GlobalWafers Co., Ltd. (6488) Earnings Call Transcript & Summary

[Audio Gap] GlobalWafers Co. '20 earnings conference call. [Operator Instructions] Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Haas Liu. Please take over, sir.

Welcome to GlobalWafers' Third Quarter 2020 Earnings conference Call. This is Haas Liu, semiconductor analyst for Credit Suisse and your host for the conference call today. I am pleased to be joined by Doris Hsu, the Chairperson and CEO; and William Chen, Vice President and Spokesperson for GlobalWafers. During the call, we will start with the executive summary by Doris and followed by the reading of third quarter financial results by William. We will then open the call for a Q&A session with Doris and William. [Operator Instructions] And now I'm pleased to turn the call to Doris and William. Please go ahead with your summary on the results and outlook.

Okay. Thank you, Haas. Hello, everyone. Welcome to GlobalWafers' Q3 '20 Earnings Call. I'm William Chen, GlobalWafers Vice President and Company Spokesman. We also have Doris Hsu, Chairperson and the CEO of GlobalWafers, in this call. Doris will give us the executive comments first, and then I will present industry overview, Q3 '20 performance update and the company ESG highlights. The final Q&A session will be hosted by Doris as usual. For today's presentation file, as always, we had uploaded it onto our company's website around 2 hours ago. If you do not have the file on hand, please access into our website to get the most updated file. Please note that some information during our discussion today will consist of forward-looking statements, which are applied throughout the call and the presentation. These are subject to significant risks and uncertainties. Actual results of -- or trends could differ materially from our forecast. Please refer to the safe harbor notice in our presentation, Page 2, disclaimer. Now I'd like to hand over the call to Doris for the Page 3, executive comments. Doris, please.

