United Microelectronics Corp

TWSE:2303

Earnings Call Transcript 2021-Q1

[Operator]

Welcome, everyone, to UMC's 2021 First Quarter Earnings Conference Call. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit our website, www.umc.com, under the Investor Relations, Investors' Events section.

And now I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. And Mr. Lin, please begin.

[Michael Lin, executive]

Thank you, and welcome to the UMC's conference call for the first quarter of 2021. I'm joined by Mr. Jason Wang, the President of UMC; and Mr. Chitung Liu, the CFO of UMC.

In a moment, we will hear our CFO present the first quarter financial results, followed by our President's key message to address UMC's focus and the second quarter 2021 guidance. Once our President and the CFO complete their remarks, there will be a Q&A section.

UMC's quarterly financial reports are available at our website, www.umc.com, under the Investors' Financial section.

During this conference, we may make forward-looking statements based on the management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially including the risk that may be beyond the company's control. For these risks, please refer to UMC's filing with the SEC in the U.S. and the ROC securities authorities.

Now I would like to introduce UMC's CFO, Mr. Chitung Liu, to discuss UMC's first quarter 2021 financial results.

[Chi-Tung Liu, executive]

Thank you, Michael. I would like to go through the first quarter '21 investor conference presentation material, which can be downloaded from our website.

Starting on Page 3. The first quarter of 2021 consolidated revenue was TWD 47.1 billion, with gross margin at 26.5%. The net income attributable to the stockholder of the parent was TWD 10.43 billion, and the earnings per ordinary shares were TWD 0.85. In the first quarter, the capacity utilization rate was 100%, a further improvement from 99% in the previous quarter.

And please go to Page 4. For sequential comparison, Q1 revenue of TWD 47.1 billion represents about 4% quarter-over-quarter growth, which contributed both from ASP increase of 3%-plus as well as wafer shipment, which is also 3%-plus. And it was somewhat offseted by the stronger NT dollars. Gross profit margin continued to grow to 26.5% or TWD 12.5 billion. And operating income margin rate in first quarter was 16.2%, increased by 35.7% sequentially. So the net income as reported was around TWD 0.85 per -- for -- per ADS is about USD 0.149.

So on year-over-year comparison on Page 5. Revenue grow by 11.4% despite the stronger -- much stronger NT dollar exchange rate. Gross margin improved by nearly 7% gross point -- percentage point to 26.5% compared to 19.2% the same period of last year. And gross margin -- operating margin improved to 16.2% from 8.1% in first quarter of 2020. So EPS will show a pretty significant growth from TWD 0.19 in Q1 2020 to TWD 0.85 to -- this past quarter.

On Page 6. Our cash is around TWD 107 billion, and the total equity is about close to TWD 250 billion. Like I mentioned earlier, the Q1 earning -- revenue growth contributing both from ASP growth as well as wafer shipment growth.

And on Page 7, you can see there's more than 3% uptick in our blended ASP for first quarter of 2021.

In terms of revenue breakdown on Page 8. Asia continued to grow. And right now, it represents about 63% of our total revenue. And Europe and Japan also show minor growth in first quarter of '21.

For Page 9, IDM, still unchanged, around 14%.

And on Page 10, we see some more balanced distribution among 3 major segments. So Consumer now represents about 27% and Communication is about 46%.

And for Page 11, 28/22-nanometer technology represent about 20% of our total price in Q1 2021, and the 40-nanometer represents another 20% for Q1 '21.

On Page 12, our capacity breakdown for quarter 2, we will see some 4% quarter-over-quarter capacity growth, mainly coming from 12-inch capacity expansion at both 12A as well as 12X in Xiamen.

And on Page 13, we revised up our annual CapEx budget, mainly due to a new project in Tainan, which we will go into details later. For the new updated CapEx for '21 is now USD 2.3 billion.

So the above is a summary of UMC results for Q1 2021. More details are available in the report, which has been posted on our website.

I will now turn the call over to President of UMC, Mr. Jason Wang.

[Jason Wang, executive]

Thank you, Chitung. Good evening, everyone. Here, I would like to update the first quarter operating result of UMC.

Amid the semiconductor component shortage, we are working with our customers, suppliers and partners to alleviate the capacity tightness across the supply chain.

In Q1, robust wafer demand led to a full utilization in our manufacturing side, bringing overall wafer shipments to 2.37 million 8-inch equivalents. For the quarter, our gross profit grew 15.2% quarter-over-quarter to TWD 12.49 billion, which partly reflected higher contribution from our 28-nanometer technology.

