Good afternoon, everyone. Welcome to TSMC's Third Quarter 2020 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. To prevent the spread of COVID-19, 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 are 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 third quarter 2020, followed by our guidance for the fourth quarter 2020. Afterwards, TSMC's CEO, Dr. C.C. Wei, and Mr. Huang will jointly provide the company's key messages. Then we will open the line for Q&A.

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, Finance and Chief Financial Officer / Spokesperson

Thank you, Jeff. Good afternoon, everyone. Third quarter revenue increased 14.7% sequentially in NT dollars or 16.9% in US dollars, as we saw strong demand for our advanced technologies and special technology solutions, driven by 5G smartphones, HPC and IoT-related applications. Gross margin increased 0.4 percentage point sequentially to 53.4%, mainly thanks to a much higher level of utilization, partially offset by the margin dilution from 5-nanometer ramp and an unfavorable exchange rate. The operating expenses increased by NT$7.4 billion, mainly attributable to a higher level of development activities for N4 and N3 technologies and one-time expenses to facility - our expansion in Hsinchu. Therefore, operating margin slightly declined by 0.1 percentage points sequentially to 42.1%. Overall, our third quarter EPS was NT$5.3 and ROE was 31.3%.

Now, let's move on to the revenue by technology. 5-nanometer process technology contributed 8% of wafer revenue in the third quarter, while 7-nanometer and 16-nanometer contributed 35% and 18%, respectively. Advanced technologies, defined as 16-nanometer and below, accounted for 61% of wafer revenue. In terms of revenue contribution by platform, smartphone increased 12% quarter-over-quarter to account for 46% of our third quarter revenue. HPC increased 25% to account for 37%. IoT increased 24% to account for 9%. Automotive decreased 23% to account for 2%. Digital consumer electronics decreased 24% to account for 3%.

Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of NT$742 billion. On the liability side, current liabilities decreased by NT$27 billion, mainly due to the decrease of short-term loans and the decrease of current portion of bonds payable. Long-term interest-bearing debts increased by NT$146 billion, mainly as we raised NT$145 billion of corporate bonds during the quarter. On financial ratios, accounts receivable turnover days decreased 4 days to 40 days, while days of inventory increased 3 days to 58 days primarily due to N5 ramp.

Regarding cash flow and capex. During the third quarter, we generated about NT$190 billion in cash from operations, spent NT$99 billion in capex and distributed NT$65 billion for fourth quarter '19 cash dividends. Short-term loan decreased by NT$17 billion while our bonds payable increased by NT$136 billion, mainly due to the bond issuances. Overall, our cash balance increased NT$137 billion to NT$604 billion at the end of the quarter. In US dollar terms, our third quarter capital expenditures totaled $3.4 billion.

I have finished my financial summary. Now let's turn to our fourth quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between $12.4 billion and $12.7 billion, representing a 3.4% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to NT$28.75, gross margin is expected to be between 51.5% and 53.5%, operating margins between 40.5% and 42.5%.

Now, I will hand over the call to C.C. for his key messages.

C.C. Wei - Chief Executive Officer

Thank you, Wendell. Good afternoon, everyone. We hope everybody is staying safe and healthy during this time.

Now, let me start with our near-term demand and inventory. We concluded our third quarter with revenue of NT$356.4 billion or $12.1 billion, which was above our guidance, mainly due to better demand across all our platforms in our forecast three months ago. Moving into fourth quarter 2020, we expect our sequential growth to be supported by strong demand for our industry-leading 5-nanometer technology, driven by 5G smartphone launches and HPC-related applications.

On the inventory front, we forecast our fabless customers' overall inventory to exit the year above the seasonal level, as the supply chain continues to make efforts to ensure supply chain security and actively prepare for the new 5G smartphone launches. Looking ahead, we expect our customers' overall inventory to remain above the historical seasonal level for a longer period of time, given the industry's continued need to ensure supply chain security amidst the lingering uncertainties.

For the full year of 2020, although COVID-19 continue to bring some level of impact to the global economies, we also observed that COVID-19 is accelerating digital transformation, while 5G and HPC-related applications continue to drive semiconductor content enrichment. We now forecast the overall semiconductor market, excluding memory, to increase mid single-digit percentage, while foundry industry growth is expected to be close to 20% year-over-year. For TSMC, our technology leadership position enable us to capture the industry mega trend of 5G and HPC, we expect to outperform the foundry revenue growth and grow by about 30% in 2020 in US dollar terms.

Next, let me talk about our N5 ramp-up and N4 progress. TSMC's N5 is foundry industry's most advised solution with the best of PPA, N5 is already in volume production with good yield while we continue to improve the productivity and performance of the UV tools to further enhance our leadership in UV technology. Due to the robust demand from 5G smartphones and HPC applications, we reaffirm N5 will contributed about 8% of our wafer revenue in 2020. And we expect even higher percentage in 2021. N4 will leverage the strong foundation of N5 to further extend our 5-nanometer family. N4 is a straightforward migration from N5 with compatible design rules, while providing for the performance, power and density enhancement for the next wave of 5-nanometer products. N4's production is targeted for 4Q 2021 and volume production in 2022. We saw a continuous technology enhancement. We expect our 5-nanometer family to be a large and long lasting node for TSMC.

Now I will talk about our industry status. N3 will be another full node stride form of N5, with up to 70% logic density gain, up to 15% performance gain and up to 30% power reduction as compared with the N5. We have chosen FinFET transistors structure for our industry technology to deliver the best technology maturity, performance and cost for our customers. Our N3 technology development is on track with good progress, N3 with over complete platform support for both mobile and HPC applications. Risk production is scheduled in 2021, and volume production is targeted in second half of 2022. Our 3-nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. Thus we are confident, our 3-nanometer will be another large and long lasting node for TSMC.

Finally, I will talk about TSMC's 3D fabric. TSMC has developed an industry leading and comprehensive wafer label suite IC technology roadmap to enhance system level performance. Our differentiated chip-let and heterogeneous integration technologies drive better power-efficient and smaller form factor benefits for our customers while shortening the time to market. These technologies, including CHIPS stake in solutions such as SOIC as well as advanced packaging solutions such as info and cohort. We are consolidating these offering under one umbrella and naming it TSMC 3D fabric. As industry continue to shift innovation to enhance system level performance, 3D fabric where company meant our advice technology to unleash our customers innovation. We expect revenue from our back-end services, which include both advanced packaging and testing to grow at the rates slightly above the corporate average in the next few years.

Now let me turn the microphone over to Wendell.