Thank you, William. Good afternoon, ladies and gentlemen. Thanks a lot for joining GlobalWafers' 2020 Q3 earnings conference. Different from most of the industries, I think the semiconductor market remains relatively resistant to global macroeconomic headwinds this year. Same as the previous 2 quarters, GlobalWafers had Q-o-Q improvement in both revenue and shipment quality in Q3 again despite of the criticality of pandemic and adverse foreign exchange impact. Fortunately, we managed to keep our EBITDA at 40% in Q3, which is 1.9% higher than last year. And also, we keep -- we managed to be able to keep very stable operating profit percent and net profit percent as well. Both of our operating profit percent and net income percent are the second best in GlobalWafers' record. In summary, I think GlobalWafers' overall -- Q3 overall financial performance is good. Later on, William will share more details. Now I would like to update some overall operation status. First of all, let me update our overall utilization status of each product line. The first line I would like to update is 300-millimeter epi and polished wafers. The utilization rate for both 300-millimeter epi and polished wafer are both very high, especially for epi -- 300-millimeter epi. It's extremely tight right now. We started ramping up our new fab -- 300-millimeter new fab in Korea from Q3. Due to some installation delays caused by COVID-19, this new fab in Korea -- new fab capacity is not 100% ready for mass production yet. It keeps increasing quarter-by-quarter, but we haven't reached 100% yet. Some tools are still under final installation stage or fine-tuning stage right now. Some are under customers' final qualification stage. And the shipment quantity of our new fab in Korea will keep increasing quarter-by-quarter in the next several quarters. And the second line I would like to update for our utilization status is our 200-millimeter wafer. 200-millimeter wafer -- the demand for 200-millimeter wafer is not as strong as 300-millimeter epi, but it's still very good as well. A matter of fact, the demand is improving rapidly from the last couple of months for 200-millimeter. We see very good recovery from quite a lot of automotive customers as well, and many of those automotive parts are for 200-millimeter. So our overall 200-millimeter wafer utilization rate is very high, getting much higher as well. It's not like 300-millimeter epi. That kind of over -- capacity is overloaded, but it's very close to 100% as well, our 200-millimeter wafers. And the third item I would like to update is SOI -- our 200-millimeter SOI. 200-millimeter SOI was a little bit weak in the past 2 weeks -- 2 quarters. But starting from Q4, we see a very good improvement on the loading of our 200-millimeter as well. The weakest one in the past several quarters was small diameters, which means that 6-inch or below 6-inch. Fortunately, it's improving now as well. Again, for a small diameter, quite a lot of recovery is from automotive parts. We are happy that we see much better visibility and also a much stronger demand for almost all production lines right now. In addition to utilization status, I would like to update a little bit about our cash flow status as well. GlobalWafers' as cash flow from operations is still very healthy, very strong. Our accumulated cash flow from operations in the past 3 quarters from January to end of September this year is around USD 320 million. That's from operation in the past 9 months. And as of end of Q3, our cash and equivalents amounted to USD 1.1 billion. That's our current cash position. So you see that we have -- we still have very healthy, very strong cash. Despite all of the headwinds, our EPS of the first 3 quarters of this year is still doing okay, and it has already reached $22.21 per normal share. And this is also one of a very good year for GlobalWafers as well. Our performance in the past 3 quarters were okay. And how about Q4 and 2021? Here is our view. I think the first view I would like to share with everyone is that we think that the same as the past 3 quarters, we think we will have Q-o-Q revenue growth in Q4 as well. And we are positive for the demand and visibility for Q4. But at the same time, we are seeing some major headwinds and uncertainties in not only Q4 but also maybe the coming several quarters below. The first headwinds and uncertainty is, of course, COVID-19. Early this year, we were hoping that COVID-19, the whole pandemic will be able to be well contained by end of the year, but it looks like that the situation is worse than what we expect -- what we estimated early this year. So COVID-19 is definitely #1 uncertainty from our viewpoint and also one of the most critical headwinds from our viewpoint. And COVID-19 -- how bad COVID-19 will affect worldwide macroeconomic, this is an uncertainty. Very hard for us to predict. This is the first uncertainty and headwinds for us. And the second critical headwind and uncertainty for us is foreign exchange volatility utility. It's much more difficult than ever to manage -- or to hedge our foreign exchange. So far, most of our revenue income is in U.S. dollars. More than 50% of our revenue income is in U.S. dollars, but most of our cost -- expenses are in non-U.S. dollars. So this is one of the reasons -- this FX impact is one of the reasons of our weak gross margin in Q3, slightly weaker than last quarter's FX. So FX -- volatile FX, this is our second uncertainty and our headwind we're experiencing for now. And the third important uncertainty for us now is the development of the trade tension in some area. This is also one of very important uncertainties for us as well. So these 3 are the major concerns we have for now. It's not only for Q4 but also maybe for 2021 as well. So COVID-19, foreign exchange volatility and also the trade tension, these 3 are what we concern a lot. Okay. So those are the headwinds. And overall, from business visibility viewpoint, early this year, we had more concern about BCP, supply chain stability, availability of the supply chain. But now it seems that we are seeing much better order visibility right now. The visibility is improving, including the weakest industry, automotive, early this year. We see that starting from September, we see more and more improvement of automotive industry as well. So we think that the whole semiconductor -- overall industry visibility is improving, including automotive business. So in summary, I think -- we think that the semiconductor industry will keep improving next year, and GlobalWafers' revenue will keep growing next year as well. This is our view. So in the next several quarters, our product focus is advanced silicon wafer, 300-millimeter SOI, silicon carbide, gallium nitride compound products. These are still our key focus products in the next several quarters. And administration-wise, our key focus in Q4 in 2021 will be our supply chain risk management and BCP because of all the uncertainties. So we are making more effort than before to control our overall supply chain risk management and also our BCP. The last, but not the least, is ESG. Our key focus in 2021 for ESG is to increase the weight of renewable energies in our total power consumption to keep cutting down our CO2 emission. That's our key focus in 2022. So we will provide more data of these items in our next earnings call. Thank you again for joining us today. We are very happy to show you our Q3 results. William will present further details about [indiscernible]. Thank you very much. William, please?