During the first quarter, we continued to see an increase in 28-nanometer wafer shipments, driven by strong wafer demand associated with digital TV, set-top box and connectivity chips designed into smartphones. As a result, 28-nanometer revenue grew 18% quarter-over-quarter, representing 20% of our wafer business. Furthermore, we have started to ship 22-nanometer products to fulfill consumer demand, leading to a recognition of 22-nanometer wafer revenue in first quarter '21.

We foresee a significant pickup in 22-nanometer product tape out that will increase our 22/28-nanometer product pipeline, optimize overall product mix and enhance UMC foundry share.

Looking into the second quarter, market demand will continue to outpace supply, which will lift wafer shipments and blended ASP in U.S. dollars. Recent market dynamics have provided us and our customers an opportunity to reinforce our CapEx strategy within ROI boundary, while trying to alleviate the long-term capacity constraint in the supply chain. Therefore, our Board of Directors have approved an investment plan, which will expand the capacity at UMC Fab 12A P6 in Taiwan Tainan Science Park through an innovative win-win partnership model with several leading global customers.

The P6 expansion is scheduled for production in the second quarter of 2023, with total investment for the project earmarked at TWD 100 billion. In addition to UMC's previously announced 2021 CapEx of USD 1.5 billion, the bulk of which is allocated towards equipment for the company's Fab 12A P5 sites, adjacent to P6, total UMC investment in the Tainan Science Park will reach approximately TWD 150 billion over the next 3 years. The P6 program is supported by a multiyear's product alignment between UMC and the involved customers that includes a loading protection mechanism that will ensure the P6 capacity is maintained at a healthy loading level.

We look forward to leveraging our #1 worldwide foundry market position in multiple areas, such as 28-nanometer OLED driver IC production, so we may further strengthen UMC semiconductor industry relevance and capture new market opportunities down the road.

Now let's move on to the second quarter 2021 guidance. Our wafer shipments will increase by 2%. ASP in U.S. dollar will increase by 3% to 4%. However, the surging NT dollar headwind may potentially offset benefits on Q2 shipments increase in ASP growth. Gross profit margin will challenge 30%. Capacity utilization will be at 100%. Our 2021 cash-based CapEx will be budgeted at USD 2.3 billion, as Chitung mentioned earlier.

That conclude my comments. Thank you all for your attention. Now we are ready for question.

[Operator]

[Operator Instructions] Our first question is coming from Randy Abrams, Crédit Suisse.

[Randy Abrams, analyst]

Okay. Congratulations on the results and margin improvement. First question, I wanted to ask on the capacity expansion. Could you discuss the amount of capacity for the Fab 12A Phase 5 with the CapEx raise? And also, how much capacity is planned for Phase 6 with the TWD 100 billion plan? And if there's a framework for total CapEx, if you also expect any spending to continue in China or other facilities, if there's a view the current year spend may continue around this level for the next couple of years?

[Chi-Tung Liu, executive]

So Randy, for P6 alone, the total CapEx is around TWD 100 billion. And it's likely -- the spending is likely to spread out through -- over the next 3 years. So starting from later part of this year, bulk of that in 2022 and also nearly 1/3 in the 2023. So that will be the key part of our CapEx over the next 3 years. And for the original budget of USD 1.5 billion, the bulk of that will go to the 10,000 wafer 28-nanometer capacity per month at P5. And that's already ongoing. And we are seeing the contribution earlier, maybe as early as next year.

As for Xiamen, we are also already reaching to the target -- closing to the target level of 25,000 wafer per month. And as you recall, it was about 17,000, 18,000 wafer by -- about the same time last year. But through the expansion, now it's close to the full capacity right now. So maybe, Jason, you want to add a few more?

[Jason Wang, executive]

I think the other data point is for the Tainan facility, after the P5, will be about 90,000 wafer capacity total for the Tainan site, the 12A. And by adding the P6, we'll be on top of the 90,000. So we are approaching about 120,000.

[Chi-Tung Liu, executive]

Okay, over 10,000 xP5.

[Jason Wang, executive]

Right.

[Randy Abrams, analyst]

Okay. So -- and to clarify, it's 90,000, so you have 10,000, P5; P6 is 20,000. So that brings it to 120,000. Okay.

And the second question, it gets back to the mechanism and this new expansion schedule. If you could talk on how the pricing and margins as you expand and grow the business with the new capacity. How would that impact relative to your current margins where they're getting about 30%? And if you could give an updated view that the depreciation was originally on that kind of nice downtrend in the next 2 years, but now you'll get more growth. But how does the depreciation profile change?

[Jason Wang, executive]

Well, I mean the -- without going to specifics about the actual pricing, I can update. The first is our disciplined ROI-driven strategy did not change. So this program would not affect that strategy. Starting in 2023, this program will support our topline growth, like you said, with multiple years of margin accretion. So this financially, we believe, is justifiable.