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Thank you, C.C. Let me start by making some comments on our profitability. Our third quarter gross margin exceeded the high-end of our guidance to reach 53.4%, mainly as we saw a much higher than expected overall capacity utilization rate in the third quarter. That helped to offset the margin dilution from the initial ramp-up of our 5-nanometer technology. We have just guided fourth quarter gross margin to decline by 0.9 percentage points sequentially to 52.5% at the midpoint, primarily due to the margin dilution from the continued steep ramp-up of our 5-nanometer and the less favorable foreign exchange rate in the fourth quarter.

Looking to 2021, we expect a strong ramp of N5 to contribute a higher percentage of revenue as compared to 2020. The [Indecipherable] rate of N5 continues to improve. Similar to prior nodes, we forecast N5's gross margin to take seven or eight quarters to reach to corporate average level. Thus, N5 is expected to dilute our gross margin by about 2 percentage points to 3 percentage points for the full year of 2021. As a reminder, the following six factors determine TSMC's profitability; leadership, technology development and ramp up, pricing, cost reduction, capacity utilization, technology mix as well as foreign exchange rate. Taking all these factors into consideration, we believe a long-term gross margin of above 50% is achievable.

Now let me talk about our capital budget for this year. Our business outlook is supported by strong demand for our industry-leading advanced technologies and specialty technology solutions, driven by the industry megatrends of 5G and HPC related applications. In order to meet this demand and support our customers' capacity needs, we now expect our full-year 2020 capex to be above $17 billion.

Now, I will make some comments on our corporate bond issuances and capital structure. The multi-year mega trends of 5G related and HPC applications are expected to continue to drive strong demand for our advanced technologies in the next several years. Given the macroeconomic uncertainties this year, a current low interest rate environment and the ability to diversify our funding sources, TSMC's Board of Directors has so far approved the issuance of NT$120 billion in NT dollar denominated corporate bonds and $4 billion in US dollar denominated corporate bonds. Year-to-date, we have issued NT$89.5 billion in NT dollar denominated and $4 billion in US dollar denominated corporate bonds with favorable pricing terms.

With our solid financial performance, strong balance sheet and cash position and capacity to take on debt, we are able to aggressively invest in our future to enhance our technologies and capabilities. This enables us to continue to outgrow the semiconductor industry through the cycles. With our disciplined capital management, we remain committed to a sustainable cash dividends on both annual and quarterly basis.

Jeff Su - Investor Relations Division

Thank you, Wendell. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your questions to two at a time to allow all participants an opportunity to ask questions. Should you wish to raise your question in Chinese I will translate it to English before our management answers your question. [Operator Instructions] So now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line.

Question & Answers

Questions and Answers:

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Operator

The first caller on the line is Gokul Hariharan, J.P. Morgan. Go ahead, please.

Gokul Hariharan - J.P. Morgan - Analyst

Congratulations on a great quarter and thanks for taking the question. My first question is on capex and capital intensity. Looks like this year, we will come in at around 36%, 37% capital intensity. Could we talk a little bit about how we should think about capital intensity and absolute capex looking forward at least on a directional basis. Things like the investment side cycle is still going to be pretty much impacted going into next year also looking at some of the financial options in terms of bond rating etc that TSMC has undertaken. That is my first question.

My second question is on N5. I think in previous calls, you had indicated that while N5 will be long and large node, it may not have the same number of tape-outs as N7 has had, which is probably the historical high. Is there a view changing on N5, could we talk a little bit about the N5 exceed N7 in terms of wafer capacity as well as wafer revenue in the next two years or so. Thank you.

Jeff Su - Investor Relations Division

Okay. Gokul, thank you very much. We'll take your questions one by one. Please allow me to summarize your question. Your first question relates to our capex and capital intensity. You pointed out that with the guidance that our capital intensity this year in your estimation is probably around 36% to 37%. So your question is, how should we think about capex and capital intensity in the next few years. If we cannot give a quantitative number directionally, how do we see capex and capital intensity and how does this tie-in with our recent things like such as bond issuances and fund-raising hard to stat factor in. That's the first question, maybe, CFO, Wendell can address.

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Yes. Gokul, our capital intensity, as you are right, this year will be lower than 40%. In the next several years longer term, we expect the capital intensity to be around mid 30 percentage point. However, having said that, there may be years where capital intensity is higher, if we see the strong demand for our technologies or capacity and we decided to invest.

Jeff Su - Investor Relations Division

Okay. And then, your second question, Gokul. Please allow me to summarize again is really regarding to our 5-nanometer that we have said that, it's a long and large node, but the number of tape-outs of N5 versus N7 may be lower. So your question is, can N5 exceed N7, do we believe 5-nanometer can be a bigger node than 7-nanometer in terms of revenue and capacity.

C.C. Wei - Chief Executive Officer

Well, let me say that. We don't comment on how many tape-outs so far, but we continue to see strong tape-out activities at N5 from both HPC and the smartphone applications. And the revenue for this year, which as mentioned is 8% of the wafer revenue and next year it might be even higher than - close to 20 years, something like that. The exact number, we are still not able to come in, but I can assure you that our 5-nanometer family will be another big and long lasting node for TSMC.

Jeff Su - Investor Relations Division

Okay. Thank you, Gokul. Operator, can we move onto the next caller please.

Operator

Next one, we have Randy Abrams, Credit Suisse.

Randy Abrams - Credit Suisse - Analyst

Okay. Yes. Thank you. My first question I wanted to ask on, Wendell, you raised the gross margin originally was 50%. Could you discuss now where you're saying it could be above 50%, the factors driving that change and could you clarify on the 2 point to 3 point impact on 5-nanometer. I think you already have that impact. So does that imply for next year, pretty similar to the type of gross margin you're running now are potentially even better.

Jeff Su - Investor Relations Division

Okay. Randy, I will summarize your question. Your first question is in regards to I believe our gross margin and long-term gross margin. I think you're asking that we raised our target, but I think as Wendell said, 50% is achievable for us, but you are also asking us part of that the dilution from 5-nanometer. How will that impact our gross margin next year and where should we I guess be thinking about gross margin for 2021.

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Okay. Randy, maybe let me answer this, like this. We have a very high gross margins in the third quarter and we believe we will continue to have a pretty high margin in the fourth quarter. And the main reason is that, we are enjoying a very high utilization across almost all the nodes at this moment. But the high - very high utilization may not continue forever. So, our long-term growth target or long-term growth goal for our gross margin continues to be above 50%.

In terms of dilution from N5, we see the dilution of N5 for next year to be around 2 percentage point to 3 percentage point, similar to previous nodes. And remember that the N5 will account for a much bigger percentage of our revenue next year. So, as we ramp up quickly, the dilution will continue to exist. However, we are still expecting that it will reach the corporate margin by in seven to eight quarters.