Thank you, Doris. Now let me share some pages of the industry overview. Please turn to Page 7. Latest world economic outlook. In October, IMF estimates the global economy will contract by 4.4% this year, slightly better than its June prediction, which was minus 4.9%. And the growth in 2021 is projected to rebound to 5.2%. However, from recent second wave pandemic spreading, the recovery is not assured now. Page 8, global silicon wafer area shipment. According to October research report, global silicon wafer shipments are set to increase 2.4% Y-o-Y in 2020 with continued growth in 2021 and reaching a record high shipment in 2022 again. Page 9. COVID-19 drives rise in global fab equipment spending. From third quarter World Fab Forecast report, there is an 8% increase in global fab equipment spending in 2020 and a 13% increase in 2021 to meet the newest application increase in demand plus safety stock preparation for COVID-19 and the U.S.-China trade tension. Page 10, 5G subscription worldwide forecast. 5G subscriptions are forecast to increase worldwide from 2019 to 2025, exceed 2.7 billion subscription at 197% CAGR by 2025. Page 11, public cloud computing service market forecast. The worldwide public cloud services market is forecast to grow 6.3% in 2020 to total USD 257.9 billion and exceed USD 364 billion by 2022, representing 16.4% CAGR from 2018 to 2022. Page 12. Automatic (sic) Automotive IC with the strongest CAGR grew throughout 2024 as a research report. The automotive IC market share is forecasted to register the strongest 2019 to 2024 CAGR at 9.7%. Next, from Page 13 to 18 are addressing on the compound materials, silicon carbide and gallium nitride. Page 13, road map for SiC power device. The advantages of SiC devices of high breakdown field and thermal conductivity drive many applications such as EV/HEV, charging infrastructure and high-power applications are expected to grow quickly in the near future. Page 14, prospering SiC driven by automotive application. In SiC power market, the automotive segment is the foremost driver, will hold more than 50% of total devices market shares in 2025. Page 15, SiC, revolutionizing the electrical vehicles. Comparing to silicon wafers, 4 SiC advantages in electrical vehicles: The first, smaller battery; the second, reduced weight; the third, fast charging; the fourth, increased range. Page 16, SiC positioning within an EV/HEV. SiC's primary automotive applications are on board the EV chargers, DC/AC converters and powertrain inverters. Page 17, SiC adoption in automotive companies. SIC devices have been widely used in many brand name automotive companies such as Tesla, Renault, ZF, Bosch, Continental and so on. Page 18, power gallium nitride devices market forecast. Power gallium nitride devices market growth will be in the range of 167% Y-o-Y in 2019, mainly driven by consumer fast charter applications, estimated to grow into USD 700 million market value in 2025. However, due to the COVID-19 outbreak, smartphone production is estimated to drop 20% in 2020. Next, let's move to Page 20, Q3 '20 performance update. Page 20, Q3 '20 financial highlights, about Q3 '20 financial performance. As Doris highlighted right now, semiconductor market has remained largely resistant to global macroeconomic headwinds. However, GlobalWafers still reached Q3 '20 sequential improvement in revenue and shipment. The Q-on-Q revenue grew 2.2%, and good profit despite of COVID-19. The EBITDA percentage, 40%, with Y-o-Y growth of 1.9%. Net profit percentage, 24.2% with Y-o-Y 0.9% increase. EPS TWD 7.78, which is Y-o-Y increasing TWD 0.14. Accumulated 3Q '20. EBITDA reached the second best in company history. Operating profit percentage and net profit percentage also achieved the second best as well. Financial leverage accompanied with a sufficient cash position, TWD 32.7 billion. Also with prepayment, TWD 17.5 billion. Page 21, Q-on-Q financial highlights, Q3 '20 versus Q2 '20. In this Q-o-Q comparison table, as stated earlier, the company reached 2.2% revenue growth in Q3 '20. However, caused by unfavorable exchange rate, strong NT dollars versus U.S. dollars and increasing depreciation in Korea new plant ramping up operations