As we stated earlier in the P6 press release, this P6 expansion will run at second quarter 2023. And in the meantime, the near-term downward depreciation trend remains unchanged. Even post 2023, UMC total depreciation as a percentage of revenue will be well controlled and managed. Mainly because after a few years our light CapEx depreciation rolled off together with our gross margin improvement, this effort will have strengthened our financial position to capture this market opportunity. So I think our customers also recognize part of the market structure changes. So they foresee this arrangement is meaningful to them, but also beneficial to them. Yes.

[Randy Abrams, analyst]

Okay. And one last question. The blended pricing at start of the year was, I think, kind of a minimum plus 5%. If there's an updated view, with ASP up 3% to 4% in the second quarter, but also there's a lot of talk in the market there's further rounds with the capacity tightness. If you could give a view on pricing? And is there an initial view how 2022 if you're already contracting out and may see some movement up on pricing into next year?

[Jason Wang, executive]

We will continue aligning with our customers. From the recent market dynamics, our forecast for the full year ASP growth will be in the high single digit year-over-year now. And it could approach 10%. And the 10% of the pricing will also include our product mix improvement. And -- therefore, the current ASP lift mainly reflect the value of overall market position, but is more aligned to the market price and market position. So we see -- at this point we see the entire 2021, we'll be approaching about 10% year-over-year growth on ASP.

[Randy Abrams, analyst]

Okay. And is there any talk on 2022 yet? Or is that normally as scheduled, like -- or in second half? But are you starting early given the constraints?

[Jason Wang, executive]

There are ongoing discussions, as I said earlier. We -- hopefully, we can wrap up not only just the pricing, also capacity support alignment early -- before mid of the year. And so that is still ongoing at this point.

[Operator]

And the next question is coming from Bruce Lu, Goldman Sachs.

[Zheng Lu, analyst]

Can you give us a little bit more color about your innovative business model for the new fab? Because -- I don't need any details. But the problem from the investor is when TSMC, who dominated in 28-nanometers global capacity, the Chairman is talking about double booking and oversupply in 28, and we are building additional 28-nanometer capacity. How can we ensure that the capacity, the newly added capacity is fully loaded? What kind of mechanism we can have? Or -- because we have seen so many long-term contracts in many, many industry and a lot of customers just don't honor the contract at the end of the day. So how can we ensure that we can get our desired return?

[Jason Wang, executive]

That's actually a very good question. And it can be a short answer and long answer. Let me see if I can maybe start off giving a bit of a background of this decision. The recent market dynamics lead to a supply-demand imbalance, as everyone knows, particularly in the mature node. Some of our peers in the market also mentioned about that, too. In the past few years, we have seen most of capacity expansion focused on advanced technology. However, the company did not significantly address the mature 12-inch and 8-inch capacity over a period of time due to a challenging market condition.

Within those mature 12- and 8-inch nodes, there are many critical components that play the vital roles in the semi supply chain. Therefore, we believe this event have structurally changed our role and position as a foundry service provider. And I think our customers recognize that. And so at this time, this situation stopped providing us and our customer an opportunity to work closely. And we have to solve the supply shortage together in these mature node. So the behavior of this -- toward this agreement with the customer, is it different than just putting a track expert?

And we call this innovative win-win collaboration model because this arrangement is supported by multi years of product alignment. So this is a multiple years agreement between UMC and the customers. And under the alignment, there's also loading protection mechanism to ensure the capacity to maintain in a healthier loading level. So in other words, this P6 program is well protected with the commitment and obligation from both sides.

Now when you talk about the cyclical risk, this P6 only accounts about 10% to 15% of our operations. With or without the P6, the rest of other capacity offering will be more vulnerable to the industry's cyclicality. So I think the P6 program itself is set up well-protected. Our focus is more on the base of our capacity. And at this -- at the end of the day, our goal to protect our base capacity is we have to continue our relentless enhancement in the technology competitiveness and our manufacturing excellence and -- with the predictable yield stability, our service and the sizable capacity offering. So those are the fundamental solution to cope with the industry's cyclicality.

And so the bottom line, I think the P6 program itself is more well structured, well protected. And -- but the market ups and downs, it will happen. And -- but I -- from our current academic methodology, based on our best effort, we're seeing the demand-supply imbalance situation with those material will stay for some time. The conventional concern, inventory correction or the market ups and downs, probably won't happen within the 1 to 2 years. And -- but beyond that, we have to still go back to focus on our fundamentals. Yes. So that's sort of how we view about this.

[Zheng Lu, analyst]

So that create actually a bigger problem. For example, like 28, right, your covering capacity is like 50,000 to 60,000 wafers per month. So the additional 20,000 is well protected in 2022 onward, but the remaining 50,000 is not protected. So if the customer is having like capacity in both sides, they will fulfill the P6, but they can cut their orders on the P5 -- P -- the original previous 50,000 wafers per month capacity. Is that right?