Randy Abrams - Credit Suisse - Analyst

Okay. Great. Thanks. I misunderstood. I thought I heard the word above 50%, but thanks for the clarification. Second question on the recent US restriction on SMIC. I'm curious if you're seeing any additional diversification or increase for business. And given they are more on the mature nodes, how you're positioned if you are seeing nodes to take on business on the mature nodes?

Jeff Su - Investor Relations Division

Okay, Randy. Let me just summarize your second question. Your second question is regards to the recent restrictions on SMIC. And Randy is wondering whether we are seeing any types of diversification or inquiries from customers in regards to business and especially at the mature nodes.

C.C. Wei - Chief Executive Officer

Well, Randy, let me answer the question. Actually, we are still evaluating the impact to the semiconductor industry on the - due to the ban on SMIC. But let me say that, our capacity planning and all our capex have continue based on the long-term demand profile, that is underpinned by the industry mega trend, such as 5G-related and HPC application. All right? Does that answer your question?

Randy Abrams - Credit Suisse - Analyst

Yeah. Or maybe just one quick, but for the mature nodes, which are running tight across the industry, just if it surrogate - there is an incremental surge, how well could you handle incremental business from this type of piece, if it we were to come through?

Jeff Su - Investor Relations Division

So Randy is asking if we were to see a surge in demand at the mature nodes, how ready or do we have capacity to take on or handle this type of surge demand?

C.C. Wei - Chief Executive Officer

Well, we continue to work with our customer dynamically and we try our best to meet their demand, that is all I can say for today.

Randy Abrams - Credit Suisse - Analyst

Okay. Great. Thank you.

Jeff Su - Investor Relations Division

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

Operator

The next one is Sebastian Hou from CLSA.

Sebastian Hou - CLSA - Analyst

Thank you. Good afternoon, gentlemen. My first question is, I think, besides the higher than usual inventory, which maybe a new norm because of this supply chain share [Phonetic] of disruption, how - I'm wondering and curious about how does TSMC assess customers overbooking or pulling [Phonetic] behavior and the magnitude. In particular, based on the recent smartphone OEMs aggressive procurement about assuming Huawei is going to be dead next year. How do you assess that kind of the potential overbuild inventory risk that may potentially lead to destocking correction sometime next year? This is my first question. Thank you.

Jeff Su - Investor Relations Division

Okay, Sebastian. Let me repeat or try to summarize your question. Your question is basically related to the inventory and you want to ask, how does TSMC assess the risk that there is overbooking in light of the restrictions on Huawei, and therefore, what type of levels or magnitude of inventory overbuild is there and does this create the risk of inventory correction sometime next year?

C.C. Wei - Chief Executive Officer

Well, let me share with you our view on this inventory-related issues. First, I want to say that due to the pandemic, actually the digital transformation has been accelerated, and that created a demand on 5G and HPC-related products. And so, for the long-term - longer-term basis, we do expect our customers, our overall inventory to remain above the seasonal level for longer period of time, majority partly because of they have some concern on industry's supply chain security and due to the uncertainties. And so, that will be the inventory - high-level inventory will sustain, continue for a longer period of time. That we can say that.

Jeff Su - Investor Relations Division

Okay. Sebastian, do you have a second…

Sebastian Hou - CLSA - Analyst

Yeah. All right. Yeah. Okay. But - all right. Anyway, but that didn't actually is what I'm looking for. But anyway, I mean, thank you for that, C.C. And my second question is, on the HPC business. business. Apparently, I think the - C.C. you mentioned in the prepared remarks that you see a lot of the growth this quarter and also continues for next quarter. And driven by the accelerating digital transformation you just said that led by the pandemic and work from home demand like to stay for longer and also the continued market share gain from TSMC against IDM. And when do you expect your HPC revenue exposure to crossover with smartphone revenue percentage? Possible to see that by end of next year or 2022? Thank you.

Jeff Su - Investor Relations Division

Okay. Sebastian, let me just summarize your question, which is regards to our HPC platform business. You pointed out that there is the trends of the accelerating digital transformation and the work from home and also market share gains versus IDM. So you want to know when do we see our HPC platform revenue crossing over with the smartphone or others to become the primary?

C.C. Wei - Chief Executive Officer

Okay. Let me answer the question. We do see HPC platform's growth rate is higher among our four platform, which is smartphone, HPC, automotive and IoT. And in the next few years, we continue to expect or we forecast that HPC's growth will be higher than the corporate level. When you will cross over? I don't make any comment right now.

Jeff Su - Investor Relations Division

Okay?

Sebastian Hou - CLSA - Analyst

Okay. Thank you.

Jeff Su - Investor Relations Division

Thank you, Sebastian. Operator, can we have the next caller, please?

Operator

Next one, we have Bruce Lu from Goldman Sachs. Go ahead, please.

Bruce Lu - Goldman Sachs - Analyst

Hi. Good afternoon. So I want to ask about the 5G penetration rate. So what is the latest forecast for the total smartphone growth and 5G penetration rate in 2020? And maybe a little bit color on 2021 as well? So, we also see that some of the telco is slowing down their 5G base station [Phonetic] installation. What kind of impact we see at this moment?

Jeff Su - Investor Relations Division

Okay, Bruce. Your question is regards to 5G and smartphones. You want to know what is the smartphone growth and 5G penetration rate for 2020, as well as 2021? And then in light of the telecoms potentially slowing down the deployment. Correct?

Bruce Lu - Goldman Sachs - Analyst

Yes.

Jeff Su - Investor Relations Division

Okay. All right.

Bruce Lu - Goldman Sachs - Analyst

Yes. Thank you.

C.C. Wei - Chief Executive Officer

Let me answer the question. We continue to expect the faster penetration of 5G smartphone as compared to 4G. And for this year, we still forecast high-teens penetration rate and next year even higher, much higher, let me say that. And that's all we have today.

Bruce Lu - Goldman Sachs - Analyst

Oh. And any impact on the telcos business as well?

C.C. Wei - Chief Executive Officer

Oh. I think all countries and all regions are preparing to build-up the infrastructure right now. And I believe next year, even not 100% completed, but all the region, all the countries will have a lot of 5G phone being introduced and that create a higher percentage penetration rate.

Bruce Lu - Goldman Sachs - Analyst

Okay. I understand. My next question is that, I'm a little bit surprised that China revenue contribution only increased slightly from 22% to 23% in third quarter. So, which region will - where we see the strongest growth in the fourth quarter?

Jeff Su - Investor Relations Division

Okay, Bruce. Your question is regards to our revenue by geography, and you want to know for the fourth quarter, which region will contribute the most growth in the fourth quarter?

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Okay, Bruce. We're not prepared to comment on geographic allocation among revenues in the fourth quarter. I can share with you that we expect the platforms that will grow in the fourth quarter will be smartphone and automotive. And the other two were likely to be down.

Bruce Lu - Goldman Sachs - Analyst

I understand that. Thank you.