in Q3, some Q-o-Q financial figures were slightly declined. EBITDA, minus 0.1%; operating profit, minus 3.6%; net profit, minus 0.3%; EPS, minus TWD 0.3; ROE, minus 0.4%; but for ROA with plus 0.5%. Page 22, Y-o-Y financial highlights, Q3 '20 versus Q3 '19. For Y-o-Y comparison, given COVID-19 continuously impacting this year, Q3 '20 revenue was just 2.1% lower than Q3 '19. However, when converting into U.S. dollars revenue, the Q3 '20 revenue is 4.1% higher than Q3 '19. Even so, GlobalWafers still reached a better Y-o-Y EBITDA, 2.7%; net profit, plus 1.8%; and EPS, TWD 0.14. Page 23, financial highlights accumulated 3 quarter '20 versus 3 quarter '19. For the accumulated first 3 quarter comparison, same as last page's Y-o-Y comparison, because COVID-19 impacting in 2020, the accumulated 3 quarter '20 financial results was still softer than 3 quarter '19. Page 24, revenue and gross margin. As described in Page 21, the company achieved a better Q-o-Q revenue, plus 2.2% yet with slightly gross margin percentage dropping from 38.6% in Q2 to 37.2% in Q3. The main reasons for this gross margin decreasing were: first, exchange rate, strong NT dollars versus U.S. dollars; the second, depreciation. Korea new plant ramping up operations with depreciation counting from this Q3 yet not fully loaded at the capacity. Page 25, EBITDA and EPS. For EBITDA, the accumulated 3Q '20 EBITDA to revenue percentage continuously improved to 39.4%, which was better than 39% in 2019. Accumulated 3Q '20 EPS was maintained at high profit level of TWD 22.21. Page 26, financial leverage. By Q3 '20, GlobalWafers continues to -- the sufficient cash as high as TWD 32.7 billion on hand that shows the company has very healthy financial status. LTA prepayment amount was TWD 17.5 billion, which was around TWD 1 billion decreasing in Q3. That was also similar amount decreasing trend as Q2. The bank loan increase was owing to high dividend distributed in Q3 '20. Page 27, income statement. In this income statement, just to recap, given some financial figures in accumulated 3Q '20 were slightly lower than 2019, yet very positively, there is improving Q-on-Q market change in 2020. That is much better than 2019, the Q-on-Q dropping market trend. Page 28, balance sheet. In this balance sheet are just highlights. The short-term loan increased TWD 3 billion because of dividend distribution in Q3. The inventory slightly increased to TWD 7.4 billion, still well managed mainly for macro uncertainty, Q4 factory annual maintenance and the Taiwan new epi fab expansion material preparations. Next, Page 30 to 36 for ESG highlights. Page 30, sustainable environment - electricity. GlobalWafers' optimized group-wide electricity consumption has improved operating profit by 14.8% in 3 years. Page 31, improvement on electricity consumption. GlobalWafers dedicates in enhancing energy efficiency and achieves the same revenue with less energy. That is 24% improving from 2017 to 2019. Page 32, committed to green energy. To fulfill the commitment to sustainable development, GlobalWafers cooperates with its parent company, SAS, on solar installation of 3.5 megawatts, which could reduce 1,842 tons of CO2 emission every year. Page 33, sustainable environment - waste. GlobalWafers adopts circular economy solutions to reuse and regenerate almost 80% of waste as ingredients by other industries. We are awarded the High Distinction Award from year 2020 Outstanding Enterprise for Waste Reduction and Circular Economy. Page 34, charity and environment protection. GlobalWafers devote out love to the ones that in need via donations. We also extend our care to environment throughout corporate volunteers by a series of activities like beach cleaning. Page 35, ethical business practice. GlobalWafers is continuously taking solid actions in legal compliance, code of ethical conduct, grievance system and risk assessments. Page 36, diversity and inclusion. GlobalWafers is committed to supporting gender equity, advancing women in the workplace globally. Women in our global workforce is 24% overall, 14% on our Board. Above is my presentation. Thank you. Next, I would like to hand over to Doris for the Q&A session. Doris, please?