[Jason Wang, executive]

Yes. I mean -- so what I'm saying is from a competitiveness standpoint, the -- whether we have a P6 or P5, we have to deal with the same situation. And in order to protect or compete in that space, our competitiveness is not going to be based on this imbalance or even people talking about geopolitical or trade issue or so on and so forth. Our core competence will result from our focus in our addressable market segment and which we have been doing for the past few years.

We -- another simple word to put it is we're putting -- we focus on a selective market area within our addressable market segment. And we believe the retentive technology within that segment, and then we start aligning with the customer and strengthen our portfolio. And as a result, we actually start seeing a market gain on that as well. So we have to continue executing that and -- to protect the baseline.

And so I think we march into the direction we feel comfortable. And we feel that we have been staying focused in a select area. We have been executed, and we've become more relevant. So at this point -- and we think that we just have to continue executing that. And the market risk just continues. And we don't have the confidence to say the market will never happen in this cyclical situation, but you have to prepare yourself to compete in that situation.

[Zheng Lu, analyst]

I see. Okay. One clarification for the P6 investment. You mentioned that ROE target or return-driven target is unchanged. But for me, it's like the current wafer price for the 28 cannot justify the return. How can that -- how can this P6 return be secure? Or how can we ensure that it will not be margin dilutive for this incremental revenue? Or how can we ensure that the incremental ROE is not diluted?

[Jason Wang, executive]

Because the current program has a pretty determined pricing for the P6 program. And based on that, the program not only support the top line growth, they also support our multi years of margin accretion.

[Zheng Lu, analyst]

I see. I see. So this P6 wafer price will be different compared to your increasing 28-nanometer capacity?

[Jason Wang, executive]

It is different, yes.

[Zheng Lu, analyst]

I understand that. But can we disclose somehow the price premium?

[Jason Wang, executive]

No, we can't.

[Operator]

And the next question is coming from Gokul Hariharan, JPMorgan.

[Gokul Hariharan, analyst]

Firstly, for this new capacity arrangement. Could we talk a little bit about what level of enrollment do the customers have? Did you consider any potential co-investment from the customer? And any thinking on why you accept co-investment or why you don't accept any co-investment? Just wanted to understand that part.

And when we talk about ROI boundary, could we put some numbers around it so that will be clear for us to communicate to investors? Also, in terms of what is kind of like the ROI boundary that is kind of like a hard stop in terms of where UMC will not invest?

[Jason Wang, executive]

Well, first of all, the -- in addition to what I just mentioned earlier, has a predetermined pricing arrangement of P6. And there's also a guarantee to their commitment by committing to the capacity deposit as well as the loading protection, okay? So there is a structural mechanism to protect the P6 program. And I kind of highlighted earlier in the background of this current market situation because of market dynamics. So this group of customers is willing and recognize the possible structural changes, so they participated this with us jointly. So I will say this is a joint program between us and some of the key customers. And so the -- financially, based on that arrangement, we're not affecting UMC's -- the bottom lines and also provide UMC's top line growth.

And we have spent a lot of time discussing this, ensuring many of the data. And we both agree this is the right thing to do to solving the shortage issues and without affecting UMC's disciplined ROI-driven strategy. I can elaborate more about the specific ROI numbers, but I can tell you that under our Board of Directors review and our team's review, and we see the bottom line with the margin accretion, and that meets our -- it meets our financial targets. So -- and again, I also mentioned earlier, the -- with the P6 program, the near-term downward depreciation trend remains unchanged, even post the 2023 asset production start ramping. So we feel this is a well-structured program for us.

[Gokul Hariharan, analyst]

Got it. Understood. Just one other question. Is there any change in terms of shipment outlook? I think you did talk about blended ASP being up maybe about 10% this year compared to previous. I think we're expecting a little bit more, like mid-single digits. Shipment growth or capacity growth outlook for this year, are we still roughly looking at 3% to 5% capacity growth this year? Or is it a little bit better now?

[Jason Wang, executive]

Yes. That capacity growth is the same for the year, yes.

[Operator]

And the next one is from Roland Shu, Citigroup.

[Roland Shu, analyst]

First question out to Jason. Jason, in your prepared remark, you said the first quarter gross profit growth was partly reflects higher contribution from 28-nanometer revenue. So question is, how about the 28-nanometer gross margin compared to the corporate average in first quarter? Are we seeing a 28-nanometer gross margin above corporate average already?

[Jason Wang, executive]

We don't give out any breakdown by node, okay? So the 28 becomes a meaningful node to us now and -- from both sides. They are both on the top line in our margin contributions.