Jeff Su - Investor Relations Division

All right. Thank you, Bruce. Operator, can we move on to the next caller, please?

Operator

Next one we have Sunny Lin from UBS.

Sunny Lin - UBS Securities - Analyst

Hi. Good afternoon. Thank you for taking my question. So my first question is on 5-nanometer demand. So into next two to three years, what do you think revenue split could be by smartphones, HPC, etc? And do you think the mix could be a bit different from 7-nanometer?

Jeff Su - Investor Relations Division

Sorry. Can you repeat your question, Sunny? You broke up a little bit.

Sunny Lin - UBS Securities - Analyst

Sure, sure. No problem. Sorry about that. So, I wonder for 5-nanometer demand into next two to three years, what does the management think of the revenue mix could be by smartphone, HPC, etc. And will the product mix be a bit different from 7-nanometer?

Jeff Su - Investor Relations Division

Okay. All right. Let me summarize. Thank you, Sunny. Your question is regards to 5-nanometer. And then when we look out over the next three years, how do we see the demand of 5-nanometer, the mix changing in terms of smartphone, HPC, different platforms? And then how does this compare to 7-nanometer? Correct?

Sunny Lin - UBS Securities - Analyst

That's right. Thank you, Jeff.

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Hi. We don't break it down or disclose the platform mix of certain nodes, but we can share with you, as C.C. just mentioned, in the next several years we expect HPC to be the largest contributor of our growth. So that should give you some idea and these guys use advanced technologies.

Sunny Lin - UBS Securities - Analyst

Sure. Got it. And my second question is that, for this year a key part of your growth in smartphones is driven by higher silicon content for 5G and your share gains. So I wonder if you could walk us through how your average silicon content in smartphone may trend into 2021 and 2022. Thank you very much.

Jeff Su - Investor Relations Division

Okay. So, Sunny, your second question is regards to the silicon content in 5G phones. The silicon content increase in 5G phone along with share gain is contributing to smartphone growth this year. So she wants to know what is the silicon content outlook for 2021 and 2022?

C.C. Wei - Chief Executive Officer

This is pretty hard for me to answer, because I did - I cannot release all the information I got for my customer. But let me say that, on the average, the 5G phone have about 30% to 40% more silicon content as compared with the 4G. Did I give you some kind of idea?

Sunny Lin - UBS Securities - Analyst

Sure. So, I have a very quick follow-up. I wonder if you could give us some color regarding your expectation for your market share for smartphone into next two, three years.

Jeff Su - Investor Relations Division

So, Sunny is asking whether we can give some comment on the market share, our market share in 5G phones in the next two to three years.

C.C. Wei - Chief Executive Officer

No. It's not very appropriate for me to give some kind of estimate right now. But let me say that, as long as we have technology leadership position, we are very confident that we're going to have a heightened market share.

Jeff Su - Investor Relations Division

Okay.

Sunny Lin - UBS Securities - Analyst

Sure. Got it. Thank you very much.

Jeff Su - Investor Relations Division

Thank you, Sunny. All right. Let's move on. Operator, can we move on to the next caller on the line, please?

Operator

Next, we have Roland Shu from Citigroup.

Roland Shu - Citigroup Global Markets - Analyst

Hi. Good afternoon. My first question is that, can you update the status of your license applications for shipment to Huawei? When do you expect to receive approval from US government? And also does your 4Q revenue forecast include any wafer shipment to Huawei? This is my first question. Thanks.

Jeff Su - Investor Relations Division

Okay, Roland. So your question is regards to - he wants an update of our license application status regarding Huawei and he also wants to know does our fourth quarter guidance include any shipments to Huawei?

C.C. Wei - Chief Executive Officer

Roland, we are complying fully with the regulation. And so - and we also noticed that there is a report saying that TSMC got the license. We are not going to comment on this unwanted speculation. And we also don't want to comment on our status right now. For the 4Q shipment to Huawei, no, the ban, the regulation already say that up to September 17, [Foreign Speech].

Jeff Su - Investor Relations Division

15.

C.C. Wei - Chief Executive Officer

September 15? Okay. Same.

Roland Shu - Citigroup Global Markets - Analyst

Okay. Okay. Thank you. Okay. And my second question is, how is the pricing pressure across all technology nodes, so far? Some of your foundry peers are considering to raise wafer ASP given a very high utilization at 8-inch fab. So, were you considering to follow to raise the pricing on 8-inch or on other mature technology nodes? Thanks.

Jeff Su - Investor Relations Division

Okay, Roland. Thank you. So your second question is regards to pricing pressure. Your node is that some of the foundry peers are considering to raise the 8-inch wafer price. So you want to know, does TSMC plan to raise our 8-inch wafer pricing or also raise our pricing on the mature nodes?

C.C. Wei - Chief Executive Officer

Let me answer the question. The answer - the big answer is no. We continue to work with customers and customers are our partners. So for short-term supply shortage we are definitely we are now using this kind of opportunity to raise our price. Our wafer price we are selling our values, our service to our customer that including the technology, delivery, quality, everything. Certainly, TSMC is working with all the customer and view them as our partners. And so, we don't using this opportunity to raise our wafer price. Did that answer your question?

Roland Shu - Citigroup Global Markets - Analyst

Yes. Thank you.

Jeff Su - Investor Relations Division

Okay. Thank you, Roland. Let's move on operator to the next caller.

Operator

Yes. Next we're having Brett Simpson from Arete Research. Go ahead, please.

Brett Simpson - Arete Research - Analyst

Thanks very much. I just had a question on your long-term capacity planning and you've laid out the view that we're going to see some structural tightness for the next couple of years in foundries potentially. And I'm just wondering, if you see - you have a very strong growth position in HPC, but you still have a very low market share in like x86 or PC and servers broadly. I'm just wondering if we do see Intel looking to outsource major CPU lines to foundry, it could be a large one-time boost to the industry - to the foundry industry. So, would TSMC be in a meaningful - would they be able to meaningfully support Intel's needs if there was a big one-time outsourcing? And would you be prepared to take capital intensity to much higher levels should the opportunity arise? Thank you.

Jeff Su - Investor Relations Division

Okay, Brett. Let me try to summarize your question. Your question basically is premised around our long-term capacity planning and pointing out that there is a structural tightness in foundry and we - TSMC has a strong growth position. So your question specifically relates to x86 and Intel. If Intel were to outsource any one-time - to foundry, your premise is that, this could be a one-time big outsourcing opportunity. And so, how would we prepare or handle for this?

C.C. Wei - Chief Executive Officer

Well, let me say that we do not comment on the specific customers nor on the specific product. But let me say, our capex and capacity planning is based on the long-term demand profile that is underpinned by the industry's megatrend to meet our customers' demand. And Intel is one of our important customers and we continue to work with them.