Yes. Thank you, William.

While we are waiting for the questions from the audience, I will start with 2 questions. The first question I would like to ask is on your presentation for the outlook in 2021. You mentioned in your presentation that the global silicon wafer shipment will only reach record high in 2022. Would that mean the global wafer industry will still be -- see a bit of oversupply in 2021 before [ shipping into ] 2022?

No. I will say that 2021, the wafer supply/demand will be very, very close so it will be very healthy. 2021, overall, based on our current investigation and market study, we think that the overall wafer shipment volume will be somewhere around 4%, 5% higher than this year. And -- or 2021 total wafer shipment volume square inch-wise will be very close to 2018. So if you see our Page 8, our forecast 2021 square inch -- million square inch will be around 12 billion -- 12.5 billion square -- million square inch. In 2018, it's very close. And that 2018 was one of the very fast year, the super cycle year for the industry. And in the past several years, yes, there were some expansion. So total capacity will be slightly higher than 2018. But still, I think 2021 will be -- the supply/demand will be very balanced. That's our view for 2021.

Okay. And a quick follow-up to my first question is on your view on the long-term agreement negotiations and also pricing outlook given the near-term [indiscernible].

Yes. In the past several years, long-term agreement was one of the very important business strategy for GWC. But the market is changing a little bit, especially for now due to a lot of uncertainties and foreign exchange rate issue. Now customers are not that aggressive to give us any firm commitment for the next 3, 5 years with fixed price and a significant prepayment for now. So we do have some LTA extension or new LTAs under discussion, but we didn't finalize any new LTAs in the last 2, 3 quarters. We think that maybe starting from the second half of 2021, it's very likely that maybe we will have new LTA closed in the second half of 2021. But not Q4 this year. Maybe not Q1 next year. Some are under discussion with the uncertainties and a lot of uncertainties that definitely is not helpful at all for the LTA finalizing -- for finalizing LTA. And also, from our viewpoint, from GWC as a supplier's viewpoint, if we have to commit a fixed price for the next 3, 4 years, it's a little risky. I mean I'm not talking about the price itself. But I'm talking about currency because if you have to fix the price in U.S. dollar for the next several years or you have to fix the price in euro for the next several years, I think I'm more concerned than 2, 3 years ago now so -- because of the uncertainty. So that's why neither seller -- I mean, GlobalWafers nor the customers, neither side is really very aggressive to finalize any new LTA for now. But that's still -- we believe that's still a very good strategy to really -- especially if you need to trigger any new expansion, I think LTA is a must-have factor from our viewpoint. Thank you, Haas.

That's very helpful. My next -- my second question is regarding your [ asset spend ] with the tax rate lower than expected. Could you provide an update on the capacity installation spend [ net cash ] as well -- most of the capacity is [indiscernible] remember, the customers in Korea. And also, your tax rate is lower in 3Q. Is it related with the cash incentive from the program of the government? And what should we think about tax rate in the future?

Okay. First of all, our Korean capacity is -- you're right. It's -- majority of the capacity is for memory. And our total capacity is still the same as the plan, which is 176,000 wafers a month, no change. The installation, matter of fact, tools moving were on schedule. But the problem which caused the delay was from the installation and final fine-tuning. And it's mainly because of the inconvenience of the overseas travel, the quarantine thing. So we used a lot of video conference with foreign engineers to check the status of our tool installation. So that caused a delay. But in general, it's just about 2, 3 months delay. So we are ramping up now. I think by end of the year, our Korean fab will have high output, very close to around 80% of our total design capacity. That's our view. And the tax incentive for our Korean fab, I think, so far, we haven't enjoyed any tax incentive from the new fab there. The reason that in Q3 it seems that our tax expense -- tax -- core income tax amount is slightly lower, it was -- it has nothing to do with Korea. It was -- a part of the reason is because that we approved our Japan operation. GWJ just approved to -- not to pay the dividend for their 2015 earnings. That's the main reason. And you know that in Taiwan, whenever we oversee a fab has any earnings every year, we have to reserve the core income tax in Taiwan as well. But the Board approved no return in -- for GWJ earnings in 2015. So of course, the tax expenses we reserved for 2015's earnings have to be returned, and that was one of the reason of the -- it looks like that the tax expenses is lower in Q3. So that's the main reason. And also, I think the gross margin -- our Q3 gross margin is around 1% lower than Q2. The main reason is because the more tools we started depreciation, especially from the Korean fab that -- even we haven't 100% finished installation of the tools yet. But our policy is that whenever the tools -- any individual tool is approved or in spite of we qualify the tools, then no matter if the other tools are ready or not, we have to start the depreciation. That's our accounting policy. So we apply our accounting discipline, accounting policy for Korean fab also. So that was why our depreciation jumped a lot in Q3 from Korean -- the new fab. I hope my explanation is clear. Thank you, Haas.

[Operator Instructions]

[Operator Instructions] We have the first question coming from the line of Sunny Lin from UBS.

My first question is a bit longer term. But I wonder if we could have your high-level perspective on the industry outlook. So if we think about the potentially better supply/demand into the next 2 years, how would you compare that with the up cycle in 2017 and 2018? What do you think could be some of the positives and plus the negatives? That's my first question.