[Chi-Tung Liu, executive]

If I may, the 28 is actually compared to itself over the past few quarters. So the gross margin of current 28-nanometer is actually much better than the past few quarters.

[Roland Shu, analyst]

Okay. Yes. Then how about the overall 8-inch and 12-inch gross margin? I think previously, you also said that 12-inch gross margin was below corporate average. Then after this price adjustment, how about your 8-inch and the 12-inch gross margin look like?

[Jason Wang, executive]

Price adjustment is really a reflection of our market value. It comes from both absolute price increase as well as product mix increase. So it doesn't really change too much about the dynamic between 8-inch and 12-inch. And 8-inch, as you can understand that it represents much less -- carry much less depreciation. From an accounting point of view, the numbers are always higher than that of 12-inch. But if we're talking about EBITDA margin, then that may not necessarily be the case. So overall, we were happy with the progression that 12-inch, especially 28-nanometer, has improved from a profit margin point of view.

[Roland Shu, analyst]

Understood. Yes. And you also talked about that you're starting to ship 22-nanometer product because of customers' demand. So for this 28- to 22-nanometer migration, how about the margin or profitability change? Is this a 22-nanometer? Does that carry a much higher ASP and carry a better gross margin than 28-nanometer?

[Jason Wang, executive]

I mean, typically, we provide the blended gross margin number without breaking down by detail. So it's hard to pinpoint on each node. But I'd also like to add, the gross margin is a result not just the product mix, the 12-inch wafer shipment contribution, 8-inch pricing justification as well as the continued cost reduction effort and our productivity improvement. So this is more of a blended result on everything. And it's not just associated with 1 particular node or -- and -- or fab. So the -- we're happy that we start challenging the 30% in the upcoming quarters. I think given what we have done we are confident we'll continue to improve on that, too. Yes.

[Roland Shu, analyst]

Okay. Last question for me. I think a couple of months ago, you were comfortable of the total wafer supply. And have you changed your view recently due to this increasing wafer demand? So are you able to secure enough raw wafer from your suppliers?

[Jason Wang, executive]

Yes. We had that issue a while back, and we have been diligently working on that and closely aligned with our supplier in managing the supply assurance. So we haven't seen any problem right now. No.

[Roland Shu, analyst]

Okay. So you have secure of the wafer. So how about for the wafer price change? Do you see a meaningful wafer price change recently?

[Jason Wang, executive]

We see this pricing dynamics across the supply chain. And I can't tell you what's going to happen tomorrow. But at the current stage, with -- based on the alignment with our supplier, we're okay with the current pricing structure. Yes.

[Roland Shu, analyst]

So do you see the pricing going up or...

[Jason Wang, executive]

I don't have that visibility going up at this point, but I don't know will that change tomorrow or not. Yes.

[Operator]

And the next one is from Szeho Ng, China Renaissance.

[Szeho Ng, analyst]

I have 2 questions. The first one regarding the 40-nano strategy. Because some of the 20-nano products have plans to go into the 40-nano, I'm not sure if UMC would start assessing the 40-nano expansion possibility?

[Jason Wang, executive]

Yes. The P6 program, the arrangement with option to migrate into 40, and the possible timeframe will be sometime in 2024, and -- but there's no plan before that. Yes.

[Szeho Ng, analyst]

I see. Got you. And regarding the collaborative expansion with the customer that the comment we have some sort of a loading protection mechanism. So I just wonder how long would that protection clause last in general?

[Jason Wang, executive]

It lasts entirety of the program. Yes.

[Operator]

And the next question comes from Charlie Chan, Morgan Stanley.

[Charlie Chan, analyst]

And congratulations for a very strong results. So my first question is also regarding the P6 projects. So I saw some news flow, so just want to clarify. Is there any equipment consignment from customers? Can you clarify the point?

[Jason Wang, executive]

No. The answer is no. There's no to consignment from customer. Customer will guarantee their commitment by providing the capacity deposit.

[Charlie Chan, analyst]

Okay. So is almost all from your balance sheet?

[Jason Wang, executive]

Yes, it is.

[Charlie Chan, analyst]

Okay. So with that, do you need to increase the kind of debt ratio or do some fund raising to sponsor the future CapEx?

[Chi-Tung Liu, executive]

Yes. Our current cash on hand is about a little bit more than $100 billion as well, and we just announced this exchangeable bond project, which will likely to raise another USD 600 million for us by disposing our noncore assets. So I think from a financial standpoint of view, we even can maintain our current high dividend payout ratio in light of this new P6 project. So there is pretty much no impact on our financial structure.