Brett Simpson - Arete Research - Analyst

Okay. Thank you. And maybe just as a follow-up regarding your capacity plans over the near-term. Are you planning to add any capacity at the mature nodes, maybe not so much 8-inch, but certainly sort of 28-nanometer or even 16-nanometer? And do you foresee putting any customers on allocation, given the backdrop with tightness at the moment? Thank you.

Jeff Su - Investor Relations Division

Okay. So, Brett, your second question is regards to our capacity plans in the near-term, specifically at some of the mature nodes, like 28- and 16-nanometer. Are we planning to add capacity and with the tightness our customers on allocation?

C.C. Wei - Chief Executive Officer

Well, again, let me say that we pin our capacity to meet the customers' demand, who [Phonetic] is the leading edge mature node or specialties. We always work with customer dynamically and also work with them closely to pin our capacity. And definitely, today, there are some shortage, but we are doing our best to serve our customers.

Jeff Su - Investor Relations Division

Okay. Thank you, Brett.

Brett Simpson - Arete Research - Analyst

Thanks very much. Thank you.

Jeff Su - Investor Relations Division

Thanks a lot, Brett. All right. Operator, can we move on to the next caller on the line, please?

Operator

Next one to ask question, Charlie Chan from Morgan Stanley. Go ahead, please.

Charlie Chan - Morgan Stanley - Analyst

Thanks, and good afternoon, gentlemen. My first question is about your 2-nanometer progression, because I think a couple of weeks ago, there was a news talking about, you may see the 2-nanometer in mass production in 2024. So I just want to get Company's clarification about your progress here and maybe your technology roadmap and that realistic timing for the mass production? Thank you.

Jeff Su - Investor Relations Division

Okay. So Charlie's first question is in regards to our 2-nanometer, he says, according to news reports that the production is going to begin in 2024. So he wants to know whether we can share the technology roadmap requirements and the timing of our 2-nanometer?

C.C. Wei - Chief Executive Officer

Charlie, let me say frankly, we are not ready to make any comment on the 2-nanometer yet. All right?

Charlie Chan - Morgan Stanley - Analyst

Okay. Yeah. But there seems to be some comments from your technology forum, so any reason why you can't disclose that to investors society here [Phonetic]?

Jeff Su - Investor Relations Division

No. I think Charlie, all we have disclosed about our 2-nanometer is the location, which will be in Hsinchu. We have not commented on the technology specifications, the timing or anything beyond that. So that is, you - as you said, according to your reading the news, that is not TSMC's comment. And as C.C. said, we are not prepared to comment on 2-nanometer.

Charlie Chan - Morgan Stanley - Analyst

Okay, okay. No problem. And then my second question is maybe to Wendell, about the gross margin trend follow-up. So, based on your current depreciation table, when do you think the depreciation is going to peak in the coming years or coming quarters, at what points? And also, I think you mentioned that the new nodes brand is a key factor to the gross margin dilution. But I think 4-nanometer is a part of the 5-nanometer family, right? So, can we expect that in 2022 there is not going to be any kind of margin dilution from the 4-nanometer? Thank you.

Jeff Su - Investor Relations Division

All right. So, Charlie, your second question is regards to depreciation and gross margin. Charlie wants to know when do we expect depreciation to peak out on a quarterly or an annual basis? And he also wants to know that, would we expect dilution from 4-nanometer in 2022, given that 4-nanometer is an extension of our 5-nanometer? Should, there, therefore not be dilution from 4-nanometer?

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Okay, Charlie. The first question, it's really difficult to answer, because if you continue to invest you may not have a peak in depreciation. Just as if you continue to have strong growth, you may not have a peak in your revenue.

So, the second question, yes, we still expect that N5 family, the gross margin to reach corporate average in about seven or eight quarters, and - which is some time in 2022.

Jeff Su - Investor Relations Division

Great. All right.

Charlie Chan - Morgan Stanley - Analyst

Okay. That's very helpful. Thank you.

Jeff Su - Investor Relations Division

Thank you, Charlie. Operator, let's move on to the next caller on the line, please.

Operator

Right now we are having Laura Chen from KGI. Go ahead, please.

Laura Chen - KGI Securities - Analyst

Hi. Thank you for taking my question and congratulations for the good result. My first question is regarding the 3-nanometer. Can you give us update on current engagement? And we know that C.C. just mentioned, we will have risk production next year and mass production probably on second half 2020. I'm just wondering, will it be smartphone or HPC go first. That's my first question. Thanks.

Jeff Su - Investor Relations Division

Okay. So, Laura, your first question is regards to our 3-nanometer. She wants to know what is the current engagement with customers? And then with the volume production targeted for second half 2022, is it going to be smartphone or HPC-driven?

C.C. Wei - Chief Executive Officer

All right. Let me answer the question first on the engaging with customer. We are engaging with more customer at N3 as compared with N5 and N7 at the similar stage. Okay? So there is a lot of customers are working with us. And now, which one in the second half of 2022, which one will be the first product, actually, in smartphone and HPC applications? Both.

Laura Chen - KGI Securities - Analyst

Okay, thanks. And my second question is about our supply chain equipment procurement plan. I think given our positive outlook and continuous capex. So, do we plan to evaluate more local suppliers? I think given TSMC's leading position in the global foundry space, I think that give a good position to lead the localization equipment. So, can you give us some color about what's your view on the - to buying more equipment from the Taiwanese supplier or current status of total procurement percentage per year from Taiwanese vendor, something like that?

Jeff Su - Investor Relations Division

Okay, Laura. So your second question is regards to our vendor and supply chain procurement strategy. Your question is really, will - are we considering - will we consider to use more local Taiwan suppliers? Do we have any type of percentage breakdown or anything like that, correct?

Laura Chen - KGI Securities - Analyst

Yes. Yeah. Right. Thanks.

C.C. Wei - Chief Executive Officer

Okay. We develop the technology or we maintain the technology and manufacturing based on the best performance and the best cost structure. So, we did not put the - where it came from. Or we did not put the regions into consideration, to be frank with you. So, the best technology, the best manufacturing cost is what we count. And so, we don't have any certain percentage limitation on which area or the equipment came from. All right?

Jeff Su - Investor Relations Division

Okay. Does that answer your question, Laura?

Okay. Thank you. Operator, let's move on to the next caller, please.

Operator

Next one we have, Krish Sankar, Cowen and Company. Go ahead, please.

Krish Sankar - Cowen and Company - Analyst

Yeah, hi. Thanks for taking my question. I have two of them. First one is on the matured notes, i.e., 28-nanometer and above. Not currently, but over the next few years how do you expect the revenue and wafer starts to trend on the mature nodes, especially as some of your customers started migrating to the leading edge?