Thank you, Sunny. That's a very important question we keep asking ourselves and the management team every month. We think that the next -- I think at least for 2021 and 2022, the supply will be not as tight as 2017 and 2018. Demand will be stronger than that time. But the shortage -- the capacity shortfall is not as critical as 2, 3 years ago. And the main reason was that the past -- before 2016, actually, more than 5 years, no expansion at all for a silicon wafer. Last expansion was 2010. Last sizable expansion was 2010. And then almost all silicon wafer companies are making a lot of loss. So almost no significant expansion in the past 5 years. So certainly, when the market -- when the demand improves and silicons -- and because more a slow and a lot of difficulty of the downsizing of the chip size in 2016, '17 and getting more and more expensive, so the wafer by area -- wafer demand is getting higher and higher. And certainly, people find that there is no available capacity, especially for 12-inch. So that was why the past 2 years -- I mean 2017, '19 and the first half of -- 2017, '18 and the first half of 2019, so total 13 months, those 13 months where the demand -- the supply was very tight. But starting from 2022, the situation will be a little bit different. Main difference is that the past several years, people -- I mean, silicon wafer companies did have some expansion. Some had bigger expansion. Some had a smaller one. But almost every silicon wafer fab had some expansion in the past couple of years -- several years. And another difference is that before 2016, there was no China newcomer. But now it's very different, several newcomers in China. They are working hard, although they are not really ready yet. But they will be there. The capacity for mature parts -- some China material maybe will be good enough to support some mature products. So that's why we think that 2022 supply/demand will be extremely tight again. But the problem is -- will be different because the most critical shortage will be coming from advanced node, and those are the really super tight one. And that was why I explained that our 300-millimeter epi for most advanced parts, the supply is really very tight for now. So I think that will be the main difference. But in general, I think 2022 -- '22, '23, these 2 years, the whole silicon wafer market will be very, very tight again.

Right. That's very helpful. My second question is regarding your expansion plan. So I think your new fab in Korea maybe is sort of considered as a type of brownfield expansion as the actual share of the facility [ will be flat ]. So I wonder, beyond this Korean fab, can you do some more expansions at any of the existing plants? Because with that, the overall cost could be more competitive and reasonable. And therefore, the [ 3 halves ] could also be shorter.

Yes. Thank you, Sunny. Korean fab is definitely a brownfield. We share some common facilities together and the capacity is 100% taken. Our Korean new fab capacity is 100% taken under a very strong LTA. So that capacity has already been taken. And what about other capacity? Yes, we do have some small-scale expansion here and there. For example, in Taiwan, Taisil, we have new capacity. New expansion for epi reactor that's in Taisil campus, but we expand the clean room and add several more epi reactor. The capacity will be available in early 2022, and we will have some further expansion for -- maybe for 300-millimeter SOI in our campus in St. Peters. That's pretty much what we have for now. Of course, we are open for any expansion. If any of our strategic customers are willing to make commitment, then we are always open to build capacity together with our customers. That's our strategy. If no firm commitment from customers, then our strategy is capability first instead of capacity first. That means that it's very likely that we will -- for example, we will install most advanced tools, production tools or inspection tools to replace existing tools, which maybe have already been used for 10 years, 12 years, those who are still in very good condition, but not good enough throughput-wise or quality-wise, not good enough. So our strategy -- our CapEx for the next several years will be focused on capability instead of capacity. That's our strategy. And when we're talking about capability, I mean -- I did mean that 100% for really from 7 nano to 5 nano, that kind of figure. That's, of course, a very important one. But I mean, that another capability means that, for example, quite a lot of power devices, which used to be used very difficult -- very tough products that used to be in 200-millimeter. But we know that many of our customers, maybe they will migrate to 300. We will support our customers to migrate. But for us, that is so-called capability as well. Also if -- with new automation and new tools, if we can improve our productivity, our throughput, we will consider this as a capability up as well. So in a nutshell, I think in general, our view -- our strategies in the next several years, we are not going to build a new fab from greenfield, build a new fab -- that's not our policy. It's very likely that we'll -- in our campus, maybe we will replace some -- a big portion of our tools, use the brand-new most advanced state-of-the-art tools to replace our old tools by doing so to improve our productivity, cost and also our capabilities. That's our strategy, Sunny.