[Charlie Chan, analyst]

Okay. Since you don't -- so back to the P6 business. You mentioned that there are several type of demand, including OLED driver IC, wireless connectivity, setup box, TV, et cetera. So for that kind of P6 or kind of a long-term demand, which customer or which prototype is a major driver for this P6? How the demand comes from -- even if from the current project?

[Jason Wang, executive]

Well, I mean, first of all, all of them are global leading semi companies. And I can't really name names. And the customers products and our technology roadmap has been well aligned. And it's also our existing customers. At the same time, those customers along with their demand outlook in their addressable market segments, in our view, will outpace the semiconductor industry projection. So it's in a high-growth area. And so we believe this is -- we're well-positioned program to secure the P6 capacity as well to fuel the future growth. Yes.

[Charlie Chan, analyst]

Okay. So it seems like the future demand came across for -- from the fitting customers, not as a single or few products. Is that right interpretation?

[Jason Wang, executive]

Yes. It's a multiple customer with multiple products, yes.

[Charlie Chan, analyst]

Okay. And then my other question is about the trend of the 8-inch -- semi inch project migrate to 12-inch. I'm not sure if that is happening within your fab. But you see that trend of those, for example, large panel driver IC, power IC, sensors. Those products used to use the 8-inch as a major foundry source. But going forward, do you think that this may migrate to like a 12-inch? And maybe a year or 2 years later, do you think 12-inch is more efficient for those kind of speciality semi products?

[Jason Wang, executive]

Well, I mean, every application, the motive is migrating from 8-inch to 12-inch due to, like you said, the performance reason or cost advantage. So there is a continued product pipeline the -- within a different application, and -- including what you mentioned. And we continue to align with the customer on that. We don't see -- we don't observe any 8-inch demand overflow to 12-inch because the overflow because of 8-inch is high. And so we haven't really seen that. But we continue seeing that on a bi-application basis. And because the product performance reason, because the cost reason, and they continue migrating to a 12-inch. And even within the 12-inch, it will continue migrating into different nodes.

[Charlie Chan, analyst]

Okay. Okay. Okay. So I think -- does that mean that 8-inch foundry supply shouldn't see a structural shortage? I mean because there is kind of alternative, right, to use that 12-inch. Is that a right alternative maybe?

[Jason Wang, executive]

I think the advantage 8-inch has is structural shortage issue. The demand continue being very strong. However, due to the market challenges on building a greenfield at 8-inch facility is very difficult, so we see that come online as not as fast as the demand growth. So we -- at least for the foreseeable couple of years, I think the 8-inch will remain challenged, and we're still under structural constraints. Yes.

[Charlie Chan, analyst]

Okay. Yes. And last question, maybe back to Chitung. So can you help us to understand your gross margin trend into next few years? I know you don't give a next year margin guidance, right? But just based on management's comments just now, it seems to suggest that the P6 would then dilute your gross margin, even though the capacity is from your own balance sheet, right? So can you help me to understand why -- what will give you that confidence into next year's gross margin will continue to go up? Is that because of the further price hike or the older equipments depreciation going down? Because I feel like now you are running at 100% utilization already, right? So the benefits -- margin benefit from the higher utilization presently seems to be the answer to that. Can you help us to understand?

[Chi-Tung Liu, executive]

Yes. First of all, we didn't say the gross margin will go up sequentially in 2022. We didn't say that. Okay? We say that gross margin is a collective effort of cost reduction, ASP reflecting the market and also product mix adjustment. So we are doing all of that. And hopefully, we can continue to improve our gross margin. But we will give our gross margin guidance quarter-by-quarter.

And as for the P6, it's going to represent about 10% to 15% of overall operation and with a prefixed price and with ROI exempt target. So If we plug into our current base, that's -- the basic assumption to mention that we don't expect this P6 project will dilute our gross margin. And because it's going to be profitable from the very beginning, it's actually going to be adding driving force to our overall ROE performance.

[Charlie Chan, analyst]

Yes. So I remember last quarter, you gave us some depreciation trend, right?

[Chi-Tung Liu, executive]

Yes. Depreciation trend wise, for 2021 and as well as 2022, we are still looking for somewhat less than 5% annual decline in the full year depreciation expenses. And beyond 2023, when the P6 numbers start to kick in, in the mid of 2023, the number still will be well under control, and the trend will not be reversed.

[Charlie Chan, analyst]

Okay. Sorry. Sorry, I missed that. So one last one is auto semi production. I mean how much is the revenue contribution? I'm not sure why you start to disclose there that auto semi exposure, and I guess the global investors really are very keen to get your sense about when the auto semi output will go up from your side, and also, when do you think the shortage will ease?