And then my second question is, in the past, you've spoken about converting some 28-nanometer plus capacity to 20-nanometer or so for IoT and other applications. Can you provide us an update on how this transition is going?

Jeff Su - Investor Relations Division

Okay. Thank you, Krish. Let me try to summarize your questions. Maybe I'll summarize the first one and then we can summarize the second. Your first question is regards to our mature nodes, specifically 28-nanometer and above. You want to know in the next few years what is the revenue outlook and also the demand or wafer starts outlook over the next few years, especially as customers may start to migrate to more leading nodes what we do at the 28-nanometer and above? What is the outlook?

C.C. Wei - Chief Executive Officer

Well, let me answer that specifically on the 28-nanometer. We continue to improve the technology and now we offer 22-nanometer ultra low-power and that's for IoT applications. And we also work with the customer to migrate their product from 65, 55 to 45 to 28 and to 22. Today, the noding [Phonetic] is not perfect yet, but we expect in the one or two years. And then we expect the noding will greatly improve.

And so, to answer your question on all the mature node, we still are improving our technologies and we still expect the growth.

Jeff Su - Investor Relations Division

Okay. And I think, Krish, just to clarify, your - the second question was in regards to 28 and your question was conversion to 20, but as C.C. said, we are converting 28 to 22. So, hopefully, that also addressed your second question.

All right.

Krish Sankar - Cowen and Company - Analyst

Yes, it does. Thank you, Jeff. Thank you, C.C.

Jeff Su - Investor Relations Division

Sure, Krish. Thank you very much. All right. Let's move on operator to the next caller, please.

Operator

Next one we are having Rick Hsu from Daiwa Securities. Go ahead, please.

Rick Hsu - Daiwa Securities - Analyst

Yeah, hi. Good afternoon, guys. Okay. My first question, I just want to make a little clarification about your capex for this year. I think Wendell said about it's going to be around $17 billion or is it going to be over $17 billion? Can I make - can you clarify on this? And also give us some - a little bit color about the capex for next year, please?

Jeff Su - Investor Relations Division

So your first question to clarify our 2020 capex, what is - is it about or above $17 billion?

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Yeah. It's about $17 billion.

Rick Hsu - Daiwa Securities - Analyst

Okay.

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Yeah. For 2021 - I'm sorry.

Rick Hsu - Daiwa Securities - Analyst

Yes. Please go ahead.

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Yeah. Your second question is about 2021 capex. It's too early to discuss the 2021 capex at this moment. But as - if we see strong demand and the - we will make the investments, because the capex investment in this year is always for the demand in the following years. So if we see the following year have strong demand, we will invest.

Rick Hsu - Daiwa Securities - Analyst

All right. Thank you so much. I presume the - it's not second question, just follow-up, right? Can I add one more?

Jeff Su - Investor Relations Division

Sure. Your second question, please.

Rick Hsu - Daiwa Securities - Analyst

Okay. So second question is about the inventory. I think C.C. did mention that right now because of the macro uncertainties, COVID-19, etc. So, customers intend to keep their inventories above seasonal for a longer period of time. But what if - because - unless uncertainty remains structural and it goes on forever, otherwise one day when uncertainty removed, do you worry about your customer to unwind inventory and cause some business correction?

Jeff Su - Investor Relations Division

Okay, Rick. So your second question is regards to inventory. Although there is macro uncertainty and COVID-19, but some day this will be over, so does this worry us where we see a sudden sharp correction or inventory drop as a result?

C.C. Wei - Chief Executive Officer

Okay. Let me share with you again our view on inventory. In fact, we don't worry too much about it because of the - as I said, now because of the pandemic, the digital transformation has been accelerated and that created a lot of new demand. Let me say that, it looks like - take for example, now work from home, so, now everybody buy a PC, every kid had to buy a PC. And then just look at again on the 5G smartphones benefit. The advantage of the bandwidth and the speed and the low latency, everything, and people are going to need it in this digital transformation. And so, even right now is that, we expect inventory is higher than historical high-level, but the demand will pick-up. And in next year or the 2022, we are confident that demand will pick-up. And so, that minimize or mitigate the impact of the inventory correction that everybody has a doubt on their mind.

Jeff Su - Investor Relations Division

Okay?

Rick Hsu - Daiwa Securities - Analyst

Okay, great. Thank you so much.

Jeff Su - Investor Relations Division

Sure. Thank you, Rick. Operator, let's move on to the next caller, please.

Operator

Next one is Mehdi Hosseini from SIG.

Mehdi Hosseini - Susquehanna International Group, LLP - Analyst

Yes. Thank you for taking my question. First one, is your customers are willing to have inventories above this average trend line, should we assume that your wafer shipment in the first half of 2021, specifically Q1 would also follow better than seasonal trend? And I have a follow-up.

Jeff Su - Investor Relations Division

Okay. So, Mehdi's first question is regarding to basically our first quarter. If customers are willing to hold a higher level of inventory, should we assume that wafer shipments in the first quarter will also be much better?

C.C. Wei - Chief Executive Officer

We are going to share with you in the first investor conference. All right? Right now, we are now ready to make any comment on 2021, especially the fourth quarter.

Jeff Su - Investor Relations Division

Okay. Your second question, Mehdi?

Mehdi Hosseini - Susquehanna International Group, LLP - Analyst

Okay. Sure. Can you please remind us how we should think about tape-out activity, specifically at N4 and N5 and how does it compare to N7? Any follow-up would be great.

Jeff Su - Investor Relations Division

So your question is the tape-out activity at N4 and N5 as compared to N7.

C.C. Wei - Chief Executive Officer

Well…

Mehdi Hosseini - Susquehanna International Group, LLP - Analyst

Yeah. If there's any update.

C.C. Wei - Chief Executive Officer

Okay. The demand is very strong in N4, N5 and we are engaging many customers. So, the exact number of the tape-outs right now is all in our planning, and - but I can share with you that customers' demand is very strong and will be continue to be strong for the next couple of years.

Jeff Su - Investor Relations Division

Okay. All right. Thank you, Mehdi. Operator, can we move on to the next caller, please.

Operator

Right now we have Gokul Hariharan from J.P. Morgan.

Gokul Hariharan - J.P. Morgan - Analyst

Thanks for the follow-up question. There has been a lot of discussion on market share on leading edge. So, C.C. could you comment a little bit on how do we think about TSMC's market share in N7s, which I think is probably like 85% - 80%, 85% or little higher? And compare that with what are we expecting for the N5 family, which include N5 and N4? And I had a second question as well. Thank you.

Jeff Su - Investor Relations Division

All right. Gokul's first follow-up question is in terms of market share. He wants to ask C.C., what do we see in terms of our market share at 7-nanometer? And what is our expectation or outlook at the 5-nanometer family?

