Gokul Hariharan: Thank you so much. The second is about gross margin. In the downturn, we are forming up at much higher [indiscernible] than before. talk a little bit about what happens when we get back to close to full utilization? I think we are still running at well below full utilization in 2023. And could you also explain the gross margin dilution that you’re expecting in second half ’23, because of this capacity conversion. What exactly leads to that gross margin dilution? And is that like a onetime kind of dilution that lasts for a little bit of time and kind of levels off in 2025?
Jeff Su: Okay. Thank you, Gokul. So, If I heard correctly, Gokul’s second question is around gross margin. So, two parts to it, maybe the second part first, which is he is asking I believe about this gross margin in the second half of this year, particularly with what Wendell had described, they are plan to convert some of the capacity. The gross margin impact here and is this a onetime thing? Is this better capital? What does this mean in the mid- to long-term profitability? That’s the first part. And then I’ll go to the second part.
Wendell Huang: Right. Second half, as I said, there are two negative factors affecting our gross margin this year. The first one is the N3 dilution. N3 volume will be much bigger in the second half than in the first half. So the second half impact from N3 dilution will be between 3 percentage points to 4 percentage points. And also, the N5 capacity converted to N3 that will mostly take place in the second half as well. So that will be 1 to 2 percentage point. That’s for this year. For the longer term, if you look at these two factors, our N3 dilution will gradually reduce, because the profitability will continue to improve or increase in the next several years. And N5 converted to N3, it’s a onetime short-term impact on profitability, which will bring capital efficiency to us in the middle to long-term.
And the benefits together would be much bigger than the onetime hit in the short-term. So, if you’re talking about the longer-term profitability, including these two factors plus we are selling our value, our technology value, as C. C. mentioned. We continue to drive down the cost. We build our capacity based on the long-term market profile and not the short-term cyclicality and therefore enable us to have a pretty good utilization. The only thing we are not able to control is foreign exchange rate. So, if you put all these together, we still believe that 53% and higher long-term gross margin is achievable.
Jeff Su: Gokul, does that answer both parts of your question?
Gokul Hariharan: Yes. So just to clarify, so given we are at a much lower utilization than normal, what you suggest Wendell is that gross margin should get back to the mid to high-50s once the up cycle starts to gain more momentum, just like what we saw in 2022. Is that a reasonable expectation?
Jeff Su: Okay, thank you. So Gokul really, he’s asking 53% and higher, can it be higher? Because of course he looks at last year the utilization was lower and we still managed to deliver. So, he’s wondering once utilization goes back to four, can it get to mid to high-50s?
C. C. Wei: We are working on it. Certainly, we prepare our capacity according to customers’ demand. Last year is very challenging because everybody missed their forecast and so did TSMC and we saw the utilization rate is pretty bad. And I believe everybody got more experience in the next few years and so TSMC’s utilization rate will continue to increase, I guarantee that.
Gokul Hariharan: So, the question is, we’re working on it, it can be.
Jeff Su: Okay. Thank you, Gokul. Thank you. Operator, let’s move on to the take the question from the second participant on the call.
Operator: The second one to ask question is Randy Abrams from UBS.
Randy Abrams: Okay. Yes. And good luck to both Mark and C.C. as you go through the upcoming transition. I wanted to ask, going back to the question on the IDM, I think earlier you conceded that your competitors’ process is actually pretty good for optimizing to their own products. Could you talk about your view on sustainability of the ramp of that IDM outsourcing with your own products in HPC? If you look out over the next two to three years. If you see that continuing to grow or reversed where there could be a bit of a cooling off from some of the opportunity you have right in front of you now?
Jeff Su: Okay. Thank you, Randy. So, Randy’s first question goes back to the IDM. His question is with IDM saying their technology is pretty good. What is the risk or how do we see the sustainability of this IDM’s outsourcing business to TSMC in the next two to three years? Can this continue to grow? Or will this reverse and go back in house to the IDM? And how do we manage our plan for this?
C. C. Wei: Randy, that’s a good question. Actually, we have taken into account all the considerations, including the IDM, can do it by MCO. We pull that one into consideration. We actually in our capacity pending. Actually, we took very conservative way to prevail our capacity in this kind of a situation. I cannot speak more because of that’s our strategy.
Randy Abrams: Okay. If I can ask a follow-up actually just through the CapEx, where I think earlier you stated rate of increase would slowdown, but I think still in finance should increase over time as you grow. If you could discuss the CapEx that you guided was flat, should we think of it as a pause where as you start to move into 2-nanometer, there should be another wave of increase? And second part somewhat related, but curious about the geographic expansion. There’s been a lot of press about new fabs in Japan, second fab and potential third advanced fab. And it feels like the first fab went smoothly. So, are you starting to redirect or think more expansion to Japan rather than U.S. or potentially both? So, you have both options as you move to 3-nanometer?