[Jason Wang, executive]

I mean the shortage right now is across the board, and we just have to work with our customers closely, and along with the productivity improvements as well as the new capacity expansion. The auto segment itself, we haven't really break it down in our pie. It's category under the others. So right now, others account about 11%. So for our automotive market, it's within numbers. Yes.

[Operator]

And the next one is from Sunny Lin, UBS.

[Sunny Lin, analyst]

And congratulations for your great results. My first question is also on your P6 expansion. I think you just put out a press release saying that the fab show has been completed, but the net production will only start from second quarter of 2023. So I wonder if that's because of the equipment supply constraint that we are now seeing in the industry? Or is there any possibility that the mass production could actually start earlier than expected?

[Jason Wang, executive]

Well, I mean we are working with our suppliers. And at this point, we'll see there's a lead time for the overall equipment. So we project the P6 already for production on second quarter 2023. That's what we're targeting. But we're still confirming with our supplier to ensure that, that would happen. So that's the current plan.

[Sunny Lin, analyst]

Got it. Maybe a follow-up to your 28 expansion. Since most of your capacity is built several years ago, and therefore, depreciation start to come down. If we compare the production cost for the new capacity versus your current capacity, I wonder if you could share with us any color in terms of the cost increase.

[Jason Wang, executive]

Well, first of all, I don't think there's a cost increase. So once you reach to certain economic scale, the overall cost is actually coming down, so we don't -- [indiscernible] in building a factory now compared to what we're doing in the capacity 6 years ago. It's higher. And it's actually -- in fact, it's actually lower, okay? And we -- in terms of the CapEx budget that we presented, we don't generalize this figure given that our P6 program has the flexibility that converting into a 22-nanometer as well as a 14. That was earlier question, if we consider a 14, and the answer is yes. So the entire program has certain flexibility converting that into the 14-nanometers. And so we want to make sure this -- when we plan this, we have that flexibility, okay? And so we can regenerate this figure to what 6 years ago. But in general, the current 28 cost is lower than what we built 6 years ago.

[Sunny Lin, analyst]

Got it. That's very helpful. My second question is on the overall supply-demand imbalance. And that's now I think driving several foundries to accelerate the CapEx for the trailing edge. So just want to get your sense if in the medium term this could lead to overexpansion or more volatility for the whole industry?

[Jason Wang, executive]

I mean the -- I kind of touched this earlier as well. But once the newly capacity become available, we anticipate the supply imbalance issue will be addressed, okay? But nonetheless, the structural shortage in the material we think will remain unchanged until 2023, okay? Given the lead time consideration, okay? Based on our research and study, we don't even -- we think there's a good chance they won't have any excess capacity, okay? It's probably not likely to happen within the next 1 to 2 years, okay? In addition to that, consider the -- beside the lead time, capacity delivery lead time, and also the uncertainty of the geopolitical tensions, we have pretty good confidence this tightness will probably continue for at least 1 to 2 years.

[Operator]

The next question comes from [ Stefan Chang ], [ Ellis Capital ].

[Unknown Analyst]

And I have 2 questions here. First is I'm just wondering, because we see for some [indiscernible] technology, we already see clients have the semi product that they are using dual sourcing. I'm just wondering, if you look at the 28-nanometer now, do the clients usually use only 1 foundry for those production product or for the semi product clients would still use dual sourcing? This is my first question.

[Jason Wang, executive]

Well, I mean, this is -- there are several different perspective on this, okay? One is from a customer's perspective. If a customer believes they need a multiple sourcing strategy to ensure their supply, to ensure their supply came, and they have the design resources, I think the customer is capable to do so to enable multiple sourcing. If they perceive single-source will enable their supply assurance and result in double the design efforts, they probably don't need to. So one perspective is on the customers' perspective on the supply chain.

And the -- on the design and the product specific, and that's a different consideration [indiscernible] they're very customized. So they are very hard to have multiple source. So because the [indiscernible] of the product, yes. So when you're talking about the advanced node, because we don't serve on the very leading edge node, so I can't really give you a comment about UMC specifically. But I can tell you as a general sense, design into an advanced node is very costly. So if you want to enable multiple source, that will be a very -- it will be a significant investment. So investment is one of the important factor here. Yes.

[Unknown Analyst]

Yes. Yes. Understood. Actually, the question was, if your comment you just made all sort of tied to 28-nanometer?

[Jason Wang, executive]

If you look at the 28 capacity, the -- I think most of the product, they'd be able to enable multiple source. I think -- as long as the customer wants to do it. There will be a -- there will be some differentiation on the technology side. For UMC, we have a few leading market position on some of the technology solutions. And for those, I think we're still ahead in the market. So we probably will enjoy better customer stickiness on that.