C.C. Wei - Chief Executive Officer

Gokul, since I'll continue to say we have technology leadership, so I can share with you that we have very high percentage of market share. But what exactly the number is not appropriate to announce it because it's all our own estimate. But, again, the most important thing is not the market share. The most important thing for us is continue to maintain the technology leadership and we are focused on that.

Jeff Su - Investor Relations Division

Okay?

Gokul Hariharan - J.P. Morgan - Analyst

Okay. And just a follow-up question on that. Can we say at least directionally is N5 market share in our own estimate higher than N7 or similar to N7?

Jeff Su - Investor Relations Division

Okay. So the second question Gokul wants to ask is still our market share. Do we see directionally will N5 market share be higher than that of N7?

C.C. Wei - Chief Executive Officer

Yeah. Very similar because we always are the technology leader. When we introduced N7, we are the technology leader. And when we introduced the N5 this year in mass production, we continue to be the technology leader. So, yeah, very similar.

Jeff Su - Investor Relations Division

Okay. Thank you.

Gokul Hariharan - J.P. Morgan - Analyst

Understood.

Jeff Su - Investor Relations Division

Yeah. Thanks, Gokul.

Gokul Hariharan - J.P. Morgan - Analyst

Can I ask one more question? Sorry.

Jeff Su - Investor Relations Division

I think - Gokul, sorry that's two, so I - sorry, I would like to ask you to get back in the queue, because we still have, I think quite a few people.

Gokul Hariharan - J.P. Morgan - Analyst

Okay. All right.

Jeff Su - Investor Relations Division

But thank you. All right. Operator, let's move on to the next caller, please.

Operator

Next one we have Randy Abrams from Credit Suisse.

Randy Abrams - Credit Suisse - Analyst

Okay. Thanks for the follow-up. I wanted to ask on the R&D, it stepped up faster in the quarter. From this higher level, could you discuss the investment rate that you're expecting for R&D, say, as a percent of sales? And would the new advanced nodes and packaging investments start to increase the R&D intensity?

Jeff Su - Investor Relations Division

Okay. So Randy's first question is that, he noticed - well points out, actually, that our R&D has increased or stepped up in the third quarter of this year. So he wants to know given advanced packaging and the continued technology leadership, what is the R&D percentage of sales outlook that they - we should expect?

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Randy, let me share with you that in the third quarter the R&D expenses are higher because of our development activities in N4 and N3. Longer-term, we're still expecting the R&D expense to be about 8% or slightly higher than 8% of our revenue.

Randy Abrams - Credit Suisse - Analyst

Okay. Great. Appreciate that. And the second follow-up question I had, just on a couple of segments, auto, I think you mentioned earlier about coming back, it was soft in the quarter. Could you discuss now, as a growth driver from a low base, if you're finally seeing some of those content drivers for next one to two years, there could be a meaningful pick-up even without auto, but from a content?

And then the other side on consumer, which was quite weak just despite a lot of work from home and consumer electronics are coming through. So, if you could give color maybe on something happening in the consumer segment?

Jeff Su - Investor Relations Division

Okay. So Randy's second question is really a little bit split into two, but he wants to know with the automotive business seeming to bottom out, how do we view our automotive platform as a growth driver or outlook over the next few years? And then similarly, he also is asking about digital consumer?

C.C. Wei - Chief Executive Officer

All right. Actually, let me comment on the automotive platform. Actually, the COVID-19 has a major impact on the automotive market and supply chain this year all been affected. But we are seeing the sign of recovery in 4Q. In the longer-term, the trend towards safer, greener and smarter vehicle will continue to drive silicon content increase, as well as the demand for advanced and specialty technology. And again, I want to emphasize, with our technology leadership, we are well positioned to capture the opportunities. The growth rate will continue to pick up and - but still behind the HPC's growth rate.

And for the digital consumer, it's kind of flat or it's a little bit growth that I can see today. Did that answer your question, Randy?

Randy Abrams - Credit Suisse - Analyst

Yeah. Yeah. Just maybe the near-term, I was surprised it was as much down, factoring in their stay at home, consumer electronics demand, but I know if anything just specific or short-term in nature on that.

C.C. Wei - Chief Executive Officer

Okay. Actually, some of the product, because of stay at home or the work from home, some of the product we put into the HPC's category.

Randy Abrams - Credit Suisse - Analyst

Okay. All right. Great. Thank you.

Jeff Su - Investor Relations Division

Okay. Thank you, Randy. Operator, let's move on to the next caller, please.

Operator

Next one is Sebastian Hou, CLSA.

Jeff Su - Investor Relations Division

Hello, Sebastian, you may need to unmute.

Sebastian Hou - CLSA - Analyst

Yeah. Good. Thank you, Jeff. So let me - first question, let me try the overbooking inventory question in another way, if I may. So we understand the higher inventory is structural, led by COVID-19. But how about the higher inventory you expect led by customers' fear of foundry capacity tightness, which is now undersupplied almost everywhere, from leading edge to cutting [Phonetic] edge? Based on the past cycles' experience, the tighter the supply of any components, the higher the risk of supply chain overbooking. It happens. I'm curious whether TSMC is seeing any gap between customers ordering volume and your internal forecasts on end demand. Or it's not a concern at all, as all the strong orders are just a reflection of the real demand? Thank you.

Jeff Su - Investor Relations Division

Okay. So Sebastian's question is around the inventory. And while his views some of the inventory may be related to COVID-19 and more structural or linger for a while. He wants to know, is there a concern - does TSMC have a concern that because the foundry is tight, therefore, their customers are doing a lot of overbooking or so-called double booking? And also, therefore, does this create a concern for TSMC when we look at our internal forecast for the end demand market versus customer's booking that there is a large gap in risk of shortfall?

C.C. Wei - Chief Executive Officer

Well, Sebastian, actually in TSMC's view, all my customers are our partners. So we work with them very closely. And so, to, let's say, that minimize the feel of overbooking because they don't have to be afraid of capacity shortage and then do the overbooking to TSMC. No. We work with them as a partner and we - both parties and all my customer work with TSMC and tell us their view on the market and we share our view on the market with them also. So, this one minimize a lot of the possibility of overbooking. And that's the way that TSMC working with our customers. They are all our partners.

Did that answer your question, Sebastian?

Sebastian Hou - CLSA - Analyst

Thank you. Yes, yes. That's very, very great answer. Thank you, C.C. My second follow-up question is that, we've seen the rising cross-strait relationship risk in recent months. So what - if TSMC or your customers are concern or discuss with you about the potential risk in production operation as most of your fabs are located in Taiwan? And if such heightened risk continue for longer than just months, whether TSMC will keep - consider keep most fabs in Taiwan or increasing investment in other regions? Thank you.

