier, improving the visibility of the business

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

As a result of passing on the incremental cost to customers, TSMC is confident to deliver GM of 50% or higher in the long term.

• "As we continue to work closely with our customers to support their goals, our pricing strategy will remain strategic, not opportunistic, to refer to our value creation."

• "Even us, we shoulder a greater burden of investment for the industry, by taking such actions we believe we can achieve a proper return that enables us to invest to support our customers growth and deliver long term profitable goals with 50% and higher gross margin for our shareholders."