Sure. Just a very quick follow-up, if I may. So for new expansion, what's the current lead time for brownfield, greenfield expansion? And are you seeing any very initial customer engagement for the future expansion? That is one.

Lead time-wise, if we are talking about a brownfield, I think it will take at least 18 months, 18 months. That's a very efficient project, about 18 months lead time. If you are talking about a greenfield, I think it will be another 6 to 12 months longer than a brownfield. That's our view. And so far, yes, we -- several customers are talking with us. But so far, none of them are already very close to the final stage yet. So at this point of time, GWC doesn't have any plan to make any brownfield or greenfield expansion. We have no plan to make any new brownfield or greenfield expansion for now. We will do more existing fabs renovation and upgrade. That's what we're going to do for now.

We have the next question. It will come from the line of Thurston Lee from Goldman Sachs.

I'll keep my questions short. First of all, could you quantify -- help me quantify the margin impact in 2021 from the Korean fab depreciation? Is it something like 1% to 2%, this kind of range? Or is there any way we can quantify that?

It's very hard to quantify for now. We have several improvement action items working out. So our goal is to keep the gross margin percentage not so big difference, but we will increase the gross margin amount. That's our strategy. So I think even there is some impact, I think it's very hard to quantify. But it should be minor from our viewpoint. Of course, as I explained earlier, there are quite a lot of uncertainty, including Korean won, U.S. dollar. A lot of factors, and those are challenging from our viewpoint.

Got it. And then just a follow-up on one of Haas' earlier question. Could you just comment on -- a little more about the inventory levels that you're seeing on the supply chain for the raw silicon wafer? I know like in the last analyst meeting you mentioned that inventory looks quite manageable, even though slightly higher. I just want to get an update on that.

Okay. Yes. Inventory is something we are very conscious as well. Usually, our inventory level -- the whole group consolidated inventory level is always amount -- around TWD 7 billion. And this year -- this quarter, end of Q3, it increased a little bit to TWD 7.3 billion, slightly higher. And the reason for a little bit higher inventory was because that we feel that COVID-19 is not really contained yet. So we intend to increase some raw material inventory. And also another reason for this is that we see better visibility of our order demand. So we don't want to lose any of our capacity, keep any capacity idle. So as long as we have firm orders, even the lead time -- the customer delivery time is Q4 or even early Q1, we will produce as long as we have idle capacity. So that -- these 2 factors are the reason why our inventory went up a little bit at the end of Q3. And if we're talking about our supply chain -- other supply chain, our suppliers' current status, I think so far, COVID-19 is getting tough right now and we see more countries locking down again. So it looks like a little bit challenging. But we feel that operation-wise, it should be okay, but the transportation lead time maybe will get longer. So our strategy is to double the transportation time -- I mean, increase our inventory -- raw material inventory by doubling the exportation time as a target. So for example, some shipment by vessel usually takes 2 weeks. Then we will count that maybe we will need 4 weeks for now. For example, we -- our shipment to customers to Germany and to France now because of almost lockdown, we're still checking that -- how much that affects our transportation by lead time. So let me make it a quick summary here. For supply chain, I think we don't see much about operation disruption -- operation trouble. I mean our supply is -- operation issue, manufacturing issue, but we see more risk on delivery lead time -- landing lead time. That maybe prolonged transportation lead time, that is our concern. So we will intentionally increase our raw material inventory by somewhere around 2 weeks. That's our strategy. And finished goods-wise, as long as we have enough -- some idle capacity, we will build our finished goods inventory a little bit higher. So somewhere around 1 weeks to 2 weeks, a little bit higher just in case that we need to ship the goods to our customers earlier due to the transportation -- longer transportation lead time. So that's our view. Thank you.

We have the next question come from the line of Roland Shu from Citigroup.

The first question is for the gross margin. Can you comment on the gross margin impact on this exchange rate volatility? So in Q3, we have this EBITDA depreciation. I mean -- so [ how's ] the impact of gross margin in 3Q?