Jeff Su - Investor Relations Division

Okay, Sebastian. Thank you. Let me summarize your second question. Your question is regarding that you observed the rising or growing risks in the cross-strait relationships. And so, therefore, for our customers, do they feel there is a heightened risk, and thus, is there a need for TSMC to, I guess, paraphrase, expand our manufacturing footprint into other locations given the state of cross-strait relations in the next few years?

C.C. Wei - Chief Executive Officer

Okay, Sebastian. In fact, TSMC will continue to focus on Taiwan. I mean, that's our center of R&D and majority of our production fabs will continue to be located in Taiwan regardless of all the geopolitical tension or any kind of disruption. Did that answer your questions?

Sebastian Hou - CLSA - Analyst

Yes, yes. That's great. Thank you, C.C. And thank you, Jeff.

Jeff Su - Investor Relations Division

Sure. Thank you, Sebastian. All right. Operator, let's move on to the next caller, please.

Operator

Next one we have Bruce Lu from Goldman Sachs.

Bruce Lu - Goldman Sachs - Analyst

Okay. So the question is for the advanced packaging, what is the revenue growth for advanced packaging in 2020? The growth rate seems very strong but the management also only guided for like the future growth for the advanced packaging is only slightly higher than the corporate average. This was much lower than what we had in the past three years. Any reasons behind that? And what's the profitability for the advanced packaging right now?

Jeff Su - Investor Relations Division

Okay. So, Bruce, your first question is regards to our advanced packaging business. You want to know what is the growth of the advanced packaging business in 2020, and also, what is the profitability of the advanced packaging?

Wendell Huang - Vice President, Finance and Chief Financial Officer / Spokesperson

Yeah. Bruce, the growth of our advanced packaging in this year is close to the corporate, but not as high. In the next several years, we do expect that on a CAGR basis, it will be faster - it will grow faster than the corporate average. And in terms of margins, its margins is lower than the corporate. However, its investment intensity, capital intensity is lower. Therefore, on a return basis, ROIC basis, it is acceptable to us.

Jeff Su - Investor Relations Division

Okay?

Bruce Lu - Goldman Sachs - Analyst

Okay. So, the next question is for the 28-nanometer. I want to clarify something, in the fourth quarter 2019, I think the management showed a very high confidence that 28-nanometer utilization where we're back to the corporate average driven by the more applications, such as CMOS, uni-sensor [Phonetic] etc., etc. However, if my understanding is correct, management still expect it will be lower than the corporate average in the coming years in terms of utilization rate. Is that the right understanding right now?

Jeff Su - Investor Relations Division

Okay. So your second question, Bruce is regarding our 20-nanometer in…

Bruce Lu - Goldman Sachs - Analyst

28.

Jeff Su - Investor Relations Division

I'm sorry.

C.C. Wei - Chief Executive Officer

28.

Jeff Su - Investor Relations Division

28?

Bruce Lu - Goldman Sachs - Analyst

I'm sorry, 28-nanometer.

Jeff Su - Investor Relations Division

Yes. 28-nanometer and that you said that we had commented in the fourth quarter 2019 earnings result, January this year, that our 28-nanometer utilization would improve in one to two years' time. And so - and to the corporate average. And now your question is, does that statement still hold true?

C.C. Wei - Chief Executive Officer

Bruce, let me say that the progress is a little bit slower than we expected, but still in one to two years the utilization rate of the 28-nanometer, particularly we advance to 22-nanometer will be reaching the corporate average.

Jeff Su - Investor Relations Division

Okay?

Bruce Lu - Goldman Sachs - Analyst

I see. Thank you.

Jeff Su - Investor Relations Division

All right. Thank you.

Bruce Lu - Goldman Sachs - Analyst

Thank you.

Jeff Su - Investor Relations Division

Thank you, Bruce. All right. In the interest of time, we will take the question from the last caller or last participant, please.

Operator

The last one to ask question is Roland Shu from Citigroup. Go ahead, please.

Roland Shu - Citigroup Global Markets - Analyst

Yes. On your N6 technology is with one more EUV layer insertion than 7+, but N4 is with reduced mask layers for N5 and is with a simplified process. So, can you elaborate your technologic development logic between N6 and N4 and also the target market for N6 and N4? And how N6 and N4 contribute to your business, respectively, going forward?

Jeff Su - Investor Relations Division

Okay, Roland. So your question is regards to N6 versus N4 positioning. You point out, technology-wise, 6-nano - N6 has one more EUV layer than 7+, but N4 may have reduced mask layers versus N5 and with simplified process. So you really want - you're asking, does N4 serve the same group or target the same group of customers as N6 or are they separate markets or targeting separate customers and applications?

Roland Shu - Citigroup Global Markets - Analyst

Correct. Thanks.

C.C. Wei - Chief Executive Officer

Roland, it's actually very hard to answer your question whether the N6 is the same group of the N4. Let me give you some kind of idea. N6 is kind of development, continued enhancement of the N7 or N7+. And so, all the second wave of the customer will use N6 when they want to enter the 7-nanometer family, and because of that offer the better density, better performance and better power consumption.

Now, the similar to N6, N4 is also - we continue to improve the N5. And we also observe that if we can reduce the mask count, we can improve the defect density, we can improve the cycle time. And we also - at the same time, we also offer the better density, better performance, etc., etc. And so, are they the same group? I cannot answer this question. But it's the same purpose, we offer N6 to be the second wave of the N7 to the customer. We offer the N4 also to offer to the second wave of the customer of N5. Yeah.

Roland Shu - Citigroup Global Markets - Analyst

Okay. Thank you. Yeah, a little bit complicated. Yeah, because N4 does - is there any performance enhancement to N5, because this is with the simplified process? And still there is - I can understand that there is improvement on this defect on this product, production cycle time, but how about for the performance point of view, is there going to be enhancement in N5?

Jeff Su - Investor Relations Division

Okay. So your second question, Roland, continues to ask about the 4-nanometer. Will 4 - N4, does it carry any performance enhancement or PPA improvement as compared to N5?

C.C. Wei - Chief Executive Officer

Yes. The short answer is yes. We improve the density, we improve the performance, including the transistor performance.

Jeff Su - Investor Relations Division

Okay?

Roland Shu - Citigroup Global Markets - Analyst

Okay. Thank you.

Jeff Su - Investor Relations Division

Thank you, Roland. Yeah. Thank you very much. All right. 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 four hours from now. The transcript will become available 24 hours from now. Both of them are going to be available through TSMC's website at www.tsmc.com.

Thank you, everyone, for joining us today. We hope everyone continues to stay safe and healthy, and we hope you will join us again next quarter. Goodbye, and have a good day.

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Q3 2020

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