[Unknown Analyst]

Understood. Another question is -- although just very quickly, so we understood that for the mature node, like 200 millimeters, 300 millimeters mature node, they are always [indiscernible]. But if you really need to do a comparison between the 2, do you see it is tighter or the bigger shortage in 200-millimeter or in 300-millimeter?

[Jason Wang, executive]

Well, it's -- this is an interesting question, okay. From our view, what we see, they're severely constrained on both the 200-millimeter as well as the 300-millimeter. But there's a possibility also the customer is a double booking on that to ensure they'd be able to secure supply. So how we're judging the overbooking is very difficult. But I can tell you, at this point, I think industry-wise, we are under severe shortage across the board on the mature node.

[Unknown Analyst]

Yes. So just a very quick follow-up on your last comment. So you mentioned about, probably due to a possible overbooking. But previously, you also mentioned you see the tightness will continue probably for another 1 to 2 years. So can we assume when you make the comments regarding supply tightness possibility, you already try to exclude the -- you already had to consider the possible overbooking?

[Jason Wang, executive]

Absolutely. I mean this is a planning 101. So we have to consider that. And we actually -- based on our research and study, we're actually going back all the way to the end market, entire pipeline in terms of the supply chain to analysis that. So I think that there's a few mega trends in this space driving the demand, from 5G smartphones, the automotive, EV adoption as well as the learn-from-home, work-from-home space. And so those demands are real, okay? So -- and if you look at the past years, there's lack of CapEx in the mature node space. So structurally, they're just not enough. And so that's why we believe, even with the P6 or even with any announced capacity today in the foundry space, we still believe this -- the structural shortage will probably remains.

[Operator]

Ladies and gentlemen, we're running out of time, so we're taking the last question. And the last one is from Bruce Lu, Goldman Sachs.

[Zheng Lu, analyst]

Okay. I have a question about ASP. For the first quarter, ASP as a blended base improved by 1.3% only and -- which is pretty much driven by like more 28-nanometer product mix improvement. So where is the price hike that market is talking about? I mean also for the second quarter, the capacity is growing by 4%, but [indiscernible] growing by 3%. But I'm assuming that the new capacity addition is mainly for 28-nanometer capacity, which is supposed to have a much bigger or much higher ASP. The ASP guidance for second quarter is also like 3%, 4% only, which is, again, pretty much driven by 28. So as a like-to-like base ASP, do we see any improvement?

[Chi-Tung Liu, executive]

Well, there's [indiscernible] the first quarter ASP growth was actually more than 3%, not 1 point something. So as I mentioned about -- some of that comes from price increase, so less than 3.2%. And some of that comes from product mix improvement. So overall, quarter 1 ASP growth was more than 3%.

[Zheng Lu, analyst]

I see. What is the ForEx assumption in first quarter? Because it's using like...

[Chi-Tung Liu, executive]

ForEx was 2 -- 28.3. So there was a nearly 2% negative impact from ForEx.

[Zheng Lu, analyst]

I see. Understand that. Understand. So for the second quarter, what is the ASP -- what is the assumption for the ASP expansion driven by the product mix improvement?

[Chi-Tung Liu, executive]

Still similar. I would say both are key factors, which contribute nearly 50-50 each. So we normally don't give the detailed numbers, but you should expect to see a similar driving force for this 4% growth for quarter 2 in ASP.

[Zheng Lu, analyst]

I see. Okay. Last question, I just did a very quick math for the P6 28-nanometer wafer price. It seems to me that you want to have a similar return. The wafer price for that 28 has to be like 50%-plus higher than the current market price. That seems too good to be true from my simple math. So is there anything I'm missing? Or is that math sounds correct?

[Chi-Tung Liu, executive]

I can't really comment on [indiscernible] percentage, but there is a predetermined pricing arrangement with the customers. It's actually a very diversified customer portfolio. So it -- well, I mean the bottom line is the mechanism works. I mean the math work, okay?

[Zheng Lu, analyst]

The math -- so my math work?

[Chi-Tung Liu, executive]

So it's -- yes, I can't comment about the percentage of that.

[Jason Wang, executive]

Basically wrong in one effect of the total ROI calculation. We also factor in the benefit of the economy of scale and also the cost reduction effort and et cetera, et cetera. The -- all the factors Chitung just mentioned. So again, it's a collective factor.

[Operator]

Thank you. And ladies and gentlemen, we thank you for all your questions. That concludes today's Q&A session. I'll turn it over to UMC Head of IR for closing remarks. Thank you.

[Michael Lin, executive]

Yes. Thank you for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at [e-mail]. Have a good day.

[Operator]

Thank you. And ladies and gentlemen, that concludes our conference for first quarter 2021. Thank you for your participation in UMC's conference. There will be a webcast replay within an hour. Please visit www.umc.com under the Investors' Events section. You may now disconnect. Goodbye.