Yes. Our gross margin this month -- this quarter, Q3 versus Q2, the gross margin dropped around 1.2%. there were 3 main reasons for the gross -- weaker gross margin. Number one is, of course, product mix is a little bit different than previous months and the same previous quarter. The second one is Korean depreciation starts. So that's the second issue. The third reason is foreign exchange, especially super weak U.S. dollar and super strong NT dollar. So these 3 factors are the main reason of the weak gross margin in Q3. And if we want to quantify these 3 factors, I think the most critical one is foreign exchange rate. This one accounts for somewhere around 0.6% to 0.7% of our gross margin down. And the other 2 accounts for another 45% of the gross margin impact.

Okay. This is helpful. And how about 4Q gross margin? Because now [indiscernible] is still strong. And also, you are increasing depreciation from Korea new fab. So how to view this in 4Q gross margin?

I think 4Q, if FX is stable, I think 4Q should be same as Q3 or a little bit better than Q3 because we expect that Q4 revenue will grow again Q-o-Q. So we -- our view is that Q4's gross margin -- because Q4 depreciation should be very close to Q3. Slightly higher than Q3, but not that big difference. So gross margin should be close. But our concern now -- we have 2 concern for Q4 gross margin. One is freight. Remember that in Q2, we suffered badly from extremely expensive freight and now several countries in lockdown again. So far, we are still investigating how much that will curtail freight. So that is one issue. And the second issue is that it seems that euro become very weak as well. It's getting weak now. So that's another impact. So -- and that was from October. In Q3, there was no impact from euro yet. But now it went down from $1.9 down to -- $1.91 down to $1.16. And we don't know that -- if it will be stabilized or will be -- keep going down. We don't know yet. But the Korean won, Japanese yen and NT dollars are still high. And we have big fabs in Korea, Japan and Taiwan. So we monitor the FX impact very closely. So far, it's very hard for us to predict that -- to project our Q4 forecast. It's not -- it has nothing to do with promise because we have a 100% firm orders for now. Nothing to do with it promise. Nothing to do with the depreciation because we know the depreciation, we know our revenue. But we don't really know how expensive the transportation freight will be, and we don't know how bad the foreign exchange currency will be. So those are our -- the reason why we cannot give you a better projection for now. Thank you very much for your question. I think -- I hope that my answer is clear enough for your reference.

The next question comes from Sebastian Hou from CLSA.

I have 2 questions. The first one is on the pricing outlook. I'm not sure if -- because I dialed in later so I'm not sure if materially you have talked about this in your prepared remarks. But do you have -- can you give -- share some light about the pricing for both spot and LTA in this quarter and also in 2021?

Thanks for your question. Pricing, this is very sensitive. And I think that in general, if we are talking about same product, the price for same product in 2020 versus 2021, then I can tell you that the price -- most of the price will go up. And the main reason is -- there are 2 main reasons for the price increase, price improvement. One is that the demand. I mean the supply capacity is tighter than this year, and the second one is because of currency. When -- we suffer a lot of currency -- foreign exchange currency in 2020. So of course, if the quotation -- if the revenue is in weak currency, then next year, we definitely will discuss with the customer either convert to some other currency or share the FX loss together with our customers. So for these 2 reasons, we believe that 2021's ASP should be a little bit better than this year. That's our view.

Okay. And my second question is also related to the first one is the propulsion between the LTA and the spot on your 12-inch and 8-inch wafer into 2021. And how does that compare with this year?

Yes. I think LTA percentage definitely will be going down year by year. That's for sure. Before we sign any new LTAs -- of course, the existing LTA is coming down. Percentage-wise, it's getting weaker and weaker. That's the direction. But it's not really very drastic. I mean the percentage is not -- especially in 2021, I think it's still quite close to 2020 LTA coverage-wise. It's lower, but not big reduction in 2020 order.

Okay. So if that's the case, then I think the chili in your comments on the pricing movement on next year, while the LTA propulsion is similar or going down a little bit into next year, then does that imply that the spot price will go up next year?

Yes. The spot price definitely will go up. That's our view. Especially -- I mean, for 300-milliter, spot price versus spot price is going -- it will go up next year. That's our view. Thank you very much for your questions. Thank you, everyone.

[Operator Instructions] The replay will be available on the company's website later. Thank you, and have a nice day.

Thank you, everyone. Thank you. Have a